Airlines have historically regarded ancillaries as insignificant ancillary revenue streams based on highly-regulated pricing and flat-rate fees. However, due to narrow profit margins and extreme volatility in oil prices, Ancillaries are no longer ‘add-ons’- they are now the primary lever for airline profitability in a world where base fares are increasingly commoditized‘ as the high-margin, profit-driving component that distinguishes the leaders in the airline industry from others just striving for break-even performance.
There is a disconnect between how airlines have priced their traditional seat inventory (via a dynamic pricing approach for seat sales) and how they price their ancillary products (with static pricing).
Although an easily managed $30 baggage fee or $50 exit row fee provides revenue to the carrier, they are missing substantial revenue opportunities. In contrast, some of the most sophisticated commercial airlines (i.e., the global FSCs and agile LCCs) are now treating their ancillary revenue products like their seat inventories – as dynamically priced, data-driven and context-aware.
For airline leaders seeking to extract maximum yield, a real-time, dynamic pricing methodology for ancillaries is no longer an aspirational goal; it has now become an urgent need. Following are steps that can help airlines convert from static to dynamic real-time offers for their ancillary products.
The High Cost of “Simple” Pricing
A standard baggage charge appears easy on the surface: it’s clear cut for the passenger and easy to process through the PSS. The simplicity of this model, however, also introduces yield dilution.
Take the example of two passengers flying from London to Frankfurt on a Tuesday morning-one is a business traveller who has purchased a full fare ticket 48 hours prior to travel and the other is a budget-conscious family of four planning a summer holiday and purchasing tickets three months in advance. To charge both passengers the same fare for their luggage (let’s say $30) is illogical. The business traveller may have a much higher willingness to pay than the family; therefore, For the price-sensitive traveller, even a small fee difference can influence airline choice and conversion.
Also, static pricing fails to take into account the context of flight. When a cabin is within 95% of capacity, the value assigned to items like “Preferred Seats” or upgrades to premium economy drops precipitously; conversely, when a flight is half full mid-week, the goal should be to create demand for that flight through lower pricing instead of attempting to hold a high fixed margin. When your pricing is static, you are either undercharging/overcharging the high-intent traveller or alienating/attracting the price sensitive traveller.
The Variables That Power the Engine
Real-time pricing continuously computes the optimal offer by combining customer intent, inventory state, and contextual demand signals. Real-time ancillary pricing is an extension of Continuous Pricing and Dynamic Offer Management as defined by IATA’s modern airline retailing framework.
1. Passenger-Level Intent
Passenger-Level Intent can be defined as the signal that can help determine the optimal price for a passenger and can be described in 3 main areas:
- 1. Booking Channel – is a passenger booking via your website (higher intent) vs. booking through an aggregator (price sensitive)?
- 2. Past Behaviour – has the passenger historically purchased (10%) of extra legroom on their flights
- 3. Point of Sale (POS) – Is the passenger’s booking originating from a high GDP country or from a market with low purchasing power?
2. Real-Time Inventory & Load Factors
Here’s where the PSS talks with the Pricing Engine to supply that information:
- Remaining “Prime” Seats – If two aisle seats remain in the cabin front this would impact price so that as they get sold the price would reflect real-time inventory scarcity.
- Cabin Spread – What is the price difference between Economy and Business right now, if that difference is small then the Upgrade price must be very targeted; the goal is to minimize the number of tickets sold at the higher price.
3. Macro & Contextual Signals
- Event factor: Do you have an event at your destination? Events such as conferences or major tournaments can significantly increase demand and willingness to pay for ancillaries like baggage and priority services.(chargeable items like baggage and early boarding), regardless of their base price.
- Time prior to departure: The perceived value of comfort-driven ancillaries increases as departure approaches, especially for business travelers. An example would be if a traveler declines an upgrade when they are 30 days out but will pay more for that same upgrade 4 hours prior to their departure because they have realized they now have to do some work on the flight.
Category Logic: One Size Does Not Fit All
A lot of airlines are doing the same thing when it comes to ancillary pricing; they use a single pricing algorithm for all ancillary items. However, there are distinct psychological profiles for baggage, seats and upgrades.
- Baggage (The Commodity): Highly price-sensitive and necessity-driven. The best way to price is using a time-based escalator (an introduction price that encourages booking lower; a check-in price that penalizes late should use a higher price rather than try to force the customer through the door at the last minute).
- Seat Selection (The Experience): Lots of sensitivity around availability. As the “good” seats disappear, pricing should increase. This is due to not just revenue management, but also for managing cabin density and passenger flow.
- Upgrades (The Luxury): This is the most complicated category when it comes to pricing. Several airlines are moving toward Bid-Based Models versus flat pricing. This enables market-driven price discovery while maximizing willingness to pay. and allow the airline to maximize WTP, while at the same time preventing the “insult” effect of having the tickets priced significantly too low with no passengers in the cabin.
The Post-Booking Window: Your Secret Weapon
After clicking a “buy button,” conversion does not end at booking – it often accelerates post-purchase; frequently, highest conversion occurs with ancillaries in the post-booking window (48–72 hours before departure).
At the time of the first ticket purchase, the traveller focused on total price paid (sticker price) rather than considering value for dollars spent. Price sensitivity at the time of purchase; however, once a ticket has been purchased (sunk cost effect), resistance to making an additional purchase of a $40 upgrade or $15 meal increases significantly.
Pricing in real time should align with the entire traveller journey; e.g., the offer should look different (and most likely more expensive) if sent via push notification 24 hours prior than if presented during the initial booking transaction.
The Reality Check: Overcoming Implementation Hurdles
Dynamic ancillary pricing is a complex process that uses technology to reach the maximum potential for an airline to maximize revenue/ profit. Even if the technology were simple, there are usually other barriers preventing ROI: like legacy debt. To do dynamic ancillary pricing properly you need a smart algorithm, as well as an offer & order management system that is modern. A large percentage of legacy PSS environments were never designed to handle large amounts of API traffic or to support the construction of individualized offers.
Three technology pillars are foundational to a successful rollout of the programme:
- Real-Time Data Pipeline: You must have the ability to integrate CRM data with real-time inventories at zero latency. If it takes your pricing engine 5 seconds to load an offer, your revenue will be lost.
- Distribution Ready (NDC): You must be able to distribute your dynamic ancillary offerings through indirect distribution (OTAs, TMCs) and not just direct (web).
- Commercial Guardrails: Dynamic pricing can create the impression of “price gouging” if not managed. Price limits must be put in place in order to ensure that no aircraft seat costs more than a predetermined percentage of its base fare. This will ensure that your company retains its customers’ trust.
The Bottom Line
“Expanding by gaining new city pairs,” is being replaced with “Expanding by improving each individual seat.” For network carriers, the target is no longer to reach high load factors, but instead to maximize Ancillary ARPU (average revenue per user). Making the move to hour by hour dynamic pricing is not an option. It is critical due to increasing costs of operating each aircraft, and continuing to stay within the price constraints of your market for base fares. Future airline growth will not come from adding capacity-but from maximizing value per passenger through intelligent, real-time retailing.
