Don't Call Us...

We need to take a short pause today to commemorate the birthday of one of our greatest leaders. President Lincoln? Sure, him too. We were thinking Jenn, the virtual agent, at Alaska Airlines. We're a touch belated, as she actually turned one a couple days back. [For pure comedic value, as well as some background on the project, read this interview with Jenn that appeared in Travel Weekly last March.]

Jenn

Alaska notes that Jenn has facilitated 1.5M chat sessions in her first year of life. Think of the benefits that provided. Let's assume she improved site conversion, driving a little revenue and possibly removing some channel costs. She has to have saved a few dollars in the call center, answering the easy questions that choke the lines for other customers. Throw on a little free publicity, and we're guessing Jenn's paid for herself already.

Jenn's milestone comes as United Airlines announced it will no longer allow customers to lodge complaints over the phone. Surely this will result in a more consistent, and probably better, response to complaints. Not to mention it probably will save money.

American also AAnnounced new cAAll center AAutomation.

As the industry continues to look for cost savings, and customers adapt to self-service, we expect to see much more fine tuning in the call centers. Especially if consumers start to question the value they are receiving for call center transaction fees.

Nickels & Dimes Add Up

For anyone not on the ancillary revenue and service fee bandwagon, check out this investor presentation from United Airlines (Dec 2008). Yes, maybe United is not the fiscal role model all airlines should aspire to be, but their nickels and dimes may be adding up to real money. $1.2 Billion in 2009 to be exact. We beeline to Slide 14 for a summary of their ancillary revenue growth:





That's a pretty ambitious target for 2009, given the 2008 data and declining capacity in a global economic downturn. Yet the growth of the previous years suggests it's within reality. Keep in mind, over half of the target comes from good old fashioned service fees tied to a captive audience (e.g. ticket change fee, call center fee, etc.), as shown in this table:





Look at it a different way. UA reported 63 million mainline revenue passengers boarded in 2008, a 7.7% decline from 2007. Yet they were able to grow the ancillary revenue 28%. That's pretty good. And if passengers remain flat in 2009 (optimistic?), and UA meets their ancillary revenue target, they'll collect ~$19 per mainline pb in ancillary revenue. That's approaching $50 per ticket sold. Pretty good stuff.

Now Boarding......

FMV is not sure what's going on here - but we flew United last night and it looks like they had the "First Day of the New Program Jitters"

The gate agents were all over the place and therefore they thought the new program allowed Premier Exec AND Premier members as part of Boarding Area 0.5. Question: Who else was left? Nobody. The scene was such that Boarding Area 0.5 was simply the same as previous Boarding Area 1.

We're told that other flights did it correctly, and only Premier Execs were part of the 0.5 - but we also had this thought. By making the Premier Executive benefit so public - you also make the Premier benefits less valuable since you took away something they previously had....

Boarding Zone 0.5 ??

FMV recently recieved the following email from United:

Dear FMV: Beginning November 12, our Premier Executive members and Star Alliance Gold guests will board before Seating Area 1 customers through the Economy Lane.

The new boarding order will be as follows: Global Services, 1K and customers sitting in United First will continue to board first through the Red Carpet Lane, followed by our United Business customers. Our Premier Executive and Star Alliance Gold members will then be invited to board.

After all of our most-valued guests are on board and getting settled, the regular boarding process of seating areas 1 through 4 will begin.

Previously, there wasn't a ton of obvious difference between Premier Execs (50,000 miles flown) and "regular" Premier (25,000 miles) members. Yes, you had priority for waitlists and maybe upgrades, you could book exit row seats, and you had the nebulous Star Gold benefits - but it wasn't very obvious. Especially for international travellers. On the contrary, Seating Area 0.5 changes this and makes a very public benefit.

Most airlines are pretty blatant that their elite fliers matter more than the causal flier. On one hand, it causes some bitterness, on the other hand FMV is Premier Exec so YAY !!

Fed Ex Airlines

WAAYYY back in May, 2007 - FMV had this thought:

FMV considers [the idea of] carriers partnering with the baggage shippers to provide more customer options and deflect complaints about baggage fees.

Well - it's come true courtesy of United, who introduces their "Door-to-Door Baggage" Program:

Stop lugging your luggage around. Instead, send it ahead with Door-to-Door Baggage. Purchase this service at united.com, and FedEx will pick up your baggage from your home or office and ship it directly to your destination. Or if you prefer, you can drop off your baggage at a FedEx Office location or any other FedEx authorized shipping center.

The unique feature about this program is that United has tied FedEx into their passengers' itineraries. Once you sign in to your United.com account and press the "Door to Door Baggage" link - the site automatically starts the FedEx process using the dates and cities of your itinerary.

The kicker is the boastful tagline:

United is the first airline to save you time and money with this simple and convenient service.

Save you money?!! How much do they charge for this?? Starting at $149 !! (vs. $15 for a first bag fee??). Hey, thanks for the money savings United !

Hence, this program isn't really about cash savings. It's about time savings. This is for the guy that kind of wanted to send his golf clubs ahead to avoid the hassle of checked bags. He also didn't trust the airine not to lose his clubs. The same logic could hold for business people who don't want to shlep business materials and simply say "eh, I'll just ship it and expense it".

However, the real winner here is FedEx, who picks up some highly qualified leads over its competitors. If UA can skim some of that value, and spin it as a positive for their customers, good for them. It's time to fly.

CWT and UA Make Nice Nice

This is mostly to close up an ealier post and let everyone know that CWT and United has once again agreed to be friends. From the Travel Weekly (which is updated daily):

"Carlson Wagonlit Travel and United Airlines have come to terms on a preferred-supplier agreement...CWT spokeswoman Shannon Coughlin said no further comments or deails would be released...."


Sheesh - they made their spats so public, but then take their make up private. How's a blog supposed to make a living??

CWT QSI on UA ASAP !

According the an article in TravelWeekly.com (which comes out daily by the way) - It looks like CWT is having a spat with United and "continues to move market share away from the carrier"

The Beat is also on it saying that UA canceled its U.S. CWT agreement in June, so CWT in turn cancelled its International agreement - and they have not come to terms on a commission structure.

As a result - "[CWT] have shifted a substantial amount of traffic away from United... We are still shifting business away from United when all else is equal. Where there are markets served by United as well as other major carriers, and scheduling and pricing is as good for our clients, we have taken business away from United in favor of primarily one of the other big four U.S. carriers."

Overall - this seems pretty crazy. We know UA is taking aim at their huge commission costs, but UA also relies very heavily on agency corporate business. CWT being the biggest out there - seems like a tough fight. In addition, IF it's true that they are successfully moving business away from UA - it seems like this will only get worse once CWT starts to broaden the reach of online Symphonie initiatives and can easily automate rules to their clients.

UA used to place a huge emphasis on the QSI metric - the "Quality of Service" that is the marker for how much any agency should be selling on any route. We wonder if they have moved away from this - or if CWT really wasn't selling much of UA to begin with...

Victory for the Lowest Common Denominator

It turns out that UA has "matched" AA's $15 fee for the first checked bag. This to us was a matter of when, not if. We have to assume this charge will become the norm in the market (except for Southwest - who will really start to ramp up the PR machine on this fee now).

If so, then consumers don't really need to worry about cross-shopping confusion. The bag fee is just another necessary expense of travel, like airport parking, little tiny in-flight liquor bottles (hold the ice), and cigars at the duty-free shop...

Airline Merchandising 101

If you spend any time at travel conferences, you're going to hear airlines talking about "merchandising". It is quite probably a federally mandated talking point. What does it mean?

We can enjoy Slide 18 from this PPT from United Airlines for a peak behind the curtain. UA is targeting a $1B revenue increase (roughly 5% over current ~$20B revenue) in five years from the following initiatives:

• Seat upsell, $300M/year


• Unbundling product (e.g. Baggage Fees), up to $300M/year


• New products, $400M/year

We wish we knew more about the "new products" (c'mon, pay toilets!), but we speculate that means things like entertainment, buy-on-board, new lounge purhcase plans, etc. Wait and see.

PS, FOR NERDS ONLY:

This is all interesting stuff, but the humor is found in the math error. Note that the slide indicates that seat upsell "can DOUBLE to $300M/year". That means the incremental benefit is only $150M. That means the total target only adds to $850M, not $1B. Not to mention that a $100M range was cited for "unbundling product". Oops, now we're down to $750M. Fine, fine, $250M is a rounding error when you're talking about $20+B in total. However, they may want to hire a consultant to check the other consultants' work (yes, FMV Available)

Baggage Fees Save Airlines Money

You didn't need Nostradamus' skills to predict that there would be followers to United's fees to check a second bag. Sure enough, US Airways will begin charging passengers if they check a second bag.

What is interesting about the news, is that US states that 8% of their passengers check a second bag. As we noted in our post about United's policy, we estimated that it would take well over 16% of passengers checking a second bag to generate United's targeted benefit. We consider this proof that a big portion (maybe half) of the benefit of the fee is cost savings, not ancillary revenue. Carriers claim the savings deals with fuel, we suspect it's as much about the labor associated with handling the bags.

The ultimate source of the savings is fairly irrelevant. The multi-million dollar question is in fact, will a $25 fee really persuade the general travelling public to pack lighter? It probably depends. Imelda Marcos type shoe fiends? Probably no. Family of four going to Disney World? Probably yes. We'll just have to stay tuned, and see if they dial the fee up to $50 to know for sure.

UA Baggage: The People Have Spoken

Lest you miss it, America's Finest News Source, The Onion, has some fairly comedic public feedback on the new United Baggage Fees. Yes, it's a parody - but we suspect if you asked enough real people in ORD Terminal 1, eventually you'd get these exact responses. OK, maybe you'd need to hit the United Express gates in T2 to get the fireworks response.

Overhead Bins: Prepare to be Very Full

This move has been a long time coming, so it shouldn't come as any surprise to FMV readers that approximately every media outlet in the nation is reporting that United Airlines will begin charging $25 to check a second bag on May 5.

The Chicago Tribune reports that UA expects a $100 million annual benefit from the move (combined cost savings and revenue boost). We would kill to know exactly how McKinsie computed that benefit. Consider that UA lifts about 25 million tickets per year. That would mean at least 16% of passengers would have to pay the fee, assuming no cost savings. However, it's actually got to be much higher than that, considering elites, premium cabins, gov't/military pax, international itineraries, etc. are exempt. Are there really that many hayseeds dragging two bags to the counter? We say no; hence, we conclude there has to be a big cost savings benefit anticipated.

There is also a gaping loophole in the policy, for those that enjoy gamesmanship. There is no charge to gate-check a second bag! Hence, you can go to the counter and check one bag then check the second at the gate. Certainly a nice strategy, and one that also diversifies your lost baggage risk portfolio.

We think the UA spokesperson says it best, "We will keep [the baggage fee] as long as customers want low fares". Oh, SNAP! Take a suck at that, Mr. Consumer. You brought this on yourself, with your demand for low fares without recognition for premium services.

That quote is airline-speak for "don't hate the player, hate the game".

In related news, United traffic fell 5.3% in January on a 3.4% decrease in capacity.

Book Direct. Because You Want To.

At the end of January, looks like United will become the latest airline to pull their mileage bonus for booking direct. It's pretty clear that carriers are feeling confident in their abilities to draw consumers to direct bookings without such incentives.

What are the key drivers of this change? The short list looks something like this:

• The popularity of meta-searchers such as Kayak, Farecast, Sidestep, etc.


• Lack of perceived consumer value in the on-line travel agent space.


• Carrier surrender in the battle to drive share away from corporate TMC's.


• Save Booking Fees over the agencies.

It could also be that carriers are positioning themselves to employ other stick-type penalties (i.e. rather than current carrot-like incentives) for booking away from their sites. That's a great conspiracy theory, but not likely to happen until current GDS deals expire.

The most realistic hypothesis is that consumers are pretty satisfied with the carrier sites. Most offer good shopping tools, a low-fare guarantee, ancillary travel services (e.g. insurance, car/hotel booking, etc.), and other tools like flight alert and on-line check-in. Why bother going anywhere else, especially for a preferred carrier?

This is kind of like any mature relationship. When you first start, you start giving neat trinkets and surprises. But then that starts going away, and the pair get kind of comfortable and content being with each other on the couch eating ice cream and watching "Terminator: The Sara Connor Chronicles" (editor's note: Tonight on FOX!). Just be wary if one of them gets all frustrated that it's not special anymore, sees some other hot young thing out there, and dumps their old standby. Because you can bet that it's going to take more than a handful of devalued miles to win back the mate...or attract a new one.

Put it on Credit -

A few months ago – we profiled a new company called Yapta.com, that tracks specific flights, and alerts a user if their flight(s) have dropped in price. The beauty of this service was that you can actually get money back if you’ve already purchased your trip. Some airlines would issue a credit voucher for the entire price drop difference, or charge you a $100 fee if you wanted cash back instead. However, according to a Wall Street Journal article (subscription may be necessary) - it looks like some airlines are switching practices and treating credit the same as cash:


"[I]n mid-July, US Airways quietly changed its policy on vouchers for price changes after you purchase tickets. The carrier now charges a $100 change fee regardless of whether you want cash or a voucher… American, Delta and Continental airlines also charge change fees in these cases; Alaska, JetBlue, Southwest and United airlines all offer vouchers for the full price difference…


Yapta says even as airlines tighten up rules on refunds when they cut prices, its service is still useful in tracking price changes before you buy tickets. Yapta President Tom Romary says 78% of all itineraries tracked by Yapta are pre-purchase -- people get alerts from Yapta when prices change so they can make better buying decisions."


A few points on all of this:

1) This doesn’t seem the optimal result for the airlines. By charging a $100 fee no matter what – they are effectively forcing people to ask for their money back, rather than settle for credit (why would you choose credit over cash??). As a result, they lose some stickiness on getting people to fly their airline again, and they will lose the breakage potential on these credits. Seems like there is a definite advantage for the airlines that they are forgoing here.

2) We note that United is currently an airline that allows the full difference back through a credit voucher. FMV predicts that this will change before the turn of the year. United’s corporate theme song is U2’s “I Will Follow” – and if the major carriers are starting to lean one way – we think they will eventually follow.

3) No matter what they say – we think this really reduces the value proposition for Yapta. 78% of all itineraries are pre-purchase?? Wow. It then becomes a bit mixed with Orbitz’s Deal Detector, SideSteps’ FareTracker and others - and probably underperforms without a related travel product (i.e. actually allowing you to shop for and/or book flights).

4) FMV is waiting for Expedia's Fare Alert and Travelocity's FareWatcher Plus to step it and get a better set of names! (FYI - Fare Market Value can be bought.....)

United We Sell !!

United just posted a new Miles Plus promotion:

Offer: Pay $20 and receive 1,000 bonus miles on your next qualifying United, United Express or Ted roundtrip.

Now, FMV is all for elite status on airlines - so we can see this "bonus" working out if it can help you reach or maintain elite tier status. Sign us up! But wait, there's more. United inserts this kicker of a clause:

"Bonus miles do not count toward elite qualification"

Excuse me? No thanks. Granted, this promotion does accelerate your earnings toward a reward. As a Premier Executive it might take only eight ORD-EWR trips instead of 11 to accrue a 35,000 mile reward. Yet that acceleration costs you $160! We GUESS this is a deal relative to the normal offer to "Buy Miles". United generously offers to sell miles every day, at an even suckier rate than this promotion: 1,000 miles for $64.57, and 5,000 miles for $182.82.

Yet the ONLY instance where we can see this promotion making sense is the case where you know your travel plans for the next several months and you know when you're done you'll be a few thousand miles short of the award ticket you want.

Otherwise, this is a blatant whoring of miles and lends more ammunition to the argument that the most profitable part of United is the Mileage Plus Program. There has even been talk that analysts believe United is preparing to divest the program - much like Aeroplan and Air Canada. If Mileage Plus were sold or taken public, it could be worth about $7.5 billion, compared to the airline itself with a total market value of around $5.5 billion.

Maybe this promotion helps UA demonstrate the consumer market price for miles? It certainly helps demonstrate that "there's one born every minute".

Coffee or tea? Cash or credit?

United Airlines reported a disappointing $150M net loss for the 1st Quarter. FMV could type all day and not fully capture how troubling we find this, so instead we'll grab our half-full lens and focus on the "so-called-solution" (or at least part of the solution) as suggested by United, ancillary revenue.

In addition to trying to charge more to business passengers - United suggests they may consider charging passenger fees for baggage handling and seat selection. United is already on pace to make $100M from upselling EconomyPlus seating to non-elite passengers, so they believe it also makes sense to peek under other rocks. The pessimist would note that with $3.3B in 1Q07 passenger revenue, there's no fast track to UA profits through ticky-tack fees. However, consultant Patrick Murphy (Tralliance Coaching & Consulting) estimates that fees and advertising can generate up to 35% incremental revenue! That's real money.

Word from the UATP Conference is that AirTran, Frontier, and US Airlines are among other carriers considering similar strategies. That's no shocker, considering the industry is dedicating a conference to the topic of ancillary revenue this fall. But FMV wonders, can any carrier's top line revenue actually grow if everyone follows the same service fee playbook? We think the answer is yes, but only for those carriers that can effectively market their repositioned products and we believe that doesn't include most of the legacy carriers.

For example, will UA be able to win new business travellers with high restricted business fares AND a seat selection charge? It may work to some degree for lesuire customers, but we can't see it working enough to make a huge difference overall. Business travellers, who already make up a large majority of their revenue, will either be exempt from these fees, or will resent paying them and perhaps pop to another carrier.

The marketing and loyalty efforts are going to have to heat up - and just add it to the fuel charges.