How does an airline value its branded fares?

Branded Fares features go beyond basic fare rules; they can include additional air miles, lounge access, limousine services, increased baggage allowances, or anything that will entice the traveller to choose a brand that provides the features and benefits that provide them value, above simply the lowest fare.

Branded fares are the bundling of optional services that airlines historically charged for a la carte – in addition to the base fare – or provided on a complimentary basis. We refer to these in industry terms as ancillary services and ancillary fees. These service offerings fall into the following categories:

• Onboard sales of food and beverages
• Checking of baggage and excess baggage
• Assigned seats, preferred seats (window or aisle) or seats with additional leg room
• Call center support for reservations
• Fees charge for purchases made with credit cards
• Priority check-in and screening
• Early boarding benefits
• Onboard entertainment systems
• Wireless internet access

"Branded Fares" are a re-bundling of optional ancillary services back into an inclusive fare

Normally includes a discount versus purchase of all features ala carte

Lufthansa launched its version of "branded fares" in 2015


Many U.S., Middle East, and other international airlines offer such re-bundling

Airline financial analysts project over $1 Billion additional value from such branding for key carriers going forward

How to an airline value its branded fares?

Segmentation

First, airlines begin by understanding the ancillary purchase behaviour of different market segments

For Example: Business Vs Leisure VS Family


Base Case: Business passenger

How do business passengers currently purchase their tickets, and their ancillary services?

At Current prices, what ancillary services do they tend to purchase?

Do they check bags? Do they purchase onboard Meals?

Elasticity

Would business passengers purchase more ancillary features if the prices were lower?

Would they pay for checked bags if the fee were $5 lower?

Would they buy drinks more often if the price were $2 lower?

Any likely increase in purchases is reflected in ancillary price elasticity

The discount on the bundle thus translates into additional ancillary purchases



Business Passengers: Total New Purchases

Base Case (before branded fares)

Market Segment

Elasticity

Changes due to branded fares

Discount for bundle

But increased ancillary may not just be because of the discount on the bundle


Simplified buying process

The simplified buying process- one click purchases the flight along with the desired ancillary by the business passenger’s

Incremental Revenue versus Dilution

The new revenue stream can be divided between:

Dilution (a lower price for travelers who already were purchasing the bundle at the base prices)

Incremental ancillary purchases

(due to both price elasticity and ease of booking)


Will the total revenue actually increase when existing purchasers of the same bundle of features pay less?


Net Revenue Impact

Factoring in Ancillary Costs

Incremental ancillary purchases will drive higher costs

Analysis must focus on incremental profitability, new revenue net of costs

   1. Price of bundle of features

   2. Quantity Purchased

Channel cost Impact

Some airlines offer branded fare as a way to move more customers to lower cost distribution channels

Booking directly through the airline website is significantly lower cost than booking through OTA's or traditional travel agencies

Often, the branded fares are more accessible, and much more transparent, on the airline website

Other Market Segments

Each Segment is likely to respond differently to the branded fares

• Business: More likely to value new flexibility or onboard amenities
• Leisure: Appreciate the discount relative to other airlines & more likely to move to the airline website
• Family: Will value checked bags, pre-reserved seating and inflight entertainment

Total Profit Impact

The total profit impact on the airline is the sum of the impacts across the various segments

Eg. A branded fare that targeted more ancillary purchases by business passengers would be expected to drive incremental profit in the business segments that would offset any potential dilution in other segments.

Conclusion

Each segment is likely to respond differently to the branded fares

Represent a streamlined way for certain customers to buy ancillary service

Drive incremental ancillary purchases in their target market segments

May drive distribution cost saving by directing more bookings to the direct channel

Expect to see new variations on such branded fares as airlines continue to explore e-merchandising