Delta Airlines: glaring omission or smarter market targeting?

Tom Bacon takes a look at Delta’s new fare structures and finds that there are some useful lessons

Delta Airlines recently announced its new proposed fare structure, a new version of ‘fare families’ or ‘branded fares’.  Branded fares was first introduced in the US by Frontier Airlines and followed by American Airlines.  Carriers across the globe have their own version of such ‘families’ of bundled ancillary services or features.

Here’s Delta’s description of its planned branded fares:

In terms of US offerings, what’s different about Delta’s announcement?

Perhaps surprisingly, Delta’s announced framework doesn’t include any mention of fees for checked bags.  Most US branded fare offerings include one to two free bags as part of the sell-up process. Aren’t bag fees the single most popular ancillary feature? Wouldn’t free checked bags make Delta’s sell-up options much more attractive?

This is not, however, an oversight by Delta. In fact, Delta is following the first rule of branded fares:  clearly identify your target market.

To promote sell-up most effectively, branded fares needs to be designed with features that target a certain market segment – are we designing a bundle of features for business passengers or leisure?  Individuals, couples or families? 

A clearly focused target market represents:

  1. A combination of features that promotes sell-up because they are valued across a whole customer segment;

  2. Avoidance of dilution from including too many diverse features that are not consistently valued by the target segment – and therefore require significant discount for the diverse segments to buy the whole bundle

Mathematically, these relationships can be expressed by correlations. What features are commonly purchased across a target market?  Of course, to drive more upsell the correlations ideally should be based on value and potential - ‘willingness to pay’ - rather than historic performance;  unfortunately, such ‘intent’ is obviously more difficult to measure. In any case, poorly correlated features are unattractive (in business segments, checked bags and flexibility have low correlation since  business passengers do not consistently value checked bags – actually many prefer to carry-on their bag). Highly correlated features (potentially, big seat and onboard meal, for example) signify a sell-up opportunity -- customers could be interested in a bundle that includes both product enhancements.

Interestingly, key market segments – business and leisure, individuals and families - do not have a consistently high probability of checking bags; most segments, in fact, check bags approximately half the time. Including bag fees in a bundled fare can exclude up to half of any target segment.

Let’s look at Delta’s Economy Cabin offerings:

Basic Economy: No cancels or refunds, no seat selection

DL has specifically said that this new no frills product is designed to compete more effectively against ULCC’s (ultra low cost carriers).  Fees for checked baggage, of course, need to be charged for passengers who choose the lowest fare.  Potentially, this low fare will eventually include charges for drinks and carry-on bags, both of which are common at ULCC’s (although there could be logistic challenges with such charges only applicable to a small subset of passengers).

Main Cabin:  ‘Flexibility’ on changes

This extra ‘flexibility’ means passengers can change their bookings subject to a $200 change fee.  For the lowest fares, the fares are essentially non refundable but for higher-priced tickets, for example $500, this flexibility can be valuable.  Although this limited extra flexibility – along with free assigned seats -- represents a relatively small value-add versus Basic Economy, it targets less price sensitive passengers, including business passengers who are not purchasing fully refundable fares.  These business passengers will not consistently value free bags since many of them actually prefer carry-on.  Thus, DL’s does not have to dilute its bag fee revenue and its Main Cabin product can be attractive to all such passengers who value a bit more flexibility – not just the 50% who also check bags.

DL ComfortImproved on-board experience.

The sell-up to DL Comfort is focused on an improved onboard experience – no additional flexibility and still no free bags.  This product bundles more room, free alcoholic drinks and free meals – very focused on a target market that values such features.  This too will tend to be business passengers but will include less price sensitive leisure travellers who don’t like the Main Cabin product. The benefit of not including free bags is still:

  1. No dilution of bag fee revenue, and;

  2. No narrowing of the target market by bundling onboard features with a feature that is not generally valued by all of the target segment.

Besides bags, another feature commonly bundled in branded fares is FFP (frequent flyer programme) mileage earned.  Many branded fares represent tiers of FFP earnings potential (no credit or 75% credit or 150% credit, for example).  DL’s announcement also omits this feature – perhaps because their new ‘revenue-based’ FFP earnings structure already addresses this.

Here is a summary of Delta’s proposed offerings based on different ancillary features:

Ancillary Feature

Valued by which Target Mkt

Delta’s Reported ‘Fare Families’

Bags

No clear target

Not included in any Economy Product

Flexibility

Primarily Business

Limited flexibility included in 1st sell-up

Onboard experience

Service-sensitive

Considerable upgrade included in 2nd sell-up

FFP miles

Primarily Business

Not included in any Economy Product

Thus, Delta’s approach is different from other ‘branded fare’ offerings in the US.  American and Frontier both offer free bags as part of their sell-up choices.  Both have bundles that include all four components of common ancillary features (bags, flexibility, onboard experienced, and FFP miles).  For these carriers, from a target marketing standpoint it is much less clear what segment the bundles are designed for. I expect considerable ongoing experimentation and additional analytical work – in the US and globally – on ‘optimal’ design of branded fares.

Delta may modify their offerings between now and launch – and they, like both Frontier and American, will likely modify their offerings post-launch as they gain better understanding of customer behaviour. But, for now, I applaud their announced version of branded fares for potentially better segmentation – and more targeted marketing appeal – than currently exists in the US marketplace.

Tom Bacon is a 25-year airline veteran and industry consultant in revenue optimisation. Tom launched the first branded fares in the US, at Frontier. Questions?  Contact Tom via email or visit his website

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