Ancillary revenue

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Airline revenue from non-ticket sources, which is called ancillary revenue, has become an important financial component for low-cost carriers (LCCs) in Europe and is being adopted by all types of airlines throughout the world. Ancillary revenue has been defined as, “Revenue beyond the sale of tickets that are generated by direct sales to passengers, or indirectly as a part of the travel experience.”[1] Ancillary revenue has been further defined to include these categories: 1) a la carte features, 2) commission-based products, and 3) frequent flier activities.[2]

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[edit] History of ancillary revenue

European consumers would likely attribute the birth of this movement to Europe’s largest low fare airline - Ryanair. Michael O'Leary, Chief Executive of the airline, may have described the inauguration of the ancillary revenue movement during a 2001 interview in the UK Sunday Times.[3] “The other airlines are asking how they can put up fares. We are asking how we could get rid of them.”

The unorthodox business model envisioned by Mr. O’Leary uses commissions from pay-per-view entertainment, onboard shopping, internet gaming, car hire and hotel bookings to eventually replace the revenue from selling airline seats. Consumers may someday “fly for free,” but airline executives already benefit from the bottom line boost provided by ancillary revenue. Mr. O’Leary’s radical idea catalyzed an industry-wide trend to coax more revenue from the profit-challenged airline business.

Management at competing airlines often ridiculed the path pursued by Ryanair. Legacy carriers defined their product distinction by bundling many amenities into the price of an airline ticket. At the same time, low cost carriers had not yet embraced the option of selling an unbundled airline experience. But economics eventually prevailed and airline management and consumers began to understand the relationship between low fares, rising costs, and the invention known as ancillary revenue.

[edit] Passenger reaction to a la carte pricing can be negative

Airlines can boost their revenues by "unbundling" the travel experience by charging separate fees for services such as checked baggage and beverages served onboard. Low cost carriers such as easyJet and Ryanair have generated significant profit from ancillary revenue, and major airlines such as British Airways are trying this too. However, the consumer backlash from charging fees (for services included in the price of a ticket by other airlines) can damage a carrier's reputation. For example, "European Skyway Robbery" was the headline written by noted travel columnist Peter Greenberg to warn consumers of abusive overcharging for baggage fees in Europe by easyJet and other carriers.[4] The world's largest carriers are not immune from the public backlash against aggressive ancillary revenue actions. British Airways also wanted to boost its ancillary revenue with higher baggage fees during 2007. The carrier eventually backed down after the public outcry became too great.[5]

[edit] Ancillary revenue fills a need for airlines

The unrelenting increase in the price of jet fuel has greatly impacted the economics of the airline business. When combined with other factors, the outcome has created considerable challenges for legacy airlines and low fare carriers.

2007 has been especially difficult as the price oil reached the neighborhood of $100 per barrel during late 2007. Concurrent with this, Ryanair announced record half-year profits.[6] Announcing these results Ryanair’s CEO, Michael O'Leary, said: “These record profits reflect a 20% growth in passenger volumes, a 1% decline in yields, and strong ancillary growth. Ancillary revenues grew by 54% to €252 million, due to improved penetration of car hire, hotels, travel insurance, as well as strong onboard sales and excess baggage revenues. Ancillaries now account for just over 16% of total revenues as we make steady progress towards our 20% target.”

Ryanair’s €408 million profit, along with ancillary revenues of €252 million, confirmed what the airline industry has already realized. Ancillary revenue activities have become a necessary ingredient in the profit mix of successful airlines.

Other airlines all over the world also report ancillary revenue from legacy airlines to low cost carriers. The following lists total ancillary revenue reported by these airlines for fiscal year 2006: easyJet €189,476,508,[7] Aer Lingus €63,407,000,[8] SkyEurope €10,827,000,[9] AirAsia (Malaysia) €22,713,479.[10]

[edit] Ancillary revenue includes three categories

A la carte features: These represent the original DNA of the ancillary revenue movement and consist of the amenities a consumer can add to their air travel experience.[11] The list continues to grow and the following lists typical activities: 1) onboard sales of food and beverages, 2) checking of baggage and excess baggage, 3) assigned seats or better seats such as aisle rows, 4) call center support for reservations, 5) fees charged for purchases made with credit cards, and 6) early boarding benefits.

Commission-based products: Ancillary revenue activities also include the commissions earned by airlines on the sale of hotel accommodations, car rentals and travel insurance. The commission-based category primarily involves the airline’s web site, but it can include the sale of duty-free and consumer products on board aircraft.[12]

Frequent Flier Programs: The frequent flier category is defined by the sale of miles or points to program partners such as hotel chains and car rental companies, co-branded credit cards (co-branding), online malls, retailers, and communication services.

Industry agreement largely exists for inclusion of a la carte features and commission-based products under the ancillary revenue banner. These are perfectly aligned with Ryanair’s current ancillary revenue activities. Frequent flier activities represent an inclusion that is growing in acceptance.

[edit] References

  1. ^ "Ancillary Revenue Conference Preview 2007 Preview", September 2007, OnBoard Services Magazine - Worldwide
  2. ^ “Buckle Your Seat Belts - Airline Executives Predict More Fees and Plan to Sell More Services via Their Web Sites”, Report dated August 17, 2007, IdeaWorksCompany.com
  3. ^ “Flying for Free on Ryanair”, BBC News, May 13, 2001.
  4. ^ European skyway robbery, MSNBC, May 16, 2007
  5. ^ "BA admits baggage charges too high", Times Online, October 25, 2007
  6. ^ “Ryanair’s Half Year Profits Rise 24% to Record €408M”, Press release dated November 5, 2007, Ryanair.com.
  7. ^ easyJet 2006 Annual Report (fiscal year ends September 30)
  8. ^ Aer Lingus 2006 Annual Report
  9. ^ SkyEurope 2006 Annual Report and the Financial Report Presentation for the 3rd Quarter of fiscal year 2007
  10. ^ and Air Asia Fiscal 2007 from Fourth Quarter 2007 Results dated 30 August 2007
  11. ^ "A la carte: The future of airline pricing", Article by David Grossman, August 28, 2005, USAToday.com
  12. ^ "Europe’s Top 4 Low Cost Carriers Generated 470 Million Euros (US$593 Million) From Non-Ticket Sources in 2005”, Report dated October 10, 2006, IdeaWorksCompany.com