Wine can be a key revenue driver for airlines
Pop-glug-fizz! That’s always a good sound. It is of course the sound telling us a glass of champagne is imminent. I have three popping airline champagne stories:
1. Back in 2009 I flew Gulf Air from Doha to Bahrain and back. The return ticket was about £200 and in the lounge I discovered a bottle of Perrier Jouet Belle Epoque, which was certainly not the standard business class champagne, in a self-service ice bucket. Pop! I opened the bottle, enjoyed the wine and arrived back at Doha pretty merry. Given that a bottle now retails for more than £150, even accounting for inflation I reckon that £200 ticket was the best value for money I ever got from an airline.
2. In 2010 I was on the upper deck of a BA 747 walking back to the stairs past the galley. Pop! The bottle’s cork found it’s way out of the galley and straight into my hand. Howzat! I thought. The Italian stewardess told me that catching the cork meant I would be married in the year. Perhaps I should have taken the hint…
3. In 2011 I had the good fortune to be involved for a short period in Qatar Airways’ wine procurement programme. I got to see the bonded warehouse where boxes of Krüg were piled ten foot high. Remarkable! I also got to speak to our wine consultant, who had cannily bought all the Krüg under a long-term contract shortly before a large global price increase driven by Asian demand – the third but slightly different pop!
These days my tastes have moved on and I am not really a champagne drinker anymore. When I take a flight these days you will be more likely to find me enjoying a sweet sauternes or cognac if the flight is a late one and a cocktail of some kind if not. Here is an enormous cognac BA once served me on a flight from Dubai to London. I asked for a large one but this was a bit ridiculous!
So what does champagne and wine have to do with airline revenue economics? Read on to find out…
Glamour & menu development
Every year Business Traveller magazine, which can be found in many airport lounges, runs it’s ‘Cellars in the Sky’ wine awards. Wine is an important part of life for many travellers and the publishers themselves found out long ago that around 50% of business class passengers consider the catering when choosing their airline.
You only need to look at FlyerTalk, an Internet Bulletin Board, to see many people referring to the wine with the meal and glass of champagne on boarding in their trip reports to realise that wine is an extremely important part of the flight.
Every airline operating longhaul first and business class will tell you how important food and wine is as a part of the overall experience.
But what is a bit less clearly explained is the opportunity for well designed food and wine pairings to enhance the dining experience, something many passengers will be aware of and care about. Tastes at altitude are a bit different to those on the ground, so some interesting combinations work well. This is the part of the wine programme that allows truly great airline service developers to distinguish themselves.
We put a lot of effort into this when I was at Qatar Airways and I know the other regular participants in the Cellars in the Sky awards do the same. It pays off because wine is so important for many people who buy tickets. Get the wine and the food right together and they will buy more tickets, increasing demand, reducing the cost of seats going unsold (spoilage) and increasing yield.
And it is not just for individual travellers buying their own tickets where wine makes a difference. If an airline’s wine is enjoyed by a C-level executive at a large corporate, maybe that company will sign a deal with the airline for hundreds or thousands of seats a year. It has happened in the past and it will happen again.
Both British Airways and Virgin Atlantic have a wine club, where people can earn or burn their frequent flyer points on wine. This generates revenue for the airline in partnership with a co-brand vendor – in BA’s case Laithwaites and in Virgin Atlantic’s case Virgin Wines.
It generates revenue in the same way as co-brand in a loyalty programme in general does (see article). The co-brand ships the product and buys the points from the wine club. The wine club (owned by the airline) sells the points to the wine merchant when the member uses cash and buys the wine when the member uses points. There is a margin in both directions which results in profit for the wine club.
One of the big advantages of these wine clubs is that redeeming points for wine is achievable for loyalty members with small balances who would not otherwise use their points. This keeps more people coming back to the airline, increasing sales, reducing seat spoilage and growing customer lifetime value as well as generating a small profit on the wine transaction itself.
One of the ways that comfy business and first class lounges earn money is by brand owners paying the airline for their product to be present. This can be done in two ways:
1. A sponsored stand where the product is available for lounge visitors to try and buy
2. A certain product being available as part of the standard lounge offer.
These products are not just limited to alcohol of course. But I have always doubted that British Airways, an airline with notoriously strong cost controls, really pays for the Johnny Walker Blue Label in their lounges. The current price on Whisky Exchange is £207.14 per litre and there is no way the airline will be paying anywhere near that.
I would wager there is a good chance BA get their JW Blue for free or perhaps they might even make a small profit on it. In exchange, the brand owner has their product consumed by a captive audience of first class passengers who might go out and buy it in the future. Brand owners have also been known to get their products into supermarkets, which is really where they make their money, on the back of having it available to an airline’s passengers, so there are opportunities for private equity to fund these deals.
You can read more about how lounges generate revenue in this article.
oliver AT ransonpricing DOT com