Analysis of Willingness to Pay for Ancillary Revenue of Full Service Airline (The Case of Garuda Indonesia)

Airlines are facing challenges from high cost structures and intense competition. This has made airlines universally look for opportunities to generate ancillary revenue, additional income apart from their main sources, including Full Service Carriers (FSC). Measuring consumer’s willingness to pay is pivotal in pricing and estimating ancillary revenue demand. This study analyzes whether customer’s type of journey, purpose of journey, length of flight, and type of flight class have an impact on willingness to pay (WTP) of Garuda Indonesia’s ancillary revenues which comprises of unbundled products and commission-based income. This paper uses data from a survey to Garuda Indonesia’s customer and follows quantitative studies to identify and describe the relationship between the WTP of Garuda Indonesia’s ancillary revenue and all variables involved. The study found that passengers value more the unbundled products. It is also found differences in WTP for particular ancillary products and services based on purpose of journey, length of flight, and type of flight class. Keywords: Ancillary Revenue, Willingness to Pay, Type of Journey, Length of Flight, Journey Purpose, Type of Cabin Class, Full Service Carrier

A Review of Ancillary Services Implementation in the Revenue Management Systems

Ancillary services in air transport represent a set of services provided to passengers to choose from, enabling them to enhance their travel experience while accumu-lating additional airline revenue. Low-cost airlines pi-oneered the practice, but the separation of ancillary services from the basic service has become an intense-ly growing trend in the air transport industry over the last decade. This practice has enabled low-cost airlines to significantly reduce the price of the basic service. To remain competitive in an era of transparency provided by search engines, traditional airlines offer ancillary ser-vices in addition to the basic service. To meet the passen-ger’s needs, a whole range of ancillary services has been created. However, existing revenue management systems do not take this ancillary revenue into account when cal-culating reservation limits. If the airline knew that an in-dividual passenger is willing to pay more for ancillary services, the system would be able to adjust the availabil-ity of the service for that passenger during the booking process. A review of research on passengers’ willingness to pay for ancillary services is presented in the paper, as well as a review on research on the personalisation of ancillary services and challenges of integrating person-alised pricing into existing revenue management systems

The dynamics between price and demand of myopic and strategic consumers in the air transport industry

This thesis sheds light on the relationship between dynamic pricing strategies and consumer demand in the air transport industry. The work is structured around three main research questions, which explore revenue management implementation and the relative influence on consumers’ purchasing behavior. The first research question extends the literature on airline pricing strategies by investigating the presence of quantity price discrimination of a leading European low-cost carrier, finding evidence of a two-part tariff pricing structure in offered fares (i.e., airfares are composed by a fixed fee per reservation and a variable component of price). Interestingly, the application of this kind of strategy is not linear in volume and it generates quantity discounts. Quantity discounts do not substitute the typical pricing discrimination strategies implemented by airlines, rather they are an additional way in which airlines price discriminate consumers. Second, to have an overview of the effectiveness of implementing price discrimination strategies, passengers’ price elasticity of demand is investigated. Outcomes suggest that price elasticity of European low-cost passengers greatly varies across different dimensions (i.e., seasonality, booking and flight characteristics, and served markets). Specifically, price elasticity is higher for reservations made more days in advance, as well as for bookings and departures occurring at weekends. Moreover, flights taking off during lunchtime and in the summer period are characterized by more sensitive passengers with respect to other daily timings and during springtime. As a third step, since price variations are the main outcome of revenue management, their impact is quantified by considering an advanced measure of price volatility, which takes into account past and more recent price changes, as well as the predictability of fare changes over time. Empirical analyses reveal that with higher degrees of price volatility (above and beyond the predicted price trajectory), demand decreases coupled with a significant decrease in price elasticity. Intuitively, price volatility induces lower demand elasticity, whereby consumers may end up paying more, but possibly reducing the overall demand (given the higher price). This insight suggests the need to incorporate the effects of price volatility on consumers’ demand into the classical revenue management model (Expected Marginal Seat Revenue), demonstrating its potential implementation benefit, while capturing the potential harm caused by the presence of strategic consumers. Overall, this thesis gives new explanations on consumers’ behaviour and timing of their purchases: i) consumers’ knowledge of price discrimination strategies helps in their timing decision in order to pay a lower price; ii) acknowledging that only in markets where consumers are price sensitive it is beneficial to implement price drops, price elasticity estimates on different dimensions lead passengers to more easily identify the possibility that airlines plan price variations; and iii) consumers may take advantage of price fluctuations and wait for downward price adjustments

A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure

While real estate brokers have long set their fee as a straight percentage of a home's sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if divorce lawyers set their fee as a flat percentage of a client's net value, irrespective of whether the divorce was amicable without kids or involved bitterly contested custody and other issues . Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value. The article analyzes five elements of the traditional residential real estate broker rate structure, the most important of which are: 1) setting fees as a percentage-of-sale-price, 2) letting the seller's broker set the fee received by the buyer's broker, and 3) refusing to unbundle the price of a full package of services. After explaining the conditions under which such rate elements would be justified, this article finds that those conditions do not generally exist in the real estate brokerage market. Moreover, it identifies more than a half dozen harms that the rate elements cause to home buyers and sellers. For example, buyers are often not alerted to attractive homes because the rate structure leads traditional agents to intentionally avoid showing them. Meanwhile, many buyers do not even consider negotiating the fee paid to their broker because the rate structure causes them to believe their brokers' services cost them nothing. After this criticism, the article suggests that consumers would benefit most from a fee-for-service approach, combining flat fees, hourly fees, and bonuses, including percentages of extra value created, and it identifies currently available examples of some of these options. After reviewing eight reasons why incumbents are able to protect the current structure, the article suggests four questions that consumer media should teach consumers to ask to help undermine the industry's protectionist practices.Other Topics

Low-Fare Flights Across the Atlantic: Impact of Low-Cost, Long-Haul, Trans-Atlantic Flights on Passenger Choice of Carrier

Full-service carriers (FSCs) have long ruled the trans-Atlantic market, due to the absence of low fare competition, which has kept airfares high. However, renewed interest in lowcost, long-haul (LCLH) flights was prompted by efficient aircraft, low fuel prices, liberalization of air markets, and low-cost carriers’ growth opportunities. Since 2013, multiple LCLH carriers have commenced trans-Atlantic operations, and their market share has grown to 8%. In response, FSCs are establishing their own LCLH subsidiaries and/or introducing basic economy airfares to more effectively compete in the trans-Atlantic market. The purpose of this dissertation was to further the understanding of LCLH and FSC passengers in the trans-Atlantic market by determining what demographics and airline service attributes affected their choice of carrier type, and also what impacted their willingness to switch carrier type and the amount they were willing to pay to do so. A total of 1,412 trans-Atlantic economy and premium economy passengers were surveyed at Los Angeles (LAX) and Seattle–Tacoma (SEA) Airports, which included those who had flown an LCLH (n = 787) or an FSC (n = 625). Exploratory and confirmatory factor analyses were performed to develop a factor structure for passenger travel experience attributes, which were identified as: Operations, Comfort, Onboarding, Service, and Flight Schedule, along with a variable, Airfare. Binary logistic regression was used to determine the variables/factors that affected passenger choice of LCLH or FSC. Younger passengers preferred LCLH carriers, whereas older passengers preferred FSCs. Airfare was the most important predictor of choice of carrier type, followed by Comfort, Service, and Flight Schedule. Satisfaction with Airfare and Comfort were associated with choice of an LCLH carrier, whereas satisfaction with Service and Flight Schedule were associated with choice of an FSC. Willingness to switch from an LCLH to an FSC was evaluated, with 55% of respondents indicating they would remain loyal, and 45% of them being willing to switch to an FSC. Decision tree analyses were utilized to show the relationships between variables/factors that were relevant for passenger switching decisions. The variables/factors that affected an LCLH passenger’s willingness to switch to an FSC were: Airfare, Income, Education, Age, Gender, Comfort, and Operations. Binary logistic regression was utilized to determine that Age, Education, and Cabin Class affected willingness to pay more to switch to an FSC. Willingness to switch from an FSC to an LCLH was evaluated, with 76% of respondents indicating they would remain loyal, and 24% being willing to switch to an LCLH carrier; with a decision tree showing that Gender, Service, Airfare, and Onboarding affected this decision. Binary logistic regression was utilized to determine that Airfare, Nonstop Flights, and Courtesy and Responsiveness affected willingness to pay less to switch to an LCLH carrier. This research has demonstrated that often overlooked aspects of air travel, such as comfort and service, are vitally important to long-haul passengers. Furthermore, both LCLH and FSCs have a place in the trans-Atlantic market, as some passengers prefer a no frills LCLH offering; whereas other passengers prefer an all-inclusive FSC offering

Pay-As-You-Go Driving: Examining Possible Road-User Charge Rate Structures for California

This report lays out principles to help California policymakers identify an optimal rate structure for a road-user charge (RUC). The rate structure is different from the rate itself. The rate is the price a driver pays, while the structure is the set of principles that govern how that price is set. We drew on existing research on rate setting in transportation, public utilities, and behavioral economics to develop a set of conceptual principles that can be used to evaluate rate structures, and then applied these principles to a set of mileage fee rate structure options. Key findings include that transportation system users already pay for driving using a wide array of rate structures, including some that charge rate structured based on vehicle characteristics, user characteristics, and time or location of driving. We also conclude that the principal advantage of RUCs is not their ability to raise revenue but rather to variably allocate charges among various types of users and travelers. To obtain those benefits, policymakers need to proactively design rate structures to advance important state policy goals and/or improve administrative and political feasibility

Sky high economics

The global airline industry is on the cusp of a connectivity revolution. Currently 3.8 billion passengers fly annually, with only around 25% of planes in the air offering them some form of onboard broadband. This is often of variable quality, with patchy coverage, slow speeds and low data limits. By 2035, it is likely that inflight connectivity will be ubiquitous across the world. Non-broadband-enabled ‘traditional’ sources such as seat upgrades, onboard duty free and baggage fees are currently worth around $60 billion to airlines. For the first time, this research study bridges the gap between current market estimates of traditional revenues and the forecasting of incremental revenue from broadbandenabled cabins. Using IATA passenger traffic data and forecasts of growth, including a near doubling of passenger numbers to 7.2 billion annually, this research study forecasts that broadband-enabled ancillary revenue will reach an estimated$30 billion for airlines by 2035. Overall, a total market of $130 billion of additional revenues will be created. As well as airlines, this market will include content providers, retail goods suppliers, hotel and car suppliers, airlines and advertisers. The four primary areas of broadband enabled ancillary revenue have been defined in the research are: • Broadband access • Advertising, encompassing interruptive advertising and pay-per-click • E-commerce and destination shopping • Streaming, including premium content The research looks at six key regions: Asia Pacific, Europe, North America, Africa, Middle East and Latin America, analysed using both primary and secondary research, drawing on available data of passenger numbers and of forecasted aircraft growth globally. By 2035, broadband-access revenue is forecast to remain the highest single source of new ancillary revenues, accounting for 53$0.23 per passenger in 2018, to $2.82 in 2028, reaching$4 per passenger by 2035. With current traditional ancillary revenue for airlines of around $17 per passenger, the research study projects that broadband connectivity will add around 24$11 billion of revenues, and Full Service Carriers (FSC) around $19 billion. The capitalisation of opportunities presented by a connected cabin with high quality continuous coverage will depend on the degree that airlines are willing to engage with third party suppliers, retailers, destination companies, content providers and others. The research study forecasts that by 2035, from the estimated$30 billion airline share of the total broadbandenabled revenue of $130 billion, Asia Pacific has the highest figure at$10.3 billion, followed by Europe with $8.2 billion, North America with$7.6 billion, Latin America with $1.9 billion, Middle East at$1.3 billion and Africa with $0.58 billion. The opportunity for revenue growth from broadband enabled services is dependent on airlines commercialising passenger data to a much greater degree than occurs currently. Today, only 11% of existing airline schemes offer personalised rewards based on purchase history or location data. More loyal customers can generate a 23% premium in profitability and revenue to airlines. Airlines today have failed to fully develop the potential opportunities offered by passenger data. Airlines are in the driver’s seat for realising a massive opportunity. By bringing together right technological, retail, advertising and content partners, airlines will be able to offer passengers the services they are asking for, whilst improving the bottom line. With the number of passengers currently flying every day forecast to almost double by 2035 this is a ‘sky high’ multibillion dollar opportunity for the global airline industry