Netflix and Spill
Young wonks taking their first steps in airline revenue management (RM) soon encounter the “spill and spoil” model. The idea is simple – an airline with high prices will not sell tickets and seats going empty are said to be spoiled. But if prices are too low, people who did fly might have paid more and revenue is said to have been spilled. RM is all about striking a balance.
When broad consumer trends are applied to airlines, using spill and spoil is a good place to start and see if they might work. Subscriptions, where people pay a recurring fee to access flights, are a good example.
Hunting high and low
At first glance subscriptions seem to be at odds with spill and spoil, but look deeper and they may be valuable tools in the RM kit.
When flights are in high demand, for example around a holiday or to a major event, RM increases the price to avoid spilling revenue. And when flights are not expected to be busy the airline will lower prices to avoid letting the seats go spoiled.
Subscriptions do not initially seem in anyone’s interest under these conditions – airlines would not normally offer high value seats to low paying subscribers and passengers would not subscribe if buying seats at published rates was cheaper than a recurring payment.
Lifelines
But thinking about spill and spoil over time and not just to single shopping and transaction instances, things become clearer. Some passengers will subscribe to spread the cost of one annual trip over many months – once committed to the airline many may take a seat that would otherwise be unsold, reducing spoil cost, even if some fly at peak times.
Other subscribers will take more than one flight. Some of these will be busy services, but as long as many occupy seats that would otherwise go unsold, reducing spoil cost, the airline will grow revenue overall.
What about reducing spill cost? Subscribers seeing the airline as affordable may buy ancillary services or other travel products, generating commission. Airlines should examine subscribing segments carefully to understand their propensity to buy associated services.
Most importantly, subscription models are generally considered to inspire people to pay more over a long period than simple transactions. This is known as the lifetime value. The highest spill cost an airline can suffer is when a passenger switches their loyalty to another and the lifetime value is lost. Subscription may reduce that risk.
Analogue
It turns out that thinking beyond individual transactions using spill and spoil is not new. Airlines have long used advance purchase to increase prices close to departure when people booking are expected to have high willingness to pay. Sometimes these are published explicitly but in recent years they are controlled behind the scenes. In this case, airlines are happy to increase both marginal spill and marginal spoil costs if one person pays enough extra to compensate.
Flexibility, the ability to change or refund an unused ticket, has been used in the same way – if enough flyers pay extra for refundable tickets, it is acceptable to hold a booking and risk spoiling a seat when one person cancels.
Foot of the mountain
Time will tell how far subscriptions penetrate the passenger market. Airlines will need to address three complexities for success.
1. Ticketing – today a guarantee of full payment is normally required before the passenger can fly, but with some people using subscriptions to spread the cost there may be non-payment issues
2. Distribution – ATPCO, a fare management service, say they are ready for subscriptions, but their process’s flexibility remains to be seen
3. Commercial – one subscription for everyone will not be appropriate and designing subscriptions that work across long and short flights, personal and business travel, premium and economy cabins, and possibly sales volume controls, will take time
Stay on these roads
Allocating the right subscription to the right passenger at the right time is a complex exercise in analysing consumer segments, commercial content creation and distribution.
Airlines do not currently have the required expertise or analytical horsepower so true subscription success may be some way off. However the basic principles of RM suggest that they may help grow revenue.
How will you use subscriptions? Get in touch and let me know.
Game: What links all the section headings? Get in touch and let me know.