Since iconic American Airlines CEO Robert Crandall spearheaded yield management in the 1970s, Revenue Management (RM) has been on an innovative trajectory that includes embracing dynamic and continuous pricing models and Artificial Intelligence (AI). As this transformation progresses, RM is entering a golden age of new possibilities characterized by a new category of demand – travel mode.
Travel mode is the shift in travelers’ mindsets and spending behavior in the time leading up to a flight departure. While the transition into travel mode can begin at different times, it typically peaks immediately before take-off, when day-to-day distractions are replaced with travel-related imperatives, airport-related stress, and welcome anticipation. During this period, customers’ typical Willingness-to-Pay (WTP) patterns increase.
Two key factors underpin the transformation of WTP in travel mode, economic and behavioral.
- Economic: The limited options of the air travel environment and the stage of the customer journey lead to lower elasticity of demand. Essentially, consumers in travel mode are less sensitive to price changes, even when prices may be higher.
- Behavioral: Studies indicate that consumers put money aside for leisure travel and are more flexible in how they spend it. This trend is described by the second wallet concept created by Atmosphere Research Group.
Atmosphere’s research shows that “more than four in five travelers […] establish budgets that cover their leisure trips’ transportation, lodging, ground transportation, and meals”. This second source of funds – hence the “second wallet”- allows consumers to self-indulge through travel, “It’s this second wallet that often funds travelers’ ancillary product purchases such as fast-track security, seat or room upgrades […]”.
Many RM front-runners are using real-time auctions of seat upgrades to take advantage of the change in WTP during travel mode. In so doing, they are unlocking three game-changing benefits:
- Captured Incremental Revenue
- Committed Revenue – The Backstop
- Unconstrained Demand Data
Let’s take a closer look at these practices.
Captured Incremental Revenue
During travel mode, premium seats and other products are usually restricted for customers to buy. Until now, airlines could only tap into elevated demand during travel mode through airport operations, but gate agents are not an ideal retailing channel. They are focused more on matters such as ensuring an on-time departure and policy enforcement. Also, gate agents aren’t retailers – they don’t have the same skills as other airport staff like those working in Duty Free. This is where digital real-time auctions come into the picture. They turn that demand into revenue on behalf of the airline.
Real-time upgrade auctions use a mobile application to engage customers on-the-go in gamification (bidding) to tap into WTP during travel mode. They drive incremental, non-dilutive revenue upward until minutes before departure and capture it without undercutting higher fares or purchases.
The amount of captured revenue depends on several factors, including customer profile and product availability. Generally speaking, real-time upgrade auctions can easily generate more than $10,000 in unconstrained ancillary revenue per long-haul flight.
Committed Revenue – The Backstop
Every department in the airline wants incremental Captured Revenue. On the other hand, Committed Revenue is a unique tool for the RM team and one that they can incorporate into their existing RM practices.
Bidding, by its nature, is a commitment to purchase a product should the inventory be available. It’s demand/revenue that is waiting at the gate if the airline wants – or needs – to pick it up. As such, Committed Revenue is a Backstop that gives RM the confidence to take more calculated risks, earlier. For example, make bolder pricing decisions and engage in product experimentation, channel differentiation, and innovative promotions.
In total, the bidding Backstop has been shown to deliver a ~1% boost to RASK – without dilution.
Unconstrained Demand Data
For airline RM, the benefits of real-time upgrade auctions extend beyond Captured and Committed Revenue. Such auctions can also help optimize total pricing and revenue generation strategy by capturing unconstrained demand data.
Let’s face it. Airlines are more constrained than other industries. For example, like hotels, capacity is fixed – it is not usually possible to increase the number of seats on a plane. So, accurate demand forecasting and high-quality demand data are vital to understanding when and how to adjust prices and inventory allocations. To do this, RM must have an accurate picture of the overall demand potential.
With real-time upgrade auctions, WTP is measured outside of booking controls, technical limitations, and inventory constraints. This data helps create an idealized view of the demand curve. It is RM’s Holy Grail.
Unconstrained demand data can be used across the RM discipline, from dynamic pricing and promotional strategies to scenario planning.
By combining Captured and Committed Revenue, RM obtains a previously inaccessible and well-segmented source of unconstrained demand data. This enhances RM’s optimization modeling to increase revenue overall. Add in the incremental revenue benefit to the bottom line while delighting customers – real-time upgrade auctions, such as those provided by SeatBoost, airlines have a win/win.
By Stefan Thiel, VP Operations, SeatBoost