Isaac Newton’s Laws of Motion continue to shape the way we view mechanics today. His description of objects in motion tells us all that we need in order to kick a football, design an airplane, or drop fruit. NASA even landed astronauts on the moon using Newtonian physics. But Albert Einstein saw things very differently. His theory of general relativity revealed an underlying concept that correctly predicted gravitational lensing, gravitational waves, and allowed for a functional Global Positioning System.
Einstein kept a picture of Newton on his desk. Newton, for his part, said: “If I have seen further, it is by standing on the shoulders of giants”.
Airlines too can use the work of those “giants”, or great minds, to build a path to increased revenues. Some notable examples would be Nobel laureate Daniel Kahneman and Chair of the US Federal Reserve Janet Yellen. Using their work to increase revenue was the subject of the talk that I gave today with Robert Booth, Head of Product Marketing for Merchandising, at the 11th Ancillary Merchandising Conference in Palma de Mallorca, Spain.
At the end of 2016, 66% of the global bookings made through the Amadeus system were eligible to carry a merchandising item, with 120 airlines signed up to Amadeus Airlines Ancillary Services, and over 52 for Amadeus Airline Fare Families. Those figures prove there’s a really strong basis for an ancillary program. Yet we know that there’s more ground to cover. Right now, we see that 88% of ancillary units are from baggage and pre-assigned seating options. Thinking like Einstein, airlines can consider the established practice as a good starting point and start to think beyond.
One key underlying concept is the variations between different ancillary offers. Some are monopolistic, like baggage options or seat assignments. Customers can’t purchase them elsewhere. Others are sharply competitive with other channels, like rental cars. Customers can rent from the airline’s website or from a dozen others. Some are binary choices, where a customer can either accept the offer or not. Priority boarding would be an example. Others offer a menu of options if the customer is interested: a seat map with varied prices for pre-assigned and premium seats.
An airline seat map is much like a menu at a restaurant in that there are variations on the same product with different attributes and different prices, all presented in the same view. Customers choose the right one for them, but all of the prices on the seat map impact how customers make their choices. These ‘framing effects’ have been described in detail by Daniel Kahneman and other giants of behavioral economics. A restaurant may be able to charge more for a dish of pasta if the menu also includes an expensive lobster entrée. An airline may convince more customers to purchase mid-priced pre-assigned seats by showing a few expensive options. (At least one airline has explicitly tested the idea and found it to be true.)
Even seeing other numbers influence how customers consider a price. Dan Ariely, another giant in behavioral economics, demonstrated that a Social Security number or telephone number had an influence on how much customers would pay for an object.
Insights from more classical approaches are just as relevant. William Adams and Janet Yellen mathematically demonstrated the benefit to firms and customers of offering ‘mixed bundles’, with customers able to purchase products sold in a group or separately. Several airlines have already used the Adams & Yellen work to design their bundles of flight-related options.
At the conference today, we encouraged the airline leaders in the audience to look a little differently at each of their ancillary offers, and in turn to share existing relevant research with their analysts and managers. The examples cited above, together with Amadeus’ expertise, can provide valuable insights to airlines in identifying and implementing merchandising techniques to maximize their impact.