The notion of ‘right product, at right time and at right price’ may be something airlines understand only too well but they still aren’t getting it right. Tom Bacon has some suggestions

Today many airlines recognise the tremendous opportunity of personalised e-merchandising. Many are even looking to leading e-tailers for inspiration, and are trying to understand, for example, how they can engage with online customers as effectively as the likes of Amazon. 

Airlines are asking the right questions. Shouldn’t they more fully exploit the variety of products and combinations of features arising from new ancillary services? How can they raise conversion rates and increase revenue through a more personalised approach?

However, despite consensus that there is a huge new opportunity, true personalisation remains elusive. Some of the problems include:

·      Airlines still largely focus on selling the seat; ancillary is still generally treated as an afterthought. 

·      Pricing is still driven by macro factors namely overall demand and overall booking momentum, rather than the individual customer. Even customer segment-specific, factors are ignored.

·      All passengers see the same fares two months before departure, or three weeks before departure, or three days before departure. 

·      The content doesn’t vary either – whether the traveller is travelling on business or leisure, airlines present the same options to all customers; they describe the benefits of ancillary choices in generic ways. There is no personalisation.

So, how then can airlines accelerate e-merchandising?

Well, let’s be honest, there are many impediments to this kind of change! It requires new key performance indicators (KPIs); it requires new customer databases with new information on searches and bookings; it requires new models of customer behaviour; it requires new skills among airline analysts.

Stuck in a silo

One of the largest impediments to more dramatic progress in airline merchandising, however, lies in the typical airline organisational structure, which remains highly silo-ed. Revenue management still remains distinct from loyalty which is separate from e-commerce and ancillary products. Elements of merchandising often exist in each of these functions; responsibility is thus spread across the organization. In this disperse organisational structure, merchandising ‘responsibility’ is a largely misnomer.

To accelerate the merchandising initiative, airlines should begin by centralising responsibility. 

To accelerate the merchandising initiative, airlines should begin by centralising responsibility

If merchandising is centralised, however, where does it best fit? Amadeus consultant Luca Fossati recently posed this question at the company’s revenue optimisation conference in Monaco.

To put it into context, merchandising began in e-commerce. As ancillary products were introduced, initially they were adjunct to the base airline booking. But airlines needed a new online path for ancillary purchases separate from the booking path. So, they developed a way to pay for checked bags on their own websites and they developed links to car rentals and hotels (via intermediaries like Cartrawler). Bag fees and commissions on car/hotel bookings jumpstarted the ancillary revolution.

As the ancillary opportunity grew, a variety of functions within airlines identified possible new fees and services; each in turn added resources to better exploit new opportunities. Although this has helped to grow ancillary revenue overall, it has not succeeded in driving real merchandising discipline. Ancillary options are presented, not merchandised. There remains little ‘right product at the right time at the right price’.

In his research, Fossati has found that merchandising responsibilities are still highly dispersed across multiple functions.  However, more recently, many large US airlines are centralising merchandising. These mega-airlines recognise that a centralised approach will be critical to accelerated development of real merchandising.

These airlines are placing company-wide merchandising responsibility within revenue management. Traditional RM, of course, is quite different from merchandising – and putting the two together will drive some huge changes – but there is still tremendous logic in this kind of organisational change. Among the reasons are that:

·       Total revenue counts: As airlines gain more revenue from ancillary, the definition of unit revenue, passenger revenue per available seat kilometre (PRASK), is being supplemented by ‘total revenue per available seat kilometre (TRASK). For Spirit Airlines, and other leaders in ancillary, PRASK is of relatively little value since TRASK is almost double PRASK.

·      46% of revenue comes from ancillary

So, as ancillary revenue grows, RM increasingly needs to incorporate the new fees into their management of revenue.

·       RM Analytics has value in merchandising: Amazon’s merchandising is highly analytical and is based on customer segmentation and shopping probabilities. RM, which is based on similar analytics, is in a strong position to apply business analytics to ancillary merchandising.

·       Merchandising includes product bundling: One element of merchandising is packaging features, offering the ‘right product’. At many airlines, RM has implemented ‘branded fares’ or ‘fare families,’ a small step toward merchandising that will ultimately become common.

A number of changes will be required for effective e-merchandising, not least a rethink of organisational structures. Things to consider include:

·      Integrated databases, ancillary and base: As ancillary has grown across the organisation, the data associated with different fees often lie outside the base fare database and, in fact, could be dispersed across different functions.  Merchandising will require a centralised, integrated database that includes customer purchases in all such forums.

·      Distribution: Lack of presence in third-party channels has been a major impediment to ancillary growth.  Centralising responsibility for addressing this shortcoming; implementation of the new distribution capability, for example, will facilitate ancillary purchases across the organisation.

·      Pricing and dynamic bundling: As data is made available on ancillary features purchased by different customers and different segments, RM will be in a position to design new pricing and re-bundling targeted specifically for “right product at right time at right price.” RM will be able to design product bundles and adjust pricing for maximum merchandising success.

Tom Bacon has been in the business for 25 years, as an airline veteran and industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Email Tom or visit his website