Horsing Around for Revenue Growth

Great airline lounges are revenue generating spaces, not cost centres

Elton John and Luciano Pavarotti are arguably the two greatest singers ever recorded and their unforgettable 1996 collaboration ‘Live Like Horses’ appeared as track number two on Elton’s album ‘The Big Picture’. Designers at British Airways, a profit-focused airline, might have had the song in mind when they decorated their lounges at Heathrow Terminal 5, which feature a collection of life-size horse lamps and sculptures – pictured with the author above and below.

Horses live in lounges

Revenue generators at BA never fail to see the big picture (see what I did there!) and will no doubt consider their lounges an important part of their value proposition. Snazzy sofas are expensive though and BA simply would not offer the product if they did not generate enough revenue to compensate. So how do airline lounges raise revenue? Read on to find out!

Flush flyers attract advertisers

Many passengers in lounges are affluent and will consider buying high-end products. They spend a lot of time in the space too – more than 50 minutes according to BA – all of which makes lounges attractive advertising space. A few years ago I remember seeing a BA catalogue offering the following:

(i) Digital/non-digital posters, screen savers and interactive screens

(ii) Drop boxes for business cards offering a prize draw

(iii) Table top magazines and brochures

(iv) “Experiential zones” where passengers can see things like a new suitcase or phone, drink a cocktail or eat a cake – often manned by the vendor

(v) Sponsored wi-fi.

It is unlikely that advertising will be the primary driver of lounge revenue though. For that we need to look to revenue management.

Qatar quants

When I was in the design department at Qatar Airways, a product-focused airline, one of my projects was to figure out whether or not the airline should invest in it’s own lounges. We had built a Premium Terminal (interior pictured below) at our hub over nine months and at great expense ($90 million apparently) for 2007’s Doha Asian Games. But that was it. Every other lounge was third-party, not doing our brand any favours.

The Finance Department evaluated opening our own facilities on the grounds of not having to pay third-parties for access. So Bangkok, which had more deluxe seats than any other port on the network (and so the highest lounge access cost), was top of the list. But saving money was not enough to make any construction worthwhile, so I was asked to figure out whether or not lounges would help grow revenue. Here is how I did it.

Demand effect:

Customer research showed that access to a branded lounge influenced some people’s decision to fly a competitor airline. I was able to show that Qatar Airways lounges would help sell some business and first class seats that would otherwise go unsold (or ‘spoiled’ as we say in the revenue department).

Loyalty effect:

We also knew that a lack of branded lounges made our loyalty programme less attractive than others, so I demonstrated that branded lounges would help sell seats that would otherwise be spoiled in economy as well as the more expensive cabins, economy flyers earning miles that can be redeemed for aspirational luxury seats and lounge access.

Fare level effect:

At the time Qatar Airways’ pricing power was immature in many markets. Having branded lounges was shown to help the airline increase fares and capture a higher proportion of passenger willingness to pay (reducing ‘spill’ costs as we say in the trade)

Revenue management effect:

The demand and loyalty effects would not only help sell some seats that would otherwise go unsold, Qatar Airways’ revenue management system would automatically monetise the higher demand even more by increasing the prices for some seats through reducing the number of seats available at lower fares, (a process called assortment optimisation, which can also be considered a reduction in ‘spill’ costs).

Multiplier effect:

Higher demand, more loyalty, boosted fares and more seats being sold at higher prices meant that the whole of these effects was greater than the sum of their parts. I called this difference the multiplier effect.

It worked. I showed that building lounges could be profitable and Qatar Airways now has lounges at Paris Charles de Gaulle, London Heathrow, Beirut Rafic Hariri and Singapore Changi Airports, which with high fares and many passengers are good choices. They also made significant lounge investments at Doha’s Hamad Airport which opened in April 2014 a year and a half after I left. I am proud to count those among my legacies.

If I were at Qatar Airways today I might recommend opening a lounge at Bangkok as there are still (at least in normal times) a lot of premium seats going to, from and through the city’s Suvarnabhumi Airport. But I would certainly consider the airline’s ports in North America as prime candidates for lounges too as although there may not be as many flights, the fares are among the highest the airline has.