Rafi Mohammed

Hey Delta Airlines: Want to Earn $200 Million in New Annual Profits? Read this Blog!

Posted on June 10th, 2010 (1 Comments)

I am pleased to share another strong review of The 1% Windfall by the Journal of Revenue and Pricing Management which concludes: “Rafi Mohammed's excellent book, The 1% Windfall...is a highly organized review and presentation of the wide variety of pricing strategies and tactics that progressive firms (at least with respect to pricing) have adopted to increase their profits. As such, it serves as a wonderful handbook for those who are searching for a systematic way to think about alternative ways to price their products. Real world examples are provided for virtually all of the pricing strategies and tactics, making it very easy to understand how they are applied.”

Now on to the blog…

Rafi’s rule is that any time a consumer feels “lucky” in receiving unexpected value from a product or service, the seller missed an opportunity to charge for that value.

Consider airline travel. On a packed cross country airline trip, how much would you pay for the benefit of not having someone sitting next to you in the middle seat? No airline has been able to capitalize on the value that passengers reap when someone is not squeezed in next to them. For me, an empty middle seat equates to “enjoyable flight”: no jabs and plenty of room to spread out my work materials. It’s almost as good as first class.

Today, it’s generally luck that determines which middle seats remain vacant at takeoff. When a flight is not sold out (often), some passengers are “luckier” than others. Why not start charging for this added value?

One way to essentially guarantee that no one will sit in the middle seat is to simply purchase the middle seat, as some of my friends do on international trips. However, there is a discount “no middle seat” option that may make sense to both airlines and consumers. Here’s my thinking: suppose two people book a trip and take the window and aisle seats. For, say, $100, the airline will “hold” the middle seat and designate it as one of the last seats to be sold. If demand ends up high, the airline will sell the middle seat to reap full revenue and refund the initially paid $100 option fee. If the plane is not sold out, the middle seat remains open. The benefits of offering a “no middle seat” option are two fold: consumers have the opportunity to boost their chances of enjoying a relaxing flight and airlines reap revenue from unused capacity.

So how did I come up with my estimate of Delta’s $200 million in annual hidden profits? Delta has 5,524 flights a day. Suppose one “no middle seat” option is sold on every flight (this is a realistic assumption: Southwest was selling 2 to 3 of its premium priced Business Select tickets – which offer priority seating - on every flight within a few months of rollout). Now assume an average price of $100 per option ($50 on shorter flights to $200 on long hauls). The result is an extra $550,000 in pure profit per day; multiplied by 365 days yields roughly $200 million in new profits. Skeptical about my assumptions? Let’s slash the upside by 1/2…we are still talking about a $100 million boost in new profits. Every airline should be offering a “no middle seat” option.  

This is yet another illustration of my “better pricing” mantra: small changes in price can lead to large profits…almost instantaneously.   

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Readers' Comments on This Blog Entry

From Christine Hueber on June 10th, 2010
Pricing is all about options that provide relevant value to the client ... I agree, Rafi! Have you considered having the link in the email you send to notify of a post click through directly to the blog post itself? Best, Christine Hueber