Ancillary revenues have become a vital component of airlines’ income and the increasing use of IT is helping to improve the amounts accrued. Bernie Baldwin reports.
Regardless of the global economic climate, making regular profits at an airline is tough even when the conditions are propitious. There are so many variables which can affect the bottom line, thus every positive revenue channel has to be welcomed.
Ancillary revenues at airlines have become a vital component in the sales arsenal, often making the difference between overall profit or loss. The types of ancillaries now delivered by airlines are wide and varied, but many still look to the unbundling of food and beverages, baggage and seat choice in particular as being a watershed moment in this area.
Different airlines obviously have different ancillary revenue strategies according to their business model. In fact, some airlines have tried complete unbundling and have now reintroduced bundles with fare groups including baggage and refreshments. So where is the industry gravitating?
While Norm Rose, senior technology and corporate travel analyst at travel market research specialist, Phocuswright, doesn’t offer “precise stats” on the balance, “most of the ancillary revenue is derived from the unbundling efforts,” he confirms.
“The area of growth is in dynamic bundling and continuous pricing. Dynamic bundling would deliver a set of ancillaries that meet specific consumers or corporate needs. Continuous pricing enables the pricing of inventory between traditional fare buckets,” Rose explains.
Laetitia Torre, head of product marketing, airline offer optimization at Amadeus, notes first how the Covid-19 pandemic has affected airline revenues heavily. “According to IATA figures, global airline revenue dropped more than 55% in 2020. However, ancillary revenue grew in financial importance and effectiveness during the pandemic. Total ancillary revenue for airlines was 13.6% for 2020, which is an increase compared to 12.2% in 2019,” she comments.
“In the current context, ancillary services are definitely a key contributor to generate additional revenue. According to [ancillary revenue analyst] Ideaworks, the fees associated with baggage continue to be the leading à la carte source of ancillary revenue for the airline industry,” Torre adds.
Alton Aviation Consultancy’s managing director and global airline practice lead. Umang Gupta, believes that the approach towards unbundling and bundling differs significantly between ultra low-cost carriers (ULCCs) and full-service carriers (FSCs). “Low-cost carriers (LCCs), such as JetBlue, have generally adopted the FSC strategy,” he argues.
“ULCCs unbundle to offer a low base fare that attracts price-sensitive customers and then offer ancillaries and charge fees along the customer journey when there’s higher willingness to pay (for example, seat and bag fees close to departure),” Gupta continues.
“FSCs and LCCs created unbundled ‘Basic Economy’ fare products to have an offering that competes with ULCCs for price-sensitive customers; however, they encourage and achieve a significant buy-up rate to ‘standard fares’ by value-conscious and business customers. With a large percentage of customers purchasing ‘standard fares’, the ancillary focus of FSCs continues to be value-adds such as upgrades, more-legroom seats, priority access at the airport and boarding, lounge access, loyalty, and non-air ancillaries.
“The balance between unbundling and bundling today is, therefore, almost entirely based on airlines models. With ULCCs making up ~35% of the global passenger share and increasing, one can expect the unbundling to continue,” Gupta construes.
IT applications are often used to help airlines exploit the most opportune moment for upselling services such as premium seats, hotels, car rentals and so on. Gupta reports that while some airlines have attempted to build in-house tools to offer ancillaries, carriers are increasingly relying on third-party systems to optimise retailing. “These systems use best practices gained across multiple clients, are relatively easy to layer on existing airline technology, and offer personalised ancillary products based on customer data and sophisticated artificial intelligence (AI) tools,” he elaborates. “These systems can also incorporate third-party add-ons such as hotels, cars, and experiences, allowing airlines to focus on their core digital experience.”
According to Torre, the upselling of flight related services such as premium seats is a frequent occurrence, either promoted by offering customers upgrades to a better fare family, or through promoting individual ancillaries at various times between the initial booking and the customer catching the flight. “Increased sophistication is being introduced to this retailing with data science and artificial intelligence having a big role to play in the future of upsell product recommendation,” she states. “The key is being intelligent about presenting the right upsell offer to the right customer at the right time.
“A wide variety of options exist for upselling additional services such as hotel accommodation and car rentals with the choice largely being dependent on how much time and effort the airline wishes to invest in these new product lines,” Torre continues. “If resources are limited, then upsell options linking to partner supplier white labels can generate revenues with limited effort, while airlines wishing to invest seriously in these products can use a wide range of merchandising solutions and techniques to ensure that the hotel or car rental offer is aligned with the flights being booked and matching the specific needs of each customer and travel context. Once again, being smart in what you upsell is the key to success.
“While building an airline ancillary services strategy, several components have to be considered,” Torre adds, before using the Amadeus White Paper, “Achieving flexible sales through merchandising recovery guide ” as the reference for key points. “First there, there is the timing of the offer. There are specific points when travellers are more likely to purchase additional services. As the ‘where’ and ‘when’ of merchandising are changing, there are now solutions that allow marketers to define, deploy, monitor effectively, and dynamically adjust their campaigns in real-time.
“Next, understand the purchase behaviour of the customers as the conversion rate varies depending on the channel used. So the collection of data to understand the trends is important,” Torre advises. “Additionally, use a variety of merchandising techniques, keeping in mind the customer purchase experience (such as inspiring with pictures or videos without impacting the website performance), inform the customers with relevant ancillaries (finding the right balance to avoid irritation).
“Personalise the ancillaries by tailoring the offers depending on the type of traveller (business, leisure, family holidays). Having the right price for the ancillaries, the price that the customer is willing to pay. Nowadays, this can be adjusted in real-time depending on the customer travel behaviour, their loyalty programme and so on,” the Amadeus exec comments.
Her final point of advice from the White Paper is for airlines to note that test and learn methodology helps when it comes to implementing merchandising strategies to assess the performance, to measure effectiveness, and when trying different techniques.
Advanced IT applications are not only used to help airlines promote ancillary offers, they are also used in onboard sales to ensure that payments are secure. Much has improved in this area in recent years. “Many airlines no longer accept cash and use handheld terminals or smartphone apps to sell ancillaries on board,” says Phocuswright’s Rose, though he notes that “the security of these payments depends on the vendor being used”.
Meanwhile, Alton Aviation’s Gupta reports that onboard sales have seen many innovations over the years that have actually accelerated during Covid-19 pandemic. For example, passengers being able to order food and drinks from the seat using the inflight entertainment (IFE) system has become more common. “Some airlines, especially long-haul carriers and regional carriers in Asia, have implemented order-before-flying, making it logistically efficient for airlines and a seamless customer experience. United has recently launched a touchless system by storing payments in their app, so purchases on board bypass the need for physical payments altogether,” Gupta adds.
As with most retail set-ups, the end-to end ancillary revenue operation is well down the road of digitalisation. With ancillary revenue so important to the profit/loss on the balance sheet, airlines will surely be looking to keep going down that road as rapidly as possible.
Author: Bernie Baldwin
Published: 1st February 2022
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