Why airlines need a strategic focus on product over price
There is far more to ancillary revenue than meets the eye and airlines and are starting to recognise that more clearly defined products could pay off, writes Tom Bacon
‘Ancillary’ is a new focus for airlines, with many asking just how much they can gain in revenue for incremental services not included in the base fare. However, my belief is that to truly meet customer needs, airlines must rethink the way they view ‘ancillary’.
Indeed, when airlines view ‘ancillary’ as incremental purchases to a basic travel product, they are mislabelling what should really be the definition of a customer-driven product. So instead of ‘ancillary’, airlines are now offering a new menu of products, which instead of being incremental to a base product, have become products in their own right. But if the base product meets the needs of only a tiny subset of customers, are add-ons still considered ‘ancillary’?
You see the base product varies widely. Take ground transportation. When customers shop for automobiles, there are many options, including even additional cup-holders or seat heaters. The base product can vary even more widely. For example, Lexus doesn’t have a ‘bare bones’ model that competes well with a Kia; an SUV isn’t positioned as ‘basic transportation’ with a longer chassis and, as a sell-up option, more storage space.
The current positioning of ‘ancillary’ comes from customers’ historic focus on the lowest fare
The question then is can airlines reposition their offerings as different products for different segments rather than merchandising, what is for some customers, a wholly undesirable ‘base’ product plus assorted ‘add-ons’.
Of course, the current positioning of ‘ancillary’ comes from customers’ historic focus on the lowest fare. In fact, historically airlines have learned to be incredibly focused on ensuring that no competitor has a $1 fare advantage over them.
Many airlines purchase competitive fare tracking systems to ensure they know when a major competitor is offering a lower fare so they can quickly match it. But aren’t customers now, if slowly, learning that the lowest fare isn’t necessarily right for them? Don’t customers know that one carrier’s $79 fare is ‘classic’, including free checked bags and no change fees, while another carrier’s $79 doesn’t even allow carry-on bags?
Many customers now avoid Ultra Low Cost Carriers, or ULCC’s, like Spirit and Frontier, that are infamous for uncomfortable seating, no free checked bags or carry-ons, and no free drinks or snacks. Experienced customers know that the base fares for the ULCC’s can be highly misleading; on average, ULCC customers end up paying 60-70% more than just the base fare.
Similarly, the largest US airlines, United, American, and Delta, have now all introduced new ‘basic economy’ products to compete better with the ULCC’s. But these carriers do not expect masses of their existing customers to flock to this lower-priced ‘bare bones’ option. Instead, they have intentionally defined their new product such that only the most price-sensitive passengers will buy them. In fact, by striving to be so clear about the product differences between ‘basic economy’ and economy, most customers find the former unattractive.
Product over price?
With many online travel agencies (OTAs) still highlighting price over product, customers struggle to make the right choice. The low base fares offered by the ULCCs, and now introduced by the larger carriers as ‘basic economy’, often clutter up search results. But as customers demand more product information, these same intermediaries are working to provide it.
Increasingly then, the lowest price represents a product that doesn’t meet most travellers’ needs. So customers are learning that this is as important as price in choosing which airline to fly and which fare to buy.
…customers are learning that product definition is as important as price in choosing which airline to fly and which fare to buy
Airlines can help customers in this process by replacing ‘ancillary’ thinking with a more product-oriented perspective. Economy isn’t ‘basic economy’ plus certain optional amenities, each of which comes with a sell-up fee. Instead, economy is the airline product that best meets most customers’ needs.
As airlines focus more clearly define the product, they might find that there is one that is perfect for families (as the SUV is in automobiles) or for business passengers (like the sedan). As airlines develop such products, customers will likely no longer focus so much on lowest fare or base price but will first consider what it is that best meets their needs.
Tom Bacon is a 25-year airline veteran and industry consultant in revenue optimisation and leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website