Remember when airlines used to give away their best seats for free? Ha! The economy is strong, and airlines are offering fewer upgrades. Passengers who want to sit up front need to pay for it. But don't worry. Another recession will come, and the good days (for upgraders, at least) should return.
When PlusGrade launched in 2009, it sought to persuade airlines they could make incremental revenue by offering unsold premium seats through a Priceline-style bidding process.
The idea made sense. Carriers faced high fuel prices (much pricier than today) and a global recession, and they weren’t selling many business and first class fares at expensive prices. They were happy to earn extra cash at the last minute from seats that would have gone unsold.
It is a slightly different business now. Many airlines report robust demand for premium seats through their own booking channels. For example, Delta Air Lines, which is not a PlusGrade customer, last month told investors its revenues for premium seats increased 19 percent, year-over-year, and United Airlines executives reported similar strength.
On many routes, and during high-demand periods, carriers can sell much of the cabin in advance, leaving fewer seats for deal-seeking passengers.
With less distressed inventory, PlusGrade has made a slight pivot as the supply-and-demand picture has changed: Instead of helping airlines unload seats at fire-sale prices, it often helps them squeeze as much revenue possible from a more scarce product.
“We want to make sure that as the door closes, every possible dollar has been earned and passengers get a better experience,” Chris Engle, PlusGrade’s chief commercial officer, said in an interview. “We are happy the airline is selling more through traditional channels, so what we are saying is, ‘if there is one or two, let us get you a lot of money.”’
Through PlusGrade, it’s not unusual for customers pay as much, or even more than they might have for a premium seat had they bought it at a discount in advance.
“We help them get their yields up,” Engle said.
How it Works
It is not easy for a vendor to break into the insular airline industry, but PlusGrade has had more success than most. It has more than 70 airline customers, including Air Canada, Qantas, Lufthansa Group, and Singapore Airlines.
To passengers who use it, PlusGrade’s technology may seem basic. Between booking and day of travel, customers tell the airline how much they’re willing to spend to sit in first class, business class, or premium economy. Airlines usually set parameters, low to high, and customers are told whether their bid is competitive. Then passengers wait, often until about two days before departure, to learn if they have won.
Behind the scenes, airlines have considerable control. They can decide when to alert passengers about successful bids, and which to bids to accept.
While airlines usually like the most lucrative offers, there are exceptions. Carriers may block repeat winners from being accepted again, ensuring customers don’t become too accustomed to last-minute cash upgrades. “One of the benefits to prevent dilution is an element of uncertainty,” Engle said.
Airlines may also prop up elite level frequent flyers, giving more weight to their bids to increase loyalty. Or they may allow a bidder with a streak of losing bids to win with a below-market offer. Engle said letting customers win occasionally is important to keep passengers engaged.
Airlines also like first-time winners, said Kevin Strohmaier, director of ancillary revenues at Air Canada, as a passenger who sits in premium economy or business class for the first time might buy a premium seat at booking in the future.
“Maybe once you try it you don’t want to go be in auction process where you don’t necessarily get it accepted the next time,” he said.
Air Canada Experience
Air Canada is one of three large PlusGrade customers in North America, along with Aeromexico and Hawaiian Airlines.
Most large U.S. airlines prefer to operate their own paid-upgrade programs, though PlusGrade could win the business of at least one big U.S. carrier at some point.
Air Canada also runs its own paid upgrade program, allowing customers to buy-up at a fixed price, but in 2016 it added PlusGrade bidding, in part to to reach a different group of customers.
“It’s really a new market segment you are adding to the cabin,” Strohmaier said. “There is a group of customers who are interested in knowing what it will cost and there is another group of customers who are willing to do it with a ‘maybe I’ll get it or maybe I won’t’ [mentality]. Those two segments are more distinct that people would think.”
PlusGrade customers, he said, are the most price sensitive of the segments Air Canada wants to reach. But while passengers may score deals, especially if they measure their winning bid against what a last-minute business class ticket would cost, Strohmaier said, “It is not necessarily a discount program.”
And if some customers do get a cheap seat, it’s not a problem, said Mark Nasr, the airline’s vice president for Vice President, Loyalty & eCommerce. On every flight, he noted, different customers pay different prices for the same product.
“Any advanced airline offers a variety of price points for the front cabin,” he said. “Products like advanced up-sell offers, last-minute upgrades, and bid upgrades are all just different delivery vehicles to arrive at the same outcome: A multitude of price points and product features to address different customer needs and demand periods.”
Tweaks to Model
As airlines have improved at selling premium seats through traditional channels, PlusGrade has made other tweaks.
It helps some airlines solicit bids at the airport, rather than advance, and for Etihad Airways, it introduced real-time bidding, with passengers placing bids for the last remaining seats through mobile devices. Three more airlines will launch a similar service this month, and more likely will use it in the future, Engle said.
In January, Etihad also will solicit bids for its Residence, a two-room suite that comes with a shower, though only passengers in paid first class will be able to bid for it. It’s a product that often costs $20,000 or more.
PlusGrade is also being more sophisticated in how it makes offers. After about seven years soliciting bids — no airline used its technology until 2011 — it has learned a lot about human behavior, and it can now react accordingly.
Some stuff is simple, like how travelers bid more for longer routes. “When people are facing a 14-hour flight from Toronto to Hong Kong, the bids become very aggressive,” Engle said.
But PlusGrade also has discovered passengers may be willing to pay more for a last-minute upgrade than they might have in advance because they’re essentially paying for it in installments — the economy class fare first, and the buy-up later.
“The reality is a lot of times the reason our yields are so high is because we are merchandising passengers after they buy the ticket and often after the credit card bill has been paid,” he said.
And while business routes do well — perhaps a customer is not allowed by a corporate travel policy to book in a premium cabin — leisure routes are winners, too. With Air Mauritius, PlusGrade has received “bid values for couples that were going on what are obviously very special trips,” he said.
Offer channels matter, too. Email is effective, Engle said, as is mobile, particularly when PlusGrade is embedded into an airline’s app. PlusGrade also does well through Google searches. Often, Engle said, when passengers search how they can upgrade on their airline, PlusGrade’s page will pop, and the customer will place a bid.
Then there’s Australia. Two PlusGrade customers — Qantas and Virgin Australia — are based there, and both airlines do a robust business.
“What’s really funny is on our other airlines, like Lufthansa or Etihad, you look at the list of where people are bidding from, and Australians always surface as some of the most aggressive bidders,” Engle said. “Australians really love an upgrade or an auction. I’m not sure which.”
Photo credit: Eithad Airways is a major PlusGrade customer. Passengers in business class can bid up to Etihad's first class, pictured here. Etihad Airways