Airlines compete hard. They also cooperate constantly.
Alliances, joint ventures, codeshares and special prorate agreements allow an airline to sell a journey that includes flights it does not operate. In airline terms, these are offline markets. They let a carrier extend its reach well beyond its own aircraft and, in some cases, create what is effectively a virtual hub at a partner airport.
That matters most on long-haul networks. A partner’s short-haul flights can bring demand from dozens of cities into one gateway, reducing the airline’s dependence on the local catchment area to fill a long-haul flight.
There is a pricing problem hidden inside that cooperation. The combined demand from offline markets can be meaningful, but demand in each individual market is usually small. If one market were large enough, the airline might serve it itself.
Pricing teams still need to make those markets sellable. They just cannot give every one of them the same attention as a nonstop or high-volume connecting market. This is the long tail: thousands of markets that each contribute a little, but together can contribute a lot.
So where do all those fares come from?
Take London to Koh Samui, connecting once in Bangkok. The cities and routing are real; the fare constructions and numbers below are simplified and do not represent any airline’s current pricing.
Three ways a fare can be created
For every market an airline wants to sell, it needs to offer a price. In practice, that usually means a range of fare levels, each with conditions such as advance purchase, minimum stay, permitted routing and flexibility. The underlying fare is generally created in one of three ways.
Specified fare. The airline explicitly defines a price from London to Koh Samui. These fares take the most time to manage and sit at the center of most pricing teams’ work. They are used for nonstop markets, most important connecting markets and, in some cases, offline markets.
Add-on. No specified fare exists from London to Koh Samui. Instead, the airline combines a London to Bangkok fare with a separate add-on from Bangkok to Koh Samui. Together, they create the London to Koh Samui price.
End-on-end. No through fare exists from London to Koh Samui, but separate fares exist from London to Bangkok and Bangkok to Koh Samui. If the rules allow them to be combined, the two fares price the journey. These markets are rarely managed as a whole; they tend to price by happenstance.
Add-ons are the main way airlines cover offline markets, which makes them worth understanding in a little more detail.
What an add-on does
Assume Airline 1 has a $300 fare from London to Bangkok. Airline 2 operates Bangkok to Koh Samui, and Airline 1 files a $100 add-on for that partner segment. A customer can now buy London to Koh Samui for $400 on one ticket, with a single connection in Bangkok.
That is better for the customer than piecing together two unrelated tickets. Bags can often be checked through, both airlines can see the full itinerary, and reaccommodation is much easier if the first flight is late.
The airline gets leverage too. The same $100 add-on from Bangkok to Koh Samui can combine with fares into Bangkok from many origins. It can also combine with several fare levels in each market.
One filing can make dozens of new markets sellable. That is why add-ons became the standard answer to the long tail: a lot of coverage for relatively little effort.
Simple idea, complicated filing
The commercial idea is straightforward. The airline chooses the point it wants to reach, the base market it wants to extend and the amount it wants to add.
Choosing the amount is only the commercial decision. To make the fare available for sale, the airline must publish both the price and the conditions under which it can be used so reservation and shopping systems can price the journey consistently. That is fare filing.
For filed fares, airlines generally do this through ATPCO, the industry platform that distributes fare, rule and routing data to the systems used by airlines, travel agencies and online sellers.
The filing has to state the direction of travel, whether the amount applies one-way or round-trip, the carriers and routings allowed, the fare levels it can combine with and the geographic markets it covers.
It also has to sit in the correct tariff (one of several filing categories used for different geographies) and carry a global indicator, the code describing the journey’s broad path between regions. More specific restrictions require a separate routing map.
That architecture can multiply a very simple decision. Suppose an airline wants three add-on levels to one destination: $100, $150 and $200. If the base markets span five tariffs, those three commercial levels become fifteen separate add-ons and five routing maps.
The result may be pricing in twenty-four markets, which is useful. It is also a lot of filing to express one piece of commercial intent.
Why the trade-off matters
Add-ons solve the coverage problem by tying an offline market to a different base market. That is also their weakness.
The London to Koh Samui fare inherits more than its dollar amount from London to Bangkok. Its range of fare levels and the conditions attached to them, including advance purchase, minimum stay, changes, refunds and permitted routings, come from the base market too. If the base fare changes, the through fare changes, even when competition in London to Koh Samui has not.
Those conditions were written for the base market. They may fit poorly once the journey is extended into another country or a partner network.
This does not mean add-ons were a bad idea. They were a practical response to a problem airlines could not solve manually. No pricing team could analyze every small offline market and file a specified fare for each one.
But an add-on answers a coverage question, not necessarily a pricing question. It tells us that a market has a fare. It does not tell us whether that fare reflects the competition, routing and partner economics in the market being sold.
That distinction becomes clear when several airlines sell the same city pair through different add-on structures. They can reach the same customer with three very different prices, without any of them having priced the actual market.
That is the subject of the next post, coming soon: The same market, three different prices.
