Costing BA's Avios-only flights to Dubai
How much revenue dilution will British Airways experience by offering an all-points longhaul special
It was my birthday on Tue-12-Dec, just a few days ago. I got a lovely book presenting the Sze Yuan Tang collection of historic paintings of the China Trade, the latest Kylie album and a new razor.
That same day Avios collectors got a great present from Madrid-based IAG (see this article and this article) too. For the first time in IAG’s history a whole long-haul aircraft has been made available only to people paying with points.
The big airline group had experimented with Avios-only flights before, but limited it to pint-sized trips to European destinations like ski-snow-slopes Geneva, sun-sea-sand Ibiza and, for culture vultures, Florence.
This time it is different. Every fully-flat bed on a wide-body will be occupied by a points booker. Every comfy premium economy seat will be too. Families travelling in economy can save thousands.
The late overnight flight to Dubai on Sat-26-Oct and the lunchtime return on Sat-2-Nov will be full of leisure travellers pleased to have grabbed a bargain.
These flights are normally expensive as they are timed for the autumn half-term break (or, to avoid confusing first class passengers, Michaelmas exeat…). At my old school Uppingham, the boys and girls leave their boarding houses on Sat-19-Oct and return on Sun-3-Nov. Perfect!
Comparable flights from London on the same day are at the time of writing £1,082.09 in World Traveller with a bag, £1,870.09 in World Traveller Plus, £3,520.09 in Club World and £4,820.09 in First, before any corporate and agency discounts. The prices might go down a bit in one of BA’s inevitable red-banner sales. But for these peak-of-the-peak services, probably not by much.
It must be the case that seats sold for a fixed mix of Avios and cash is less valuable to an airline than selling a few seats for the points and many more for cash. If this were not so, many more seats would be available for points. There would then be no FT (FlyerTalk, the real FT, not the Financial Times!)
This means that I would expect IAG to be losing money on the Avios-only flights. The question is, how much? Read on to find out…
Rack ‘em up
I have a little technique I use that takes published fares and calculates a “best-guess” estimate of how much revenue particular flights and routes can generate for airlines. I call it the “shelf” principle.
Imagine you are in a shop looking at the things for sale. Items on the bottom shelf are often the cheapest. You need to look for them and reach down to pick ‘em up. But because they are cheap and the Law of Demand applies, many people will. So items on the bottom shelf sell at low prices but in high volume.
Now consider the top shelf. That is where the specialist magazines priciest items tend to be. Everyone can see them, but not everyone wants them. So the shop puts them above your hands and you need to reach up if you want one. The top shelf has low volume but high prices.
Finally, imagine of the middle shelf. It is eye level and in easy reach – desirable real estate. It has all your favourite brands on, but maybe you do not always buy your favourite. The middle shelf has mid-range volume and mid-range prices.
So…
Bottom shelf – high volume, low prices
Top shelf – low volume, high prices
Middle shelf – mid-range volume, mid-range prices
All three shelves probably generate the same revenue. Or margin, since this is retail. The key idea is that each shelf contributes equally.
It is the same with a well-run airline fare structure. Our best guess as observers is that each fare class, or revenue booking designator as we say in the trade, contributes an equal amount of revenue. At least within a cabin.
Imagine an airline with only three fares:
Y = £1,000
B = £800
M = £600
If revenue management has optimised the fares so that each contributes equally, how. many seats will be sold at each price point to generate £1m?
Y = £1m / £1,000 = 1,000 seats
B = £1m / £800 =1,250 seats
M = £1m / £600 = 1,667 seats
Total seats sold = 1,000 + 1,250 + 1,667 = 3,917.
Y = paid by 25.5% of passengers, B = paid by 31.9% of passengers, M = paid by 42.6% of passengers.
Analysis of BA’s fare structure on London Heathrow to and from Dubai
The first of the two tables below shows the minimum fare in each fare class on London to Dubai for BA on the days when the Avios-only flights operates. The second table shows the mean fare. To each fare I have added the rip off taxes YQ carrier surcharge to see how much BA collects when it sells the seat. Then I divided by two to get the equivalent one-way rate.
It is important to note that the fares actually for sale on BA’s website are not actually what the airline is expecting to receive for a flight. Not just on this Dubai pair, but on every flight. The reason is that corporates and travel agents often have access to special deals, meaning the revenue received for many passengers is not the same as the one seen by the public.
There will also, in normal circumstances be other effects that make things more complex. Some passengers will be connecting, for example. Passengers originating in London paying a premium for a direct flight is another. For these reasons I feel that the tables of fares above probably are representing what BA would receive for the flights across all passengers travelling on a normal half-term Saturday.
O, Q, I and the like might not actually be available for passengers from London, but the fact that BA has filed them for use as appropriate suggests that there are other market segments out there offering similar value. The London originating passengers will need fare matches from time to time with these passengers.
Like all airlines with robust revenue management, the proportion of revenue finally allocated from a connecting ticket to the Dubai flight might be much less than could be obtained from a trip ex-London but still worthwhile if the network contribution is worth having.
For example you can have passengers flying from New York to Dubai via London, and since both cities are roughly the same distance away from London the value of the ticket might be split 50-50 for revenue accounting purposes. So a £1,000 return ticket from New York would have £1,000 / 4 = £250 on the Dubai flight.
Why would BA accept this when London is offering £1,000 / 2 = £500? If the seat on the New York flight would otherwise be spoiled, the network level contribution of the New York-originating passenger equals the passenger starting in London. They will take the money.
Using the ‘shelf’ method to calculate proportions & whole-flight revenue
I next applied the ‘shelf’ method to calculate the proportion of passengers who would provide equal revenue in each fare class. Then I multiplied this by the number of seats on each plane to get my best-guess estimate of revenue for the whole flight. Since this is half-term to Dubai, I think it is fair to say that under normal conditions BA would have sold every seat, disruptions excepted.
Note that there is no First cabin on the outbound service and the outbound flight has lower capacity overall. The outbound flight is expected to produce £125,855 to £153,153 on a normal half-term and inbound £185,342 to £227,389. It is amazing how much revenue is estimated to come just from Club World: 45.5% to 48.4%.
Revenue from Avios bookings
So how much will BA earn from the Avios-only flight? BA will in fact get paid in full. Or at least I find it hard to believe they will not. But they will be paid by their sister company IAG Loyalty, who collect revenue from selling Avios and buy seats from BA to be used by Avios collectors, who return their points to IAG Loyalty in return. To see how it all fits together, read this article.
Now let’s have a look at the Avios prices. At the time of writing the real taxes and charges were £164.09 for World Traveller tickets and £270.09 for tickets in other cabins. This is money that BA has to pay to the British government in Air Passenger Duty (APD) and the various airport operators and agencies along the way. The difference is down to APD, which is charged at a ‘reduced’ rate for passengers travelling in economy cabins like BA’s World Traveller.
BA’s redemption pricing is quite complex and there are various ways to optimise the scheme. But the headline pricing is as shown in the table below.
Not all passengers will pay the full price. Many will use an American Express 241 voucher, giving literally two-for-the-price-of-one or a half-Avios price for somebody flying solo. Here is the Expert Flyer seat map from the time of writing. Look how many pairs of seats are occupied. Lots of those will be 241s.
Scenario modelling
I evaluated two sets of three scenarios – Avios value and 241 use. I evaluated how much revenue BA would earn based on receiving 1p, 0.85p and 0.65p per Avios and how much revenue they would earn based on 25%, 50% or 75% of passengers using a 241 voucher.
The Avios values feel about right to me. 1p is my own target value and so far I have almost always done a lot better. 0.85p is a bit more than you used to be able to get at Sainsbury’s supermarket (0.80p, now 0.66p) by converting the Avios into Nectar points, a UK-based loyalty scheme that has in my view lost it’s way. 0.65p is a bit less than that – I thought it could represent the ‘mate’s rates’ scenario for pricing within IAG, if they have one.
There could be 50k to 100k 241 vouchers in circulation that are valid in BA’s three premium cabins (see article). There might be hundreds of thousands of Traveller-only vouchers around. It is plausible that on one Avios-only flight a high proportion of the seats could go to voucher holders.
There are also enough 241 vouchers around and a dedicated enough community of points collectors that I would be surprised if a lot of seats were not bought using vouchers.
And now for the results!
Here is the ‘executive summary’ table…:
…and here are the results of the model in full, leading to some interesting insights:
BA is going to lose between £134k and £303k by selling these Avios-only flights. Of course in reality BA will probably be paid their model of the market value of the flight and IAG Loyalty will take any hit for accounting purposes…
Notice how much higher the loss is for Club World and First than for World Traveller and World Traveller Plus. Club World and First can lose up to 80.2% and 73.4% respectively. There is no scenario where the flights are profitable. The average impact is:
World Traveller: 60.9% loss vs min fare & 66.9% loss vs mean fare
World Traveller Plus: 43.1 loss vs min fare & 56.4% loss vs mean fare
Club World: 65.6% loss vs min fare & 71.4% loss vs mean fare
First: 56.6% loss vs min fare & 67.9% loss vs mean fare.
No wonder premium cabin redemption seats are scarce.
I was surprised that World Traveller Plus has the lowest loss. But it is twice the Avios price of World Traveller, with fares broadly within the range of the lower cabin’s and World Traveller has a net cash outflow for bookings at standard-rate prices. Club World on the other hand is only 50% more Avios than World Traveller Plus and the cash prices are considerably higher.
Will it be worth it for IAG to lose this money? You bet! Loyalty programmes are a cash cow for airlines. A flight where every seat goes for points is great marketing for BA and IAG. More collectors will come and existing collectors will keep building their balances as a result.
[This analysis has not taken into account any ancillary revenue sources like excess baggage, advance seat selection and duty free. All Avios flights come with at least one free bag and up to four if you are a Gold card holder travelling in First. And remember, it’s just a model!]
Mechanics
For those interested in the mechanics of offering an all-Avios flight, check out the availability screenshot below, taken from Expert Flyer.
The two flights are available for sale just like any other, except that all the revenue fare classes are zeroed-out. Presumably the redemption fare classes would be Z8 U9 P9 X9 if we could see them. Well, they would probably be something like Z0 U0 P0 X3 now that everyone has had a chance to hoover everything up, but you get the idea.
When I checked last night it was U0 P0 X1 on the outbound and Z0 U0 P1 X9 on the inbound. X is the World Traveller redemption fare class. Almost every economy class seat has already been sold for Avios on the way out, not just higher cabins. That is powerful marketing…
In Dubai
My favourite building in Dubai is pictured below. I always think it is the closest thing I have ever seen to a launch arcology in classic computer game SimCity 2000, which was my 13th birthday present in 1994. I still play it from time to time. 😊
Coming up in 2024
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2. Five killer apps for the “NDC smartphone”
3. Analysis of what exactly constitutes luxury flying and how it should be priced
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In the mean time, enjoy your holidays and I will look forward to seeing you in the new year.
oliver AT ransonpricing DOT com