Airlines that offer branded fares love to talk about upsell. “30% of passengers choose to purchase one of the upsell bundles!” (Hurrah) They conclude by “Branded fares are working”.
This, however, is not the best way to look at branded fares, and is typically not the main reason airlines are increasingly offering such re-bundling of ancillary services.
We first need to distinguish “branded fares” from “fare families”. Fare families match product differences with standard, hierarchical fare classes. Thus, the lowest fares have the fewest amenities, and the highest fares bundle in the most common ancillary services. Branded fares, on the other hand, add-on a bundle of amenities as an upsell on any fare/fare class. You could purchase a low “Q” fare for $99, bucketed in a discount inventory class, and pay an extra $50 – a total of $149 – for a bundle of optional services, including for example 2 checked bags, priority boarding, premium seat selection, and onboard food and drinks. Or alternatively, you could purchase a $299 ticket a few days before the flight and for the same $50 more, get the same re-bundled amenities. With such branded fares, most often the bundling of ancillary services incorporates a discount relative to purchase of each of the ancillary items à la carte. Upsell in branded fares means customers are purchasing ancillary services – which they may or may not have purchased on an ala carte basis.
So, are such “branded fares” really working? Let’s review three examples:
- Frontier Airlines: the first carrier to offer branded fares in the U.S.
- JetBlue: one of the more recent advocates of branded fares
- Delta Airlines: which has added a new such fare to their branded fare menu, to compete more effectively against certain competitors
Frontier Airlines launched branded fares in the U.S. in 2008 soon after the industry adopted bag fees. Frontier initially matched the industry bag fees – when purchased à la carte – but offered a large discount when purchased in the first upsell branded fare. In effect, Frontier was not actually matching the industry bag fee when customers purchased the branded bundle and its most loyal customers appreciated the deep discount. Virtually everyone who bought the fare did indeed check a bag. So Frontier did not necessarily gain more revenue – no more passengers checked bags, and many of those who did now received a large discount -- but it did protect market share versus Southwest Airlines which had chosen not to assess a bag fee at all. Southwest continued to grow aggressively in Frontier’s Denver markets but Frontier didn’t lose as much share as it would have without branded fares.
JetBlue faced a similar competitive situation with bag fees. They had not initially followed the industry standard and wished to make implementation of such fees, after the fact, more palatable. Thus, they launched branded fares – with a discount on bag fees and at the same time they began levying a bag charge. They certainly sought more total revenue from the bag fees, but they also didn’t want to lose share because of their new fee.
Delta’s “Spirit match” is another example that exists with Delta’s Basic Economy fare – a lower fare with fewer amenities that they offer in select, ULCC-competitive markets. “ULCC’s” are ultra-low-cost-carriers, Spirit and Frontier, that typically have much lower fares but which accompany those fares with more ancillary fees. In this case, the un-bundling is designed explicitly for market share protection in markets where Spirit/Frontier have successfully “stolen” share. Obviously, there is no upsell here and although the fare is much lower, it has fewer amenities all made clear to the customer via the menu of branded fares.
In each of the scenarios, market share is critical to the success of the fares. Competitive positioning is actually even a higher objective than upsell. For Frontier and JetBlue, market share protection was an airline-wide objective; for Delta the share goal was focused on certain O&D’s competitive with Spirit or Frontier. For Frontier and JetBlue branded fares protected share, and for Delta, it regained share lost to a growing ULCC.
Ultimately, of course, market share gains and upsell are both proxies for better meeting customer needs. Monitoring share is more complex than measuring upsell, however. There are many factors that drive airline market share at any point in time, including changes in base fares, schedule changes both by the airline and by its competitors, and market changes (employment growth, corporate relocations, etc.). Two tips to monitoring market share gains from branded fares are:
- QSI: The industry has a conventional way to adjust for schedule changes, measuring the strength of an airline’s schedule based on “quality of service” index (QSI). Thus, Frontier could track market share losses relative to what would be expected based on Southwest schedule growth. Based on the schedule, QSI might predict a 15% share loss; a 5-10% share loss instead could be attributed to the branded fares.
- Load Factor Limits: Airlines are operating at historically high average load factors so any market share gains are likely to be limited on existing capacity – which is why share protection is a more common objective than share gains. Delta, in fact, will have little incentive to even offer the Spirit-match fares where it isn’t feeling load factor pressure. As Spirit grows, Delta will have a tool to insure that share is protected.
Branded fares are not just about upsell. They represent an effective competitive weapon. For many airlines, the success of branded fares is measured by market share. As branded fares become more common across the industry, airlines need to monitor the impact on share along with upsell.