On Monday, Delta Air Lines (NYSE:DAL) announced it would start selling its Comfort+ extra-legroom seats as a separate fare for flights in the U.S. and Canada. By contrast, up until now it has been selling Comfort+ as an upgrade for customers purchasing Main Cabin fares.
This move will make it easier for customers to understand their options when purchasing tickets to fly on Delta. More importantly, by raising the profile of Comfort+, Delta Air Lines is likely to boost its sales of this high-margin product.
Delta looks for incremental revenue
With competition increasing in the U.S. airline industry, it's more important than ever for airlines to maximize the amount that each passenger is willing to pay. Last December, Delta rolled out a new set of "Branded Fares" intended to generate incremental revenue by better segmenting its customer base.
On the low end, this entailed a broad roll-out of "Basic Economy" fares that don't even include advance seat assignments. On the high end, Delta rebranded its international premium cabin to "Delta One" in order to highlight its exclusivity, while renaming its premium economy section "Comfort+" to better distinguish it from standard coach seats.
Most of these options are just rebranded versions of what Delta was already offering, a fact that has attracted criticism. Yet Delta's management has high hopes for branded fares. The company estimates the total opportunity at more than $1.5 billion in incremental revenue by 2018.
Delta's efforts to get more revenue from its first class and premium economy sections are already working. Last quarter, Delta reported that its paid first-class load factor (which excludes free upgrades) was 56%, up by 8 percentage points year over year. Revenue from Comfort+ extra-legroom seats grew even faster, rising 42% year over year.
However, the process of booking a Comfort+ seat has been clunky up until now. Customers had to first book a Main Cabin fare and then see what Delta's asking price was for an upgrade to Comfort+.
Now, customers will be presented with a more straightforward choice between Basic Economy, Main Cabin, Comfort+, and First Class fares at the start of the booking process. This will make it easier to book a (pricier) Comfort+ fare. It will also allow Delta to better highlight the other perks that come with Comfort+ seats, such as priority boarding, dedicated overhead bin space, and complimentary wine and craft beer.
Customers can book Comfort+ seats as a separate fare for flights departing on or after May 16, 2016. This new distribution strategy should accelerate Delta's progress toward its goal of $1.5 billion in incremental revenue from branded fares.
We will see more of this going forward
Delta isn't the only airline adopting a fare differentiation strategy like this. At the end of June, JetBlue Airways (NASDAQ:JBLU) rolled out its own set of new fare options.
At JetBlue, the primary point of differentiation between the different fare categories is the number of checked bags included. The more expensive fares also earn more TrueBlue points per dollar spent, have lower (or no) change fees, and -- in the case of the top-tier Blue Flex fares -- include expedited security.
Like Delta, JetBlue Airways expects its new fare options to provide a big revenue boost in the next few years. JetBlue originally targeted $65 million in incremental operating income during 2015, reaching a run rate of more than $200 million in incremental operating income by 2017.
Last month, JetBlue told investors that it was getting more incremental revenue from the new fare options than originally expected. It raised its guidance for 2015 to $80 million in additional operating income. While the company didn't update its 2017 target, the increased estimate for 2015 implies that the opportunity is even bigger than $200 million.
Delta Air Lines and JetBlue Airways thus appear to have uncovered an indispensable tool for maximizing revenue while continuing to offer competitive fares. Investors should expect to see other airlines follow in their footsteps in the coming years.
Adam Levine-Weinberg is long January 2017 $17 calls on JetBlue Airways and long January 2017 $40 calls on Delta Air Lines, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.