Incorporating ancillary services in airline passenger choice models

This paper develops a new integrated passenger choice model to explain how consumers select ancillary services in conjunction with an airline itinerary and specific fare class. We propose that consumers are either classically rational, which we term simultaneous, or boundedly rational, which we term sequential. Simultaneous consumers are modeled to choose an itinerary, a fare class, and a set of ancillary services at the same time; sequential consumers are modeled to choose an itinerary and a fare class in one phase and then choose a set of ancillary services in a second phase. The sensitivity of revenues and bookings to various ancillary fee structures with the integrated choice model are illustrated by simulations in the Passenger Origin–Destination Simulator, showing that ancillary bundling can result in buy-up or buy-down by simultaneous passengers, but that sequential passengers provide more revenue to airlines.