Pay Now and Please, Don’t Use It Later: Expanding Virtual Capacity in the Airline Industry

There’s been much discussion in recent years about the adoption of Buy Now, Pay Later (BNPL) models in the travel industry. While that conversation may have slowed, it inspired us to explore a different, more unconventional model that we’re calling “Pay Now and Please, Don’t Use It Later.”

Though it may sound unusual, airlines have employed variations of this approach for years, and it offers a compelling perspective on how capacity can be expanded across an industry with significant operational constraints.

In most industries, when demand is high, increasing revenue is straightforward: raise prices or ramp up production. Not so with airlines. While they’ve perfected revenue management—the pricing side of the equation—, expanding capacity—the production side—is another story altogether.

Adding capacity often means increasing frequencies, opening new routes, or deploying larger aircraft—steps that are slow-moving, high-risk, and fraught with substantial sunk costs. Issues like crew shortages, constrained airport slots, and the long lead times for new aircraft, further amplify these challenges or make it impossible to add capacity. 

Given these hurdles, it’s hardly surprising that most airlines have focused their innovation efforts around pricing strategies and ancillary services. Yet, a select few have also figured out how to create what can be described as “virtual capacity”—essentially, increasing capacity without adding any physical ASKs/ASMs.

The Concept of Virtual Capacity

 Virtual capacity plays a pivotal role in many well-known industry products, from overbooking to FFPs and subscription services. While each operates in its own way, they all share a common goal: boosting revenue without inflating costs.

Overbooking is the most familiar method. Airlines sell more seats than they have, relying on data analytics to predict no-shows and, in turn, optimize load factors while minimizing unsold inventory.

Similarly, the miles or points in FFPs serve as a form of “flight credit” that airlines sell to banks and other third parties, knowing that only a fraction of them will ever be redeemed. This allows airlines to effectively sell more capacity than they will ever need to fulfill (we’re simplifying, of course, but you get the idea).

Flight subscriptions are a more recent innovation, where customers pay a flat fee for a set number of flights. A portion of the profitability comes from "breakage"—the percentage of flights that subscribers never end up redeeming.

Reframing the Conversation Around Capacity

 Our "Pay Now and Please, Don’t Use It Later" concept is a bit tongue-in-cheek, but it opens the door to a broader discussion around capacity constraints across the airline industry. More importantly, it demonstrates how reframing conversations can highlight new dimensions and attract fresh perspectives to otherwise stale topics.

This shift in conversation is particularly relevant for the hundreds of travel tech companies that make these strategies possible in the first place. Too often, they struggle to stand out in an industry plagued by repetitive conversations (cough… NDC, cough).

Overbooking hinges on sophisticated data analytics to forecast no-show rates. FFPs rely on specialized tech providers to handle vast amounts of data and transactions, from tracking miles to ensuring accurate redemption. And subscriptions require technology innovators to stretch the logic of systems like GDS and PSS, which were built for transactional purchases and can’t easily process flights sold without an origin, destination, or departure time.

The same is true in adjacent industries like hotels and car rentals, where capacity and profitability challenges persist, and technological innovation remains critical to staying competitive.

From Constraints to Creative Approaches: Looking Ahead

As we approach the 2024 World Aviation Festival, it’s the perfect time to reflect on how airlines are tackling these complex issues and how the companies that serve them (some of which are our customers) are driving these conversations forward. With thousands of attendees and hundreds of tech companies participating, we’re eager to see new discussions emerge.

For now, though, we’ll leave you with these thoughts: What will you be talking about at the next industry event? And how can you reframe your story to make a lasting impact?