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Is Seat Auctioning a Targeted Upsell or a Potential Profitability Leakage?

Is Seat Auctioning  a Targeted Upsell or a Potential Profitability Leakage?

Considering the bidding platform plusgrade.com and a number of articles written about the new trend of seat auctioning, it is very interesting to observe the concept of real time open bidding taking off in the airline industry. This new phenomenon is fast spreading.

For instance, to-date some premium service carriers, namely Lufthansa, Cathay Pacific, Etihad Airways and Virgin Atlantic have embraced this concept at least on a trial basis. Moreover, LATAM, Air China, Air New Zealand and Qantas are already pursuing this new merchandising and revenue enhancing opportunity.

Airline seat inventory is perishable, any unsold seat becomes a wasted revenue opportunity. Therefore, maximizing revenues per flight is treated as top priority. According to an article published in Condé Nast Traveler, a loyal airline expert suggested that “airlines that have adopted this approach are making seats available less expensively than they otherwise used to and that is good for travelers”. My reaction to that comment was: well, yes and no.

In the airline business, the typical high yield business traffic can represent 60 to 80% of premium service revenue and the ultra-elite traffic from 1 to 10%. Simply put, economy class passengers don’t generate enough revenue and net income to maintain viable and sustainable an airline, which offers a multi-cabin class products.

Furthermore, if distress (or potentially unsold) seat inventory and potential seats available for auction are not closely managed with clockwork precision,  the results can be counter revenue productive including premium class cabin pricing, cause margin dilution, weaken product branding and loyalty and ultimately diminish overall business profitability. So in essence, there is a fine line between maximizing revenues and allowing it to be diluted by an inconsistent and risky revenue maximization strategy.

As a matter of fact, business travelers book tickets typically one week or just a few days before departure. A seat bidding process is awarded to the highest bidder usually 36 to 72 hours before a flight, which could coincide precisely with when business traffic bookings are taking place. Hence, the following questions arise. What if customers who are naturally willing to pay a high price tag decide instead to join the bidding frenzy? Would an airline actually jeopardize high yield revenues and open the door to potentially lower yields and margins?

Therefore, it is important to keep potential for revenue leakage in perspective when adopting this new practice. A well-crafted seat auctioning strategy that maximizes airline revenues should by necessity focus the following key elements. An airline would need:

  • A strong revenue management and pricing model,
  • A dedicated team in place to release only those few premium seats expected to go unsold,
  • A meticulous data analytics platform that focuses on potential distress inventory based on market conditions, the competition and still available seat inventory, market intelligence (time of departure, date of flight, season, routing, etc.),
  • An up-to-date customer intelligence including buying preferences and behaviors, and
  • A series of targeted marketing initiatives toward the right passenger segment, among other things.

Moreover, it is of paramount importance to build a strategy, which does not cannibalize the airline’s existing premium class products. Finally, whenever a premium seat upsell does occur, it frees up a brand new unsold economy class inventory, ready to be marketed to further maximize revenues.

It is also important to keep in mind that even before offering a premium seat for bidding, other viable options must have been considered. This can include: on one hand, reconnecting with former business class passengers who may have downgraded to lower cabin products due to economic difficulties or corporate cost-cutting measures. On the other hand, approaching cost conscious customers with yet a long term potential to upgrade; this is applicable when airlines can build a solid case in support of cabin class upgrades.

Although, the seat bidding concept has already been adopted by a number of premium service airlines mainly for economy and premium economy upgrades to business class, it might eventually be extended to all types of air tickets.

This may beg the question: would Low-cost carriers (LCC) and Ultra-low cost carriers (ULCC) also join the frenzy? In my opinion this is unlikely, as they already have a bare fare structure in place and low cost approach of doing business. However, since maintaining high load factors is a top priority for them in order to generate more ancillary revenues, a cross-breed product might soon appear in the horizon.

In fact, Canada’s newest discount airline, NewLeaf as per their press release as of July 20, 2016 revealed the intention of having passengers bid on unsold seats. Therefore, NewLeaf seems to be the first ULCC embracing a bidding concept right from market inception. This early adoption immediately triggers concerns about potential yield deterioration and the long term sustainability of its business, especially considering how long it might take the airline to amortize large capital expenditure (Capex) cost incurred. As for the rest time will tell.

Editor’s note: The statements and opinions expressed in this article are solely the viewpoint of the contributor and do not necessarily reflect the position of Airline Profits magazine nor that of its editors.

 

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René Armas Maes

René Armas Maes

René is an international commercial and consulting executive with 15+ years of global revenue growth, strategic planning and restructuring experience. He has significant expertise in revenue and EBITDA margin improvement, leading global strategy, sales, NPD and profitability growth, asset productivity, lean management structure and processes, non-strategic asset spin-off, start-up operations and business competitiveness. Through his professional careers, he brings a key focus on propelling business forward through strategic positioning and brand repositioning, transforming business units and optimizing day-to-day operations and returns. He began his career as a Senior Analyst at Simat, Helliesen & Eichner (SH&E), an international consultancy firm based in New York City where he consulted global customers and traveled around the world. René earned an MBA from John Molson School of Business in Canada.