AIRLINEINSIGHTS

Airlines Hunt For Secret Recipe To Ancillary Revenue Success

Airline Retailing

Retail is the process of selling consumer goods and/or services to customers through multiple channels of distribution to earn a profit. Demand is created through diverse target markets and promotional tactics, satisfying consumers’ wants and needs through a lean supply chain.”  The first retail experience was introduced in late 1560s at The Royal Exchange in London, England.  This insight goes into airlines as retailers and how today’s competitive market requires them to transform from a transportation agent to an experience mastermind.

 

Before Ancillary Revenue

Before ancillary revenue became an industry trend, airlines got into the retail industry when Tony Jannus piloted a Benoist flying boat with its first paying passenger on January 1, 1914. The first passenger was former St. Petersburg mayor Abram C. Pheil who bought the ticket at an auction for $US400 (roughly $US9,300 in today’s dollars with an inflation of 3.15%).  The flight took the pair from St. Petersburg to Tampa in Florida, USA and did not include any in flight service.

 

Airline Retailing - First Commercial Flight
Airline Retailing – First Commercial Flight from St. Petersburg to Tampa, Florida.

Other Milestones

Since that day in 1914, the airline industry invested in new ways to improve the retailing experience through technological innovations.

Airline Retailing Milestones

  • 1946 – American Airlines introduced the world’s first automated booking system called Electromechanical Reservisor. This was also used by Sheraton Hotels for their inventory system
  • 1964 – IBM and American Airlines worked jointly to implement an automated reservation system (ARS) called Semi-Automatic Business Research Environment (SABRE)
  • 1976 – Implementation of direct travel agent access by United Airlines in 1976 paved the way for a better retailing experience between the airline and travellers
  • 2008 – Things did not change significantly on the purchase process (i.e. travel agent working directly with travellers) until internet and e-ticketing became the standard by May 2008

 

Traditionally, airlines had an all in one pricing structure for its services depending on the cabin and would charge extra for selected items such as headsets, movies and oversized baggages. No one thought of unbundling service based on fare class in the same cabin until 2004.  That was when Air Canada decided to implement an “a la carte” pricing structure to cater to economy cabin customers who wanted to pay less to forego such things as collecting frequent flyer miles, seat selection, date/route change eligibility after it ended the low cost carrier concept called “Tango”.  Travellers could enjoy cheaper in flight meals or lounge access by paying more in advance. The airline was credited as the first network carrier to implement this innovative pricing structure at the ticketing stage and giving travellers more control and flexibility.  This would be the early start of ancillary revenue generation.

 

Industry Moved Forward

It has been over 13 years since Air Canada elevated ancillary revenue to a different level.  Unbundling is now an industry norm while ancillary revenue generation continued to gain ground actual ticket prices remained stable. Between 2010 to 2014, ancillary revenue has gone up by more than 221% from US$22.6 billion to US$49.9 billion and rising.

Airline Retailing - Ancillary Revenue vs Total Revenue
Airline Retailing – Ancillary Revenue vs Total Revenue
Credit: Data from IdeaWorksCompany / Air Transport World / Airline Business and various airlines

 

Both low cost (e.g. EasyJet, RyanAir, Wow Air) and network airlines (e.g. Delta Air Lines, SAS, Austrian Airlines) are employing similar techniques as Air Canada today in competing for would-be travellers’ attention whose first consideration for purchase may be fare price.

 

Product Differentiation

Today, ultra low cost, low cost and network carriers employ some form of ancillary revenue generation to offer “extras” passengers may want to include in their tickets. Ultra low cost carriers and lowest fare classes typically would have the most options available for purchase. Here is a list of the ten most popular ancillary revenue items airlines deploy today based on different type of carriers:

 

Ultra Low Cost Low Cost Full Service
Full Size Baggage Fees – no free baggages offered, higher pricing per piece from ticketing to check in – no free baggage except for highest fare classes or with credit card affiliation, no price difference during ticketing to check in – no free baggage only at the cheapest fares, free baggage for elites or through credit card affiliation
Carry On Baggage Fees – only small carry on baggage limited by weight is allowed for free, full size carry on baggage will incur fee – free carry on baggage (small and full size) – free carry on baggage (small and full size)(except for United Airlines and American Airlines which restrict full size ones on basic economy fares)
Ticket Change Fees (Name, Date, Destination) – changes can be made at different pricing based on item and time. Ticket changes may incur additional fare difference to be charged – changes can be made at different pricing based on item and time. Ticket changes may incur additional fare difference to be charged. Names are likely not changeable. – changes can be made at different pricing based on item and time. Ticket changes may incur additional fare difference to be charged. Names are not changeable.
Ticket Purchase Fees – free for all online purchases, other forms including phone or at airport may incur administrative fees – free for all online and likely phone purchases, other forms including at airport may incur administrative fees – free for all types of fare purchases
Advanced Seat Selection Fees – advanced seat selection is not available without paying a fee. Seats cannot be changed if no fee is paid and airlines assigned them prior to flight – not all seats are free unless it’s the highest fare class. – free for most types of fares, for elites or through credit card affiliation
Buy on Board Food – all food and beverage items would incur a cost whether it is on domestic or international flights – basic food and beverage items may be offered for free in domestic and international flights. Other items incur a cost. – domestic flights may not have free food in economy class. International flights will likely have free food and beverages on most fares.
On Board WiFi – not typically available or free – free to fee by flight/pass – free to fee by flight / pass
Entertainment – not typically available. Handheld entertainment will incur a cost. – free to fee by flight – mostly free
Lounge Access – not typically offered – fee to use lounges – fee or free depending on elite status or purchased membership tier
Line Bypass – fee based if offered – fee based to free for higher fares and elite status – fee based / free for higher fares, elite status and credit card affiliation

 

Airlines are keenly aware that these many options available in the market place may lead to confusion and fatigue. It is important for these airlines to understand the demographics in different markets and approach them with the right mix of convenience and low pricing in their promotional efforts.

 

Future Development

Most airlines generate most of their ancillary revenue through products and services offered within their own sphere. Future development would be based outside of the flying component of a trip and into other experiences. Here are some examples:

  • Integrating with other forms of transportation to provide travellers with a more seamless travel experience and generating more cross revenue (Related News)
  • Offering contextual hotel and car options based on fare paid, passenger type and interests (i.e. a basic economy fare passenger would likely not choose high-end accommodations being offered).
  • Offering tour packages based on fare paid, passenger type and interests. While ultra low cost carriers like WOW Air include tour packages as part of the ticketing process, it does so without providing passengers with more information to make an informed decision)
  • Integrating with airports to maximize spending potential (e.g. while London’s Heathrow Airport offers a VIP shopping experience (Related News), no airlines currently serving the airport offers this experience as part of their ticketing.
  • Offering unique entertainment experiences that passengers would want to pay for (e.g. virtual / augmented reality and unique programming, etc)

 

Conclusion

Many airlines now rely on ancillary revenue to drive overall results. While traditional products generating the revenue are now common place, they are also clouding product differentiation between carrier types. Confusion can lead to travellers picking the wrong airline.

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