Upgrade Economics - Part 2
What are the most effective ways for airlines to offer upgrades for sale?
Getting a free upgrade is the travel equivalent of winning champagne in a raffle – it probably won’t happen to you, but on any given day somebody will get lucky. Free upgrades are great marketing for airlines to showcase cabins and, having enjoyed a smoother flight, some passengers will be inspired to pay extra cash in the future. I explained the economics of free upgrades last time (see article).
But in recent years airlines have tried to sell plush seats at the airport for cash at special prices rather than simply upgrading a lucky person for free. They may even offer the option to pay to the person who would otherwise take the seat for free – no airline wants to turn down revenue! This article is all about how airlines can monetise the last-minute upgrade.
AUP/POUG (Airport Upgrades/Proactive Online Upgrades)
Airlines use Departure Control Systems (DCS) to accept passengers and their bags. These DCS platforms read details from a Computer Reservation System (CRS) to confirm that passengers hold a valid ticket. Traditionally revenue was collected within CRS, but DCS are now often capable of pushing last-minute offers, either to every passenger or to those meeting pre-defined criteria.
The process can be both automatic and available at an agent’s desk. But it need not always be available – when revenue managers forecast that many seats will be sold at the last minute, for example on business-heavy routes, the deals can be turned off.
On British Airways, short-haul airport upgrades range from £59 to £170 for Euro Traveller (economy) to Club Europe (business). On longer flights, World Traveller (economy) to World Traveller Plus (premium economy) can be less than £100 but around £200 is more typical. Club World (business) and First upgrades are typically £400 to £600. A detailed list is available on FlyerTalk.
The advantage of offering upgrades this way is that revenue is collected for seats that would otherwise go unsold (reducing spoil costs). A holiday spirit or anticipation of imminent serious tasks can inspire people to pay more than they would weeks or months ahead of travel. There are however three disadvantages:
1. Last minute passengers paying high fares might not be accommodated, increasing spill costs – upgrade tools should be turned off when these bookings are forecast
2. Some passengers who would have otherwise paid for higher cabins at the time of booking might book a lower cabin instead and rely on their luck, increasing spill costs – upgrade tools should be configured to ensure passengers with a track record of paying for a higher cabin should either not be offered a special deal or limited to using the offer only a few times
3. Upgrading people for cash removes seats from the pool available for mileage redemptions and staff travel – airlines should carefully evaluate the costs and benefits of these programmes and ensure they are accommodated within the paid upgrade strategy.
Upgrade auctions
The other way of upgrading passengers is to open an auction where people can bid for seats, with the highest bidders getting the prize (subject to a reserve price, i.e. minimum acceptable price). This application, supplied by a company called Plusgrade, is used by quite a few airlines – 64 customers are listed.
Auctions have the advantage that airlines may capture more revenue for each seat sold. The process sounds fun and entertaining, so many people might enter. But the Plusgrade approach has all the costs of the AUP/POUG model and three more that have no clear remedy.
4. People are uncertain whether or not they will win, which might make them less likely to bid and reduce revenue – AUP/POUG offers certainty
5. People who are upgraded might feel they overpaid – the famous winner’s curse – and if they do buy premium fares in the future, might be more inclined to use a different airline - AUP/POUG offers clarity and assurance
6. If forecast revenues from upgrades are high, the airline may decide to limit luxury sales and promotions, losing customers who like to pay for premium cabins at the time of booking - AUP/POUG may contribute more towards lifetime value and long-term revenue performance
Overall I am sceptical about Plusgrade and the auction model. Most of the benefits can be achieved with standard revenue management principles and the AUP/POUG approach, and it is difficult to see how the auction model’s three extra costs can be offset. I expect that Plusgrade produces more revenue per transaction but less revenue overall than the AUP/POUG approach.
Ground service upgrades
When passengers pay for an upgrade or get one for free, should they be able to access the special ground facilities, like lounges and check in counters, available to the higher cabin? Some might say no because a plusher seat on the plane is the reward. Such an approach might be aligned with airlines like Finnair and Emirates who attempt to unbundle their premium products.
On the other hand, customer research shows that lounges and check in counters are highly valued by consumers. Airlines like British Airways who allow their upgraded passengers to experience the full package might be more likely to see those passengers paying cash for premium seats next time.
On balance, I am inclined towards offering the full experience to upgraded passengers, but I would not offer the higher cabin’s baggage allowance.
I would be cautious about selling ground-only packages where people can use the lounge but fly in economy. Such an approach risks overcrowding. On short-haul, where ground is a high proportion of the travel experience, ground upgrades could cannibalise demand so fewer people end up buying the comfiest seats.
oliver AT ransonpricing DOT com