Um, About Those Elite Upgrades…

For those of you with elite status with an airline, particularly those at the top of the pyramid, you’ve probably gotten used to at least the occasional upgrade to First Class or whatever version of “Economy Plus” your airline has. I have some bad news: The airlines are working hard to make those upgrades go away.

Why Give Away The Milk for Free When You Can Make Them Buy The Cow?

delta, revenue management

Delta presentation at the Cowen Investment Conference, September, 2018.

Airlines have spent decades refining and improving their revenue management systems, the technology that helps them determine just how much money they can make. The problem is, discount carriers have come in and wrecked the pricing structure that airlines used to use to price economy class tickets. Thus, the airlines have turned to the only place where they have a differentiated product: the front of the plane. The Wall Street Journal wrote a good article about it recently, although the piece may be behind a paywall.

It used to be that a first class ticket cost multiples of what an economy ticket cost. The result for the airline is that they didn’t sell many of them, particularly domestically, but they did give away a lot of those seats for free to their elite customers.

Over time, though, the companies began to look for ways to increase the money that they got from the premium cabins and began to play with the concept of repricing the seats and upsells. The former was simply Econ 101: Lower the price of the goods and you’ll sell more of them. The upsell process, though, is a direct result of improved forecasting technology. Now, the airline can better guess how many business/first class tickets it will sell at the “regular” price while offering economy passengers the chance to buy up, using either cash or miles. They discovered that the changes had minimal impact on business travelers’ willingness to pay a significant premium but also that economy passengers were willing to pay a reasonable price to guarantee an upgrade, rather than risk not getting it through status (Your definition of “reasonable” may vary.).

This is not a new trend, and we have not reached the end of the line, but it will make sitting up front that much tougher or more expensive. Delta is the most advanced, but I’m sure that its competitors will be in its league within the next 12 months or so. The trends will ebb and flow. Right now, demand is strong, so it’s easier for the airlines to get something for those seats. Eventually, it will soften. But the trend toward monetization isn’t going away.

 

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