Prior to Covid-19 putting unexpected turbulence into air travel, our industry was enjoying increased ancillary revenue year after year – especially in baggage (our area of expertise). In fact, airlines generated over $28.1 billion in revenue from baggage check fees in 2018 alone – more than double the $13.4 billion collected for checked bags just four years earlier. That growth trajectory wasn’t expected to fade, either.
But here we are, flights cancelled across the globe to help curb coronavirus transmission, affecting both direct and ancillary revenue. What’s up in the air instead is how long this disruption is going to last, how quickly business will revover, to what extent the industry will be transformed, and which companies will emerge relatively stronger than their peers.
According to the COVID-19 Air Transport Near Term Impacts and Scenarios global survey on investment priorities for airlines and airports:
- 68.4% of respondents expect increased investment in digital transformation over the next two years
- 60.3% expect investments in automation and deployment of artificial intelligence (AI) technology to rise
- 54.2% expect spending to increase on sustainability and environmental initiatives
If we take a closer look at total global airline ancillary revenue, the industry made over $92.9 billion last year alone (that’s 10 % of the estimated $854 billion in total revenue). In fact, global airline revenue was growing at more than twice the rate of the rest of the world economy – at a 7% to 9% clip! According to Forbes, if we calculate this specifically for baggage, with each bag incurring a $25 to $30 fee on average, total revenue from handling those billions of bags would exceed $60 billion.
Putting that in perspective, and looking at historical facts, there is mounting possibility of a big shake-up in how passengers claim their right to take carry-on or check-in baggage and at what price. Major airlines might soon employ dynamic pricing to assign different fares to and baggage fees without passenger knowledge, like they do with ticketing and seat availability. The fundamentals of dynamic pricing are simple: when you book a flight, the airline uses information to display prices based on which bag fee class it believes you’re most likely to choose, and how much it calculates you’re probably willing to pay. In the future, the baggage fee you see might be very different than the ones shown to other customers searching exactly the same trip at the same time.
To do this, important dynamic parameters will include bag dimensions and expected weight. An algorithm will do the rest of the work, including cross-selling other offerings such as baggage insurance. While dynamic pricing is often thought of as the ability to offer a product at different price points based on supply and demand, it is really a set of evolving pricing strategies that enables the price to be dynamically determined in real-time based on various criteria, not just availability.
While many airlines have a relatively high level of maturity in how they price their tickets, their level of pricing maturity for other product offerings is much less developed. Such is the case with baggage. This is mainly due to current system capabilities (or a lack thereof) and little to no incoming data on expected baggage (amount, size, weight, type). Modern dynamic pricing solutions use the latest technologies and algorithms that leverage multiple sources of data to more accurately estimate market demand. This is where visual AI comes in and where our BagsID Network can have a positive impact on financial performance. Our system can better recognize and forecast baggage handling, apply smart sortation and provide more efficient use of space – which can lead to a 20% increase in baggage revenue. That’s a potential (and mind blowing) $5.6 billion in additional ancillary revenue across the industry.
American Airlines brought in $1.24 billion in baggage fees last year. United was next at $933.3 million and Delta came in third with $817.1 million collected. Imagine the costs that could be saved and the revenue that could be generated with a more innovative solution providing advanced, automated and more exact baggage expectations and classifications. Especially now, while the airline industry recovers from the effects of Covid-19 and looks for ways to recoup lost revenue, it is time to rethink business strategies and act. BagsID not only improves the baggage handling process but additionally reduces costs related to mishandling, reconciliation and unlawful claims. It also complies with IATA Resolution 753 and ICAO Annex 17 regulations and, to sweeten the deal, it generates revenue in a variety of ways: baggage fees and dynamic pricing, smarter sorting and loading for increased cargo transport, better fuel forecasting and more.
Compared to the ongoing costs associated with RFID, scan tags and other current systems in place which are solely considered cost centers, BagsID and its visual AI network for baggage is a revenue generating solution that just makes sense. Interested in learning more? Visit our solutions page or contact us for more information.