Ken Harris, CEO of Plusgrade, poses in their offices in Montreal, Que., on Nov. 27, 2018.Christinne Muschi/Globe and Mail
When Ken Harris was travelling for work in his 20s, he regularly asked flight attendants whether he could buy his way into empty business-class seats at the front of the plane. They always said no. That an airline would turn down money made little sense to him.
“If you asked every single person sitting in economy if they’d rather sit in a premium cabin, I assure you 100 per cent of them would say ‘Yes,’ ” he says. “It was a lost opportunity for airlines and I thought, ‘Well that is a problem technology could solve.’ ”
On Wednesday, the Caisse de dépôt et placement du Québec is announcing it has bought an undisclosed stake in Mr. Harris’s nine-year-old Montreal-based Plusgrade LP, valuing a software company that has been described as an “eBay for business class airline tickets” at more than $600-million. It’s the largest investment into a Canadian private technology firm this year, and the latest in a string of big-ticket investments by the Quebec pension management giant. Plusgrade is also the latest in a string of Montreal-based travel technology companies to draw significant outside investments, including Sonder, Hopper and Luxury Retreats.
“It’s a leader in the category they created and the alignment of interests they have with their customers was very unique. It’s something we don’t see very often in the business," said Justin Méthot, the Caisse’s vice-president in charge of investing in large Quebec businesses.
Carriers digitally tell customers in lower seating classes several days before a flight that upgraded seating is available in higher classes. Interested customers then bid for the seats, with airlines notifying winners a day or two before the flight. As a result, carriers can earn hundreds of dollars on otherwise unsold premium seats, paying Plusgrade a 15-per-cent cut. Mr. Harris said customers end up paying 50 to 80 per cent of the full fare for business class this way.
Plusgrade is used by 70 airlines including Air Canada, Cathay Pacific, Lufthansa and Virgin Atlantic, although U.S. carriers, who regularly bump up elite fliers to business class, have been slower to sign on.
“Air Canada is pleased with our experience with Plusgrade,” said Kevin Strohmaier, director, ancillary revenue, with the carrier, which has used Plusgrade for two years. “The customer response has been positive. Bid upgrade allows us to expand the reach of our upgrade programs by catering to a segment of our customers who wish to experience our premium products,” but are happy to stay put if the price isn’t right.
Plusgrade, which has a little more than 70 employees mostly in Montreal and New York, is playing into a larger trend in which airlines squeeze additional revenue from passengers, who are charged fees for baggage, seat selection and food. Airlines are expected to generate US$92.9-billion in 2018 from fees other than ticket revenue, or 10.7 per cent of global air transport revenue, according to a survey released this week by airline consultancy IdeaWorksCompany and car rental firm CarTrawler. That’s a four-fold increase from 2010 in dollar terms, when ancillary revenues represented 4.8 per cent of revenue.
Unlike other ancillary streams, however, Mr. Harris says his product allows airlines to offer something “customers are really excited about and happy to pay for.” Airlines also offer a Plusgrade product that allows fliers to bid to be located next to empty seats, and cruise ship companies also now offer the upgrade tool.
Mr. Harris, 37, the son of Montreal Alouettes chairman Paul Harris, got the idea to provide “revenue upgrade” tools to airlines during his travels a decade ago while working for a student marketing company. Alouettes owner Bob Wetenhall was impressed with the idea and agreed to provide him with an investment to start the company, but pushed for Plusgrade to pursue profitability early on, unlike most tech startups.
Mr. Harris, who built websites in his teens, was able to persuade Star Alliance carriers TAP Portugal and Air New Zealand to pilot his software early on. Other carriers quickly followed and by 2015, the firm had 35 airline customers and was profitable.
“We really thought Ken as a founder-CEO was a remarkably astute entrepreneur … we thought the solution had great alignment for the carriers' [interests]," said Kurt Jaggers, managing partner with Boston-based private equity giant TA Associates, which bought a majority stake in Plusgrade in 2015 for an estimated US$50-million-plus. He said TA, which is selling some of its stake to the Caisse in the deal, decided to trim its holding because valuations for profitable, growing technology companies are robust and “the company has executed faster than we had initially expected.” He added TA plans to remain “a significant shareholder” for several years.
Plusgrade, which doesn’t disclose financial information, is believed to generate more than US$30-million in annual revenue, and Mr. Harris said the company has been profitable for at least three years. The company has ranked among the fastest-growing tech firms in Canada in that time, according to Deloitte.