Airline load factors are at record levels – many airlines average 80-90% loads on flights over a year. On all flights projected to be full, airlines strive to set aside enough seats for high fare passengers who often book close-in. Many studies have shown the disproportionate importance of high fare passengers on airline profitability so all airlines have a clear focus on these customers. On high-demand flights, airlines may reserve ten or more seats for passengers who don’t book until the week before departure.
When demand on these much demanded flights ends up even greater than expected – when the seats set aside for lower fare passengers are sold out before the final week – airlines wish they had not sold as many low fare tickets further out. They frequently scramble to cut back even further on lower fares, driving higher and higher fares to be displayed. The goal is to extract as much revenue as possible from however many seats remain.
But United Airlines has another idea to handle these high-demand flights where the models just haven’t set aside enough remaining seats to match the expected demand: find more seats to sell. This is not about overbooking, however. United Airlines is reportedly investigating offering existing passengers on these flights incentives to move to other flights – with empty seats – freeing up more seats for high fare demand on the full flights.
Of course, the dynamic pricing systems already drive shifts in demand from high-demand flights to flights with empty seats. United Airlines, for example, has six daily flights in the Denver-to-Chicago market that leave in the morning or early afternoon; the fares on them on a given day can vary by over 100%, providing a huge incentive to more price sensitive passengers to gravitate to the lower demand flights.
United Airline’s approach, nevertheless offers a new and normally untapped opportunity. Close-in to flight date, there are rarely low fares available on any flight. Although the fare on the lower demand flight may not match the fare on the higher demand flight, the fare is designed to gain maximum revenue from the remaining, primarily business, demand, for that flight. Airlines fear significant dilution if they offer too good a deal close-in even on the lower demand flight – close-in elasticity is estimated to be much lower.
United Airline’s approach is specifically designed to avoid impacting the remaining high fare demand on the low demand flight.
- By targeting passengers who are already booked on the peaked flight, United Airlines would not be impacting future high fare bookings – close-in demand for the lower demand flight will continue to pay the high close-in list prices. In fact, the shift becomes a load factor play in addition to a fare play – United Airline’s overall load factor increases from the late shift in passengers.
- Many of the passengers on the high-demand flight will already have displayed certain price sensitivity by booking far in advance. To shift relatively price sensitive passengers to another flight, United Airlines can potentially provide a very small incentive - $50, for example, may be 50% of the original fare. An incentive of $50 to gain an additional $500 in full fare revenue is a huge gain.
- The benefit to the airline of shifting passengers can be assessed flight by flight, day by day. Incentives can be limited to insure the program drives incremental revenue above any new incentives. The incentive can be structured based on the assessed probability of more full fare demand actually showing up on any given flight, with higher incentives allowed if there is a high probability of incremental demand.
Shifting passengers among flights in this way is highly compelling since it can raise both average fares (more full fare passengers) and average load factor (filling seats on lower demand flights). However, the concept doesn’t apply equally well in every market. It has the most potential benefit in high-frequency markets.
Any carrier that adopts this seeks to increase its share of close-in demand. Certainly, United Airlines dominates the Denver-Chicago market with its high frequency and its strong presence in both Denver and Chicago (it already has a high share of business passengers in this market). However, in Denver-Chicago United Airlines operates only one of the three non-stops during the morning peak. When United Airlines is filled out at this peak, full fare, time-sensitive customers may move to competitive offerings. By shifting existing passengers off this peak flight United Airlines can reduce the chances that full fare passengers will be “spilled” to the competition.
If United Airlines is successful, other airlines will likewise adopt the new process and will also benefit most in their high-frequency markets. Thus, United Airlines may be profitable in its high-frequency markets, like Denver-to-Chicago, but it would potentially lose full fare passengers in markets where other airlines dominate. If adopted across the industry, the program will serve to further entrench dominant carriers in their high frequency markets.