How Exactly Will Blockchain & Ticket Trading Grow Airline Revenue?

Secondary trading markets for airline tickets will complement & enhance established revenue management methods

Imagine a metaphor where an airline is a graceful old ocean liner like four-funnelled beauty RMS Olympic (pictured). I challenge any Airline Revenue Economics reader to nominate an airline CEO whose name is as apposite as Captain Herbert Haddock, who commanded the Olympic between 1912 and 1915.

The planning department would be the bridge, with network planners and schedulers the navigators. They play a complex game figuring out where and when the airline should fly its planes. They shift around aircraft, take-off and landing slots and travel times that are attractive to passengers.

Airline planners have one simple objective, to deploy aircraft in a way that enables their airline to earn maximum profit. Once the schedule is set, that boils down to generating as much revenue as possible. But it is down to revenue management to make that revenue generation a reality. As such, revenue management can be seen as an airline’s engine room, generating income to power operations.

Any engineer will tell you that following textbooks and manuals is not enough to get the most out of an engine. They listen carefully to how their machines rumble, mumble and grumble and watch their behaviour closely. Only then will they decide exactly where a bit more oil is needed or when a bolt needs tightening.

It is the same in revenue management too – figuring out exactly how many seats to offer at each fare level and what exactly these fares should be is as much an art as it is a science. And there is no one right answer.

Revenue managers balance a three-part equation to ensure that their airline reaches its revenue potential. First is demand forecasting, using statistics to predict how many people will want to buy tickets between two airports at any given point in time.

Second is pricing, who determine what fares should be charged and how much people will need to pay for optional extras like bags, extra legroom and tasty meals. Finally there is inventory, who fix the number of seats that can be sold at each price point. Their job ensures that seats are still available when people with high willingness to pay come to make a booking, even when this is close to the time a plane is scheduled to depart.

Traditional revenue management is one of the main reasons why airline tickets are non-transferable. Airlines wanted to maintain their ability to charge high fares to passengers with high willingness to pay. They thought there was a risk that if tickets could be transferred, a high value buyer would offer money to an existing ticket holder rather than the airline, so the airline would lose revenue and sell fewer seats.

If tickets were transferable NFTs with a few small business rules to limit last-minute trading, this would help solve three inefficiencies in the market for air travel (see article). Some people who do not currently buy plane tickets would be more inclined to do so, reducing wastage seats and boosting demand.

Second, travellers who become less price sensitive and more product sensitive towards the time of travel are more likely to have their needs served. Finally, when ticket trades can be recorded, measured and analysed, this will help revenue managers take better decisions.

There are six effects which make this happen.

Sometimes airlines sell too many seats…

Airlines have long known that not everyone holding a ticket will turn up on the day. Sometimes people choose not to fly or get to the airport too late and miss the flight. Other times reservations are lost involuntarily, for example when their first flight arrives too late to make a connection.

Overbooking helps airlines reduce the number of seats wasted by selling more tickets than they have seats in the expectation that some passengers will not be onboard. The more seats that they sell, the less likely it is that one will go empty when the plane departs. This is said to reduce the so-called “spoilage” cost.

But on the other hand, as an airline sells more seats than they have it is increasingly likely that some passengers will turn up but not have a seat ready. The airlines have to look after these passengers, putting them on a later flight and potentially paying for a hotel stay. Depending on jurisdiction and the relevant consumer law, there might also be compensation to pay. These are called denied boarding costs.

Revenue management teams attempt to balance the costs of spoilage and denying boarding to decide on the right level of overbooking. With decades of experience overbooking and some solid statistics behind them, most airlines are highly skilled at this process. When I was at Qatar Airways we prided ourselves on our overbooking.

But once the day of the flight arrives all bets are off and there is nothing more that revenue management can do. Operational disruptions or plain chance can lead to more people than expected trying to get on flights. Traditionally airlines offer cash for offloads and call for volunteers. But since passengers are already at the airport they are naturally reluctant to accept.

Using the superior plumbing of blockchain and NFT ticket infrastructure, it will be easy for airlines to proactively call for volunteers and offer incentives before passengers have even left home.

This will be particularly helpful when a longhaul flight leaves late – by this stage the airline knows that people will misconnect, but because the delayed flight takes a long time to reach the connection point, people starting their journey at the hub have not yet left their home or hotel.

As a result I expect that airlines using NFT tickets and are active on secondary ticket markets will be able to reduce denied boarding costs.

…but sometimes they sell too few

It is also possible that activity on secondary ticket trading markets will generate data that airlines can use to reduce spoil costs too. If lots of passengers on a certain flight are offering their tickets for sale in the secondary market, this could suggest that they may have decided not to travel and the airline can overbook more than usual.

Ticket trading might also indicate that there is potential for network planners to up-gauge an aircraft, perhaps from a mid-size A330 or 787 to a large A350 or 777.

This might occur when demand on a route is high and all seats are sold. Enterprising passengers, realising that their tickets could be worth more than they paid for them, may start accepting offers to trade made by people with urgent travel needs. If the airline’s network planning team can up-gauge instead, they can sell more seats and earn more revenue.

But even if the airline does not decide to up-gauge the aircraft, they will still enjoy a revenue boost – I expect airlines to earn about 10% of the fare difference when passengers trade tickets.

Sometimes airlines set fares too high…

Sometimes airlines set fares that are higher than what people are willing to pay, or they release too little inventory in the lowest fare classes. This is a normal part of revenue management if it is because the carrier expects more passengers with higher willingness to pay to materialise later in the booking window,

But sometimes market segments can be overlooked and these people might buy seats that would otherwise go unsold. If this is the case airlines will see more people than usual on a secondary market offering to buy tickets at below market rate.

Sometimes airlines will be able to introduce special fares targeting these customers, sell more seats and reduce to cost of seats being spoiled when planes depart. Similar insights might help the airline decide whether or not to hold a sale.

…but sometimes they set fares too low

On the other hand, sometimes demand or willingness to pay was higher than expected and airlines set their fares too low, or constrain too much inventory to the highest fare classes. When this happens money is left on the table and revenue is said to have been spilled.

Trading activity on the secondary market can help airlines recover some of this spilled revenue, the 10% of the price difference on trades that I mentioned earlier.

Airlines might also be able to use trading activity as a signal that fares are currently too low. If lots of people are buying and selling on secondary markets it is possible that when there are no more people willing to sell the airline will be able to sell tickets itself for a price that was higher than expected, reducing spill costs.

Secondary trading will be a proving ground for NDC…

IATA’s New Distribution Capability (NDC), a communications standard, is set to revolutionise the way airlines sell seats because carriers can get creative in what products and services they bundle with flights (see article).

Some travel buyers will still just want a seat. But others will buy restaurant meals, meeting rooms, rounds of golf and even the clubs they need to play from the airline.

But airlines are getting started slowly. Most carriers have moved or are moving towards 100% of their own product being distributed in accordance with NDC. NFT tickets will be perfect for the NDC environment because the blockchain storing information about them is highly flexible and can accommodate any product (see article).

But when NFT tickets bundling air and other travel products are traded on a secondary market it will generate data showing airlines which sorts of bundles are the most popular. When airlines launch new partnerships or new products and distribute them through NDC, secondary market trading data will be among the first available insights showing how they are received by the market.

…and ancillary revenue products

In the same way as with NDC, airline’s will be able to use data generated by ticket trading on secondary trading markets to understand where and when ancillary services are in demand. Since trading data will be available until close to departure time, catering teams will be able to receive real-time insights into how many meals and drinks they should load on a certain flight.

This will be based on whether they tickets being bought and offered for sale include or do not include on-board food and beverage. Services expected to have high catering demand can be loaded with extra trolleys and the ancillary revenue collected. But flights expected to have low catering demand can have fewer trolleys loaded, which saves the airline money on cost of goods and fuel burn.

What will be the impact

How big will these effects be or how easy will it be to predict them? It is too early to say for sure, but Ricardo and I can help you figure it out.

oliver AT ransonpricing DOT com

Are you enjoying Airline Revenue Economics?

You might remember our article “Up Front Economics” (see here), which made the case that airlines are reducing first class capacity not because there is no longer demand for the plushest cabin, but because airlines do not understand how to monetise it. Our friends at Travel Tech Essentialist wrote recently about how if you want to change the world you need to do something that is both right and non-consensus (see here). Perhaps Emirates applied this logic when they recently committed to buying 1,000 new first class seats as part of a large refit programme.