Intrigue as Virgin America plans dynamic pricing of ancillaries

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Now that Virgin America has hinted it is examining charging for carry-on bags, speculation is growing over how an airline which has won so many passenger accolades would possibly implement a charge that could prove highly unpopular among customers.

During the recent Phoenix Sky Harbor International Aviation Symposium, Virgin America CEO David Cush highlighted the fact that airlines give the best space in the aircraft – overhead bin space – away for free. Atmosphere Research travel analyst Henry Harteveldt, who was in attendance at the symposium, live tweeted: “Is Virgin America going to charge for carry-on bags? Sounds like they’re studying it.”

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An airline executive does not make these types of comments at an event with media and analysts in attendance if it’s “not giving it serious consideration”, notes Harteveldt.

But the more pertinent question, he says, is – if Virgin America implements a charge for carry-on, what form will it take? There are several models from which to choose, including the Spirit Airlines approach where no passenger is allowed to have a carry-on without a fee. Virgin America could also create fare bundles that include a carry-on option, or perhaps the airline would offer customers a trade-off in savings if they do not bring carry-on.

Virgin America certainly has a fiduciary responsibility to grow revenue, but it also needs to carefully consider any potential product changes in light of its brand promise and customer loyalty, says Harteveldt. The airline has built its brand around offering a product that is slightly upscale compared with its competitors – though the latter have been catching up – and it does not want to risk passengers opting to choose other airlines.

Cush offered his comments about overhead space just as Virgin America is preparing to debut new technology from Sabre in the third quarter to help it shore up ancillary revenues. During the first quarter the airline increased its ancillary revenue per guest by 7% to $22.24, “which is sightly below our three-year trend of 12%”, says the Virgin America CEO.

The three pieces of technology Sabre is supplying to Virgin America are electronic miscellaneous document capability and two proprietary Sabre systems, the Customer Data Hub and Dynamic Retailer.

The new technology allows Virgin America to “expand the distribution of our ancillary products to GDSs and OTAs, and we think that is critical”, says Cush. The airline is also gaining an ability to initially variably price its ancillary offerings, and ultimately dynamically price those products.

Dynamically pricing ancillaries is the next phase of maximizing revenue for airlines. For example, in 2014 United CEO Jeff Smisek declared that the carrier’s Economy Plus seats were priced by “specific seat, by specific location on specific aircraft for a specific time of day and specific day of week”.

One of the most exciting aspects of the new Sabre technology for Virgin America is “it gives us tremendous information on our guests, what they’ve ordered in the past and gives us the ability to go in and market to our guests based on past behavior rather than based on best guesses, which is what we’re doing today”, says Cush. “Our customer database will be significantly beyond what we think the other guys can do.”

Whatever the outcome of Virgin America’s evaluations of monetizing overhead bin space, it is clear the airline is entering the next phase of using granular customer data to maximize revenue on existing and potential new ancillary offerings. “Our expectation is to start seeing benefits from this by the third quarter,” says Cush.