A MAGAZINE FOR AIRLINE EXECUTIVES 2009 Issue No. 2

Planning departments follow industry best practices to compete

Global carriers take various steps to remain in the black

Air Malta makes big changes across entire organizations

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A Conversation With … Dave Barger, President And Chief Executive Officer, JetBlue Airways, Page 14.

T a k i n g y o u r a i r l i n e t o n e w h e i g h t s

Happy Jetting

© 2009 Sabre Inc. All rights reserved. wearelistening@sabre.com

Merchandising: Right Price, Right Value

By Mike Llewellyn | Ascend Contributor

Ancillary sales provide huge revenue opportunities — yielding “buy-an-airplane” kind of revenues. Offering the right ancillary choices travelers truly value benefits airlines and their customers.

Unbundling value-added goods and ser-vices from air fare is nothing new in the airline industry. Unbundling, which

involves separation of products, attributes or services from the total ticket price, can be thought of as a true à la carte offering — giv-ing customers the opportunity to purchase low fares and add only the goods and ser-vices they want.

There are a few key products that are likely to bring the most value to customers, including:

Premium or pre-reserved seats, Bags, Insurance, Lounge access, Onboard services such as Internet access.

Lowering costs and finding new rev-enue sources is certainly a key to the suc-cess of any carrier competing in the current value-focused economy. Travelers seek low fares that attract them to purchase while offering additional items they desire and can buy separately. A quick search of direct airline Web sites around the world reveals

just how far the ancillary offering trend has developed and matured. Ryanair’s Web site, determined to deliver that rock-bottom fare, is a prime example of how to successfully attract the cost-conscious traveler. That aggressive fare structure comes with a plethora of additional add-on fees and many optional services.

While some may question this strat-egy, when looking at ancillary product offer-ings at their core, the idea of separating air transport and additional services clearly has merit. It provides an opportunity to offer only the goods and services travelers wish to purchase.

Why should a person traveling on a day trip, with no bag, pay for the additional fuel consumed by another traveler carrying a 40-pound bag? It is a question that many travelers will find themselves asking in times where travel budgets are stretched paper thin.

What is the right strategy or approach to unbundling the air fare from these ancil-lary goods and services? There are three

key tenants of developing and delivering a successful ancillary product offering:

Maximize revenue opportunities, Offer customers the choices they most value,

Reach customers everywhere.

MaximizeRevenueOpportunitiesWith the right ancillary strategy, air-

lines can remain fare competitive while cre-ating those critical opportunities to generate incremental revenue. The industry numbers are clear, with several carriers in double-digit percentages of total income, all related exclusively to ancillary revenues. Some may think these numbers are reflective of only low-cost carriers, but that is simply not the case. Ancillary sales make up significant revenues to all carrier types — cost-focused or full-service.

OfferValuableChoicesConsumers have long showed that

they are more than willing to pay for goods and services that they truly value. Offering

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Removingcertainproductsandservices,suchasin-flightfoodservice,fromthepriceofanairlineticketnotonlyenablescarrierstoofferlowerairfares,itboostscustomersatisfactionandgeneratesadditionalrevenue.

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Photo supplied by Jupiter Images

a low price with aggressive fare pricing certainly attracts consumers’ attention. Airlines can provide a unique value propo-sition to every one of their customers, enabling them to choose and pay for only those products they value most. Arming customers with these ancillary opportuni-ties allows them to see the unique value in the services offered and, in turn, enables carriers to increase revenue, all while providing travelers with the products and

services they want and consciously choose to pay extra to receive.

For example, JetBlue Airways offers “Even More Legroom” for passengers who desire the additional seat pitch. The carrier’s marketing message is simple — the baseline product is good; however, the Even More Legroom product offers more. For a rather petite person, the additional legroom may not be worth the extra cost, but for someone 6’5”, it’s likely well worth a few extra dollars.

If there are cost concerns, reconfiguring an aircraft cabin to accommodate a premium seat offering may not be a necessity. Options might include exit-row seating at a premium cost, or offering rows near the front for an additional fee. Other viable ancillary options may include offering window and aisle seats at a premium or the option to pre-reserve any seat on the aircraft.

ReachCustomersEverywhereCritical to the success of any merchan-

dising strategy is channel consistency. Airlines must expose/offer and seamlessly distribute products and services across both direct and indirect channels, online and offline. This will enable them to maintain a consistent custom-er experience and maximize the incremental revenue opportunity. Missing a key traveler touch point will simply frustrate customers and decrease revenue opportunities.

In the case of premium seats, it’s criti-cal to target corporate travelers who are most likely to select the premium offering. Missing those corporate travelers, many who book in indirect channels, is a significant missed opportunity. Travelers want the same prod-ucts regardless of the touch point they use — including indirect agency channels.

Recently, United Airlines began selling its Economy Plus seats, which give custom-ers up to five inches of extra legroom near the front of the economy cabin, in the Sabre® global distribution system, and early results show that agencies are pleased to offer the product to travelers.

“I’m glad to see that Sabre [Travel Network®] and United have worked out a pro-cess to include the agency for the Economy Plus Seat purchase program,” said Brenda Ortman, director of corporate operations for El Sol Travel. “This allows us to be competi-tive in a difficult market.”

AncillaryPitfallsThere are a number of pitfalls related

to the sale of ancillary goods and services. There is no question that selecting ancillary options that a customer does not value will be reflected by a lack of sales. Recent exam-ples of this include the much-ridiculed pay- for-lavatory use or charging for pillows, blan-kets and soft drinks. Travelers are extremely savvy, and it’s critical to ensure that they are happy with both the price points and service offerings. If customers feel like an airline is gouging and taking advantage, it could turn them off and lead them directly to the near-est competitor.

A perfect example is the story of a passenger who, while booking a low-fare ticket on an airline’s direct Web site, was presented with an enticing message about a premium seat offer. Once the customer realized the premium seat would cost nearly

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UnitedAirlines’EconomyPlusproductgivescustomersfiveextrainchesoflegroomforanadditionalfee.

Photo courtesy of United Airlines

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25 percent of his total airfare, he politely declined the offer.

On the day of departure, he used the self-service check-in kiosk at the airport. Again, he was given the opportunity to purchase a premium seat offer at the same price that was offered during the initial book-ing. For all the same reasons, he declined and proceeded to the departure gate. While waiting to board the aircraft, the gate agent made a professional announcement with a crisp message that the aircraft offered a premium seat. The announcement continued with a vivid description of what the customer would receive, but interestingly, the price now reflected an increase from the offer received at both the Web and kiosk. It was assumed that the product was clearly selling well since the price had now increased.

It was upon boarding that the customer noted not one single passenger was seated in the premium seats. The non-premium “regular” seats were completely full … not a single seat remained. Perhaps if the price had been right as opposed to outrageous, the premium section would have filled up, and the airline would have gained additional revenue.

Considering that the premium seats took up nearly the first half of the coach cabin, the aircraft clearly was not properly balanced. The flight crew was tasked with explaining why, when asked, that passengers could not reseat themselves in the premium

section. After several inquiries about the pre-mium section, the flight crew finally made an announcement that the premium seats were available only for an additional fee. Now, the premium seat product had created a day-of-operation impact to the flight crew.

The plane was backed away from the gate, but then stopped short, and the flight attendants moved the last three rows of the cabin to the front three rows of premium seat product. At which point some of the other passengers who initially wanted to move to the premium seats became upset that others were moved to those seats for free. Clearly, for many on that flight, the customer opportunity was lost forever.

Offering ancillary services must be done properly. Certainly price, message, take rates and competitive position all matter when selling ancillary goods and services. A full awareness of these issues, a well-thought-out plan and perhaps a bit of caution must be exercised to avoid pitfalls.

AncillarySolutionsSome of the most popular ancillary

offerings may be technologically challenging to implement. Seats represent a great exam-ple of the complexities of ancillary product offerings. They require inventory control and must be offered in all channels to assure that consistent traveler experience.

It is clear that Saturday mid-day travel from a leisure location will not attract many

customers at the “normal” price. This per-haps is a good time to offer low-cost options to attract the leisure traveler, which would support the sale of those premium seats. Another option would be to sell those premi-um seats onboard. Many passengers would have gladly purchased when realizing the standard seating section was full. Likewise, in a heavy corporate market, those seats may well demand a price premium, especially on a long-haul flight.

Sabre Holdings® delivers a suite of products and capabilities that enable airlines to differentiate, market and sell ancillary offerings. The complete end-to-end solution allows shopping for ancillary services while enabling airlines to efficiently increase reve-nues — all while delivering exactly what the traveler wants. a

Mike Llewellyn is a SabreSonic® Customer Sales & Service marketing

manager leading merchandising products for Sabre Airline

Solutions®. He can be contacted at mike.llewellyn@sabre.com.

JetBlueAirwaysoffers“LotsOfLegroom”seatsand“EvenMoreLegroom”seats,givingcustomerstheoptiontoenjoythestandardseatsor,foranadditional,reasonablefee,choosetheEvenMoreLegroomseatswithfourextrainchesofseatpitch.

Photo courtesy of JetBlue Airways