Dictionary.com defines yield management, also known as revenue management, as "the process of frequently adjusting the price of a product in response to various market factors, as demand or competition." A long-established practice in airfare pricing, Spirit Airlines is exploring ways to apply this mysterious form of airline voodoo to the pricing of bag fees.
Deutsche Bank analyst Michael Linenberg in a research note on Tuesday revealed the carrier's plan, citing comments made by Spirit Airlines CEO Ben Baldanza. While a Spirit spokeswoman said the carrier is "not currently set up to do so," she confirmed that "we are exploring options."
As Spirit flyers know, the carrier's fares already can serve as little more than a down payment on air travel. For the first three months of this year, the airline generated on average $51.68 in "non-ticket revenue" per passenger per segment, up 21 percent year over year. Ancillary fees represented 40 percent of the carrier's total revenue in the first quarter, and Spirit executives plan to raise that figure to 50 percent, according to Linenberg's research note. That hardly sounds "ancillary."
Yet, as Linenberg noted, "After breaking the $50 mark for ancillary revenue/passenger in the March quarter of 2012, many investors have been scratching their heads on how Spirit will continue to find new frontiers in this high-margin segment of its business."
This is where revenue management comes in.
Citing Baldanza, Linenberg noted that now "it costs the same to check a bag at the peak of the December holiday season as it does on a Tuesday in September (a seasonally weak month/slower travel day)."
That is standard U.S. industry practice: carriers list a static bag fee for a certain situation, and apply it more or less consistently, with waivers for elite flyers and certain credit card users, and "discounts" from many carriers for pre-paying the bag fee online.
However, Spirit in theory would kill the static pricing and make it variable, charging more to check a bag two days before Christmas and less to check on midweek during the post-Labor Day shoulder season.
"Baldanza went on to say that there are flights when it is not possible to fit another checked bag on the plane and that there are also flights that go out with just three bags in the belly," Linenberg continued. "If Spirit were to apply revenue management techniques to its checked bag fees, it could potentially lead to securing a premium price during peak times and booking a greater number of checked bags during weaker times. Checked bags represent just one of the many ancillary products that could benefit from such techniques."
Even without deploying revenue-management techniques, Spirit's per-passenger ancillary revenue figure is astounding when compared with its largest domestic competitors, which averaged less than $10 per passenger per segment through April 2012, according to Airlines For America data representing Alaska, American, Delta, JetBlue, Southwest/AirTran, United and US Airways.
Yet, the growth rate of ancillary revenue has slowed for those carriers, according to Airlines For America data. While they're all looking for the next great ancillary, maybe Spirit has found it.
I rarely write about Spirit Airlines. I don't know many business flyers who frequent the carrier and have yet to hear of a corporation that has a preferred agreement with them. For all intents and purposes, they fly outside of the corporate market.
However, like Ireland's Ryanair, Spirit shows what's possible when imagination and audacity collide in the pricing department. Sometimes their actions foreshadow broader industry trends. After all, Spirit began charging for checked bags about a year before legacy carriers jumped on the bandwagon.
Then again, none of the U.S. majors have matched Spirit's carry-on bag fee.