Ancillary revenue refers to airline revenue from non-ticket sources, such as baggage fees and on-board food and services, and has become an important financial component for low-cost carriers (LCCs) in Europe, the United States and other global regions. 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: à la carte features, commission-based products, and frequent flier activities.[2]
Contents |
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, described ancillary revenue 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 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. 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. Traditional 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.
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. 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] These have turned airlines into finding ways to increase ancillary revenue without hurting their brand.[6]
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 traditional airlines and low fare carriers. Furthermore, Airlines can differentiate themselves by unbundling their services and thus gain competitive advantages.[7]
2007 had 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.[8] 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,[9] Aer Lingus €63,407,000,[10] SkyEurope €10,827,000,[11] AirAsia (Malaysia) €22,713,479.[12]
The importance of ancillary revenues has further increased. According to a study published by Amadeus and IdeaWorks Airlines’ ancillary revenues will increase from $ 13.5 billion in 2009 to $22.6 billion in 2010.[13] In 2009 United Airlines had a total of about $ 1.5 billion in ancillary revenues; for many airlines ancillary revenues accounted for a huge part of their total revenues, like Allegiant (29.2%), Spirit Airlines (23.9%) and RyanAir (22.2%).[14]
A la carte features are separate amenities a consumer can order while travelling.[15] 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 seats, 4) call center support for reservations, 5) fees charged for purchases made with credit cards, and 6) early boarding benefits.
Commission-based products refers to sales of products and services such as hotel accommodations, car rentals and travel insurance for sales commission. These primarily involves the airline’s web site, but it can include the sale of duty-free and consumer products on board aircraft.[16]
Frequent flyer programs are 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 à la carte features and commission-based products under the ancillary revenue banner. These are perfectly aligned with Ryanair’s current ancillary revenue activities. Frequent flyer activities represent an inclusion that is growing in acceptance.
Airlines are now using ancillary revenue sourcing companies such as Jetmax Media. Passengers have been very excepting of digital advertising which has been a preferred option for airlines. Digital advertising needs to be targeted to select passengers to be worth anything therefore airlines use the SpotU Digital platform for this.