ANCILLARYREVENUESAGAMECHANGERFORTHEAIRLINEINDUSTRY

ByDrFrankieOConnellAirlineConsultant,CranfieldUniversity
1.0Introduction
Achieving profitability in the airline industry is becoming an increasingly difficult task with each
passingyear.The2009SITA/AirlineBusinesssurveycitedthatthetoptworeasonswhyairlines
areinvestinginITistoreducecosts,followedcloselybyincreasingrevenuesasshowninFigure
1. Oneof thekey areas thatairlinesare targeting today is ancillary revenue as ithasbecomea
key strategy that is gaining traction in airline boardrooms throughout the world. IdeaWorks, a
leadingauthorityontheresearchofancillaryrevenue,statedthatairlineshadgeneratedaround
US$2.3 billion in ancillary revenues in 2006, but by 2008 this had jumped by 345% to $10.2
billion, while the Centre for Asia Pacific Aviation (CAPA) predicts that airlines worldwide are
expecting to generate $58 billion in ancillaries by 2010 a figure which represents a whopping
12% of total airline revenues. IATA estimated that $80 billion will be erased from the airline
industry balance sheets in 2009 (15% down on 2008 figures) because of the recession and
ancillaryrevenuecangosomewaytoclawingbackthoselostearnings.Thistrendofgenerating
new forms of revenues is a game changer for the industry. Ancillary Revenues fall into two
categories:
i) Unbundleoralacartproducts
ii) Commissionbasedancillariesthatareprovidedbythirdparties.
2.0UnbundledFlightProducts
Thelowcostcarrierhasbecometheinnovatoroftheindustryandmanyconceptsassociatedwith
budgetairlinesaregradually finding their way onto traditional network airlines andone of these
pioneering developments has been ancillary revenues. The low cost carriers began to
disassemble the fare into various components which became widely known as the unbundled
flight products which included separate charges for items such as: checked baggage priority
boardinginthecaseofunassignedseating
1
premium seatingonboardsalesofdrinksandfood.
Thistypeofunbundlingcontinuedtoevolveanditlaterextendedtochargingfornewerandmore
innovative items such aswebcheckin. Thehighlevels ofcommissionthat is chargedfor using
credit anddebit cards is controversialamongconsumers yetthis has addedtransparency,as
airlinespreviouslyhadtopaycommissionstocreditcardcompaniesoneachsaletransactionand
carriershadtodeductthiscostfromthegrossticketprice.Todaycarrierssimplyaddthecharges
to thegross priceoftickets, which hasallowed airlines to pass onthesecharges directly to the
passenger. Las Vegas based Allegiant Airlines has become the global leader in amassing
ancillary revenues as this had accounted for 23% of its total revenues in 2008. Passengers
travelling on Allegiant Airlines pay: $525 per assigned seat per segment $5$8.50 for priority
boarding$1520percheckedbagpersegmentand$14conveniencefeetobookaseatviathe
website. In 2009,Ryanair generatedaround 10.21 of ancillary revenue per bookedpassenger
upfrom 6.92in2005,whichisanexponentialincreaseinjustafewyears.Ryanairnowmakes
closeto20%ofitstotalrevenuesfromitsancillarybusiness.
Baggagefeesareoneofthefastestgrowingitemsinaportfolioofunbundledproductsthat
were initiated by the low cost carriers. Air fares around the world, particularly in the US, have
fallensharplysincetheonsetoftherecession,makingbaggagefeesanincreasinglifelineforthe
airline sector. The Bureau of Transportation Statistics (BTS) stated that the US airline industry
collected over $700 million in baggage fees alone in 3Q2009
2
a doubling from the previous
corresponding period and the data indicates that US airlines will smash through the $4 billion
barrier in2010.Baggage now contributesanywhere between 2.4% to 1.7% ofDelta, American,
ContinentalandUnitedstotalrevenues.UnitedAirlinesnowgeneratesanaverageof$5.81from
checked baggage charges per US domestic passenger. Revenue from fees imposed for
cancellingorrebookingflightsbyallUSairlines,meanwhile,rose52%in2Q2009.
1
AteasyJet,typically11passengersperlightusespeedyboarding.
2
During the 3Q2009 period, Delta Air Lines earned $129 million in baggage charges, while American
AirlinesandUSAirwayscollected$119millionand$111millionrespectively.
AirCanada hasbeenaninnovatorinunbundlingits faresand it haselevated itsupselling
potential.Itpresents5brandedfares:Tango,TangoPlus,Latitude,LatitudePlusandExecutive
(Business Class), each offering different combinations of service attributes (e.g. seat selection,
mileage accrual, lounge access, etc) thereby providing customers with distinct serviceprice
choice.BarcelonabasedVuelingAirlineshasunbundledtheeconomyclassseatingconfiguration
byofferingpassengersthechoiceofpurchasingamiddle seatfor30oranextralargeseatfor
13. Over the past 1015 years passengers have become more knowledgeable and ask more
frequentlyforwindow,aisleoremergencyexitrowseatsandpremiumcarrierssuchasAirFrance
and Singapore Airlines are capitalising on this and have begun to charge 50 and $50
respectivelyforexitrowseatsineconomyclassonlonghaulflights.
Table1demonstrateshowmuchthelandscapeofancillaryrevenueshaschangedoverthe
2yeartimespanof2006to2008.Thedataclearlyindicatesthatlegacyairlinesareincreasingly
implementing strategies that facilitate the generation of new revenue streams, while low cost
carriers continue to extrapolate more revenue by implementing new ancillary products, which
provetobeatestbedthatothercarrierscanadoptifitprovestobesuccessful.
3.0 Commissionbasedancillariesthatareprovidedbythirdparties.
Commissionbasedancillariesthatareprovidedbythirdpartiesareanotherimportantcomponent
ofhowairlinesaregeneratingrevenuestodayandtheconceptisknownasdynamicpackaging.It
is dynamic because pricing, constraints and ultimate choice are determined online based on a
realtime inventory. Consumers assimilate their individual travel components such as
accommodation andcar hire, which are obviousproducts thatnaturally complement the sale of
anairlineseat.Ineffect,consumersbecometravelagentsoftheirownselvesbybuildingatailor
made package, which better suits their individual needs. Ryanair for example has around 16
million visitors to its website each month and this creates an enormous revenue generating
opportunitybycrosssellingotherproductssuchastravelinsurance,citytours,airportparking,ski
lifts,cruiseholidays,dining,spas,golf,themeparks,museumsandsoforth.
Dynamic packaging will become the next game changer in producing revenues for the
airline industry lets consider the following case study where a customer travels toLondonon
business for two days and books a hotel and car through the airlines website. The hotel will
charge $200pernight where a commission rate ofaround10% is paidgenerating$40 which is
then split between the travel portal company (which integrates the different business entities
acrossacommonplatform
3
,suchasMainTrack)andtheairline.Thecommissionissimilarforcar
hirewherecontributionscanrangefrombetween$20$50perpassengerbooking.Thereforefor
a midsized airline with 5 million annual passenger segments per year and where the lookto
book ratio
4
is 1 in 10 this has the potential to generate 500,000 potential cross selling
opportunities.Iftheaveragespendperancillarysaleis$200perhotelstayand$100percarhire,
thenthetotalincrementalancillaryrevenueis$15millionandifthelooktobookratioisdoubled
this thenrisesto$30million.Thetravelportalisessentialasitmakessharingdataeasyacross
applicationsbytransferringdatafromtheairlinereservationsystem,thedatesforstayingatthe
hotel become instantaneously populated as they are synchronised with the travel dates. This
reduces the complexity and duplication for the traveler and enriches theCustomerRelationship
Managementprocess.
4.0Conclusion.
Toconclude,it is likelythatmany legacy carriers will continuetounbundle their farecategories
similarto thatbeingofferedbyAir Canada,whilechargingfor baggagehasbecomean industry
norm that is unlikely to change. However there is a finite limit to amount of charges that
passengers willacceptasJetBluehadtodropits chargesforpillowsand blankets,whileUnited
Airlines discontinued charging for food on transatlantic flights due to widespread customer
complaints.HoweverDynamicpackagingwillbecometheindustrygamechangerasthepotential
to generate revenues is enormous because the current penetration rate of booking travel
components suchashotels, carrentals, travelinsurance, etc fromairline websitesislow, but is
3
This isanApplicationServiceProviderthatusesXMLasatransactionstandardandwebservicesasthe
integrationplatform.TheapplicationusesMicrosofts.NETwhichisanindustrywidestandard.
4
Inthiscasethelooktobookratioisthenumberofpeoplewhovisitanairlinewebsiteandlookatthehotel
andcardealsonofferandthisiscomparedtothenumberwhoactuallymakesapurchase.
expectedtogrowrapidly.Airlinewebsitesare someofthebiggestecommercewebsitesineach
carriersdomiciledcountryanditisenvisionedthatawholearrayofthirdpartyproductssuchas
car insurance, life insurance,home insurance,phones, etc,can be purchased from the website
wheretheconsumerwillalsoreceivefrequentflyerpoints.Weareonlyscratchingthesurface!
Figure1.ThekeyreasonswhyairlinesareinvestinginIT(2009data)
Source:SITA/AirlineBusinessITSurvey.July2009
Table1.AncillaryRevenuesoftop5Airlinesin2008and2006
2008 2006
AmericanAirlines 1,650,000,000 UnitedAirlines 416,116,752
UnitedAirlines 1,200,000,000 Ryanair 362,104,000
DeltaAirLines 1,125,000,000 easyJet 189,476,508
Ryanair 625,350,240 AlaskaAirlines 134,662,086
Qantas 458,622,000 AerLingus 63,407,000
Source:IdeaWorks