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First class thinking

The first time I saw first class was on a Boeing 747, flying from Heathrow to Seattle in 1996. I had to turn right, but being an inquisitive 14-year-old I peered through the curtain several times.

The airline had just introduced revolutionary flat beds, and together with the pine-effect paneling, blue seat and sideboard fabric, and flowers, it looked like a cross between a hotel and the Hanging Gardens of Babylon. I decided that First was the only way to fly.

Today I appreciate the limits to product delivery in commercial aviation and know that first class is not as amazing as I imagined at 14. And since 1996, many airlines have reduced first class capacity, some withdrawing the service completely.

Fleet-planning colleagues tell me only about the costs of first class and seem to forget about revenue. To convince those planners that they should invest in first class concepts you need to prove that revenue opportunities exist. This series of blogs is about how to use revenue management insights to find those opportunities.

Revenue component 1
This one is obvious: some passengers are willing to pay more than the business class fare, and the price gap between private aviation and business class is high. Offering first class causes some passengers to pay more for their flights.

Revenue component 2
Pressures to sell economy class are high, and yields can suffer as a result. Offering first class relieves this pressure, allowing your sales force to concentrate on more valuable opportunities, boosting revenue across all cabins.

Revenue component 3
Offering first class on a limited selection of flights may produce less revenue than not offering first class at all because of passengers wishing to connect.

Having first class seats going unsold because a passenger wants to travel first class all the way and books with a competitor instead harms revenue.

Revenue component 4
If your alliance offers “circle” fares, first class passengers will always travel with your partners if you do not offer first class, increasing the cost of seats going unsold.

Revenue component 5
There may be ‘status’ benefits of offering first class, as some passengers see that product and think your other cabins must be good too. Increased demand for lower cabins boosts your yield.

Revenue component 6
Some business leaders may travel first class and offer contracts to their preferred airline. In this case, having first class can allow an airline to hoover up large quantities of lucrative business travel from that CEO’s company.

Revenue component 7
There may be a loyalty benefit from some passengers choosing to fly more to earn enough frequent flyer miles to redeem in first class rather than business.

Revenue component 8
When passengers burn their miles for first class rather than business class seats, your loyalty liabilities are reduced.

Revenue component 9
All the above may have “multiplier effects”. For example, higher
demand and higher yields going together will increase revenue by more than the sum of each.

To convince planners to invest in first class, ask your friendly revenue management specialist to help value each of these components.

Oliver Ranson is the founder of Ranson Pricing. Oliver was educated at LSE, where he took a First and then a Masters in economics. The rigorous microeconomics grounding that he received at LSE formed the basis of his passion for pricing.

After graduating Oliver joined leading consultancy Analysys, where he helped a mobile phone network operator justify their prices in front of their local regulator and conducted research for the European Commission.

He then moved to revenue management at Qatar Airways, creating from scratch the strategy framework and tools necessary for the airline to completely redefine their pricing. Before founding Ranson Pricing he was head of product research at Qatar Airways, where he applied his deep understanding of pricing concepts to investigate how product enhancements drive revenue.

Oliver believes that effective pricing based on both rigorous analysis and sound intuition is the key to long-term profitability.

 

27 April 2017

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