Ancillary revenue

In the airline industry, ancillary revenue is 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, North America 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]

History and rationale

The most aggressive proponent of ancillary revenue development within Europe has been Europe’s largest low fare airline, Ryanair. The airline uses commissions from sources such as pay-per-view entertainment, onboard shopping, internet gaming, car hire and hotel bookings to eventually offset reduced ticket costs. ^[3]

Increase in the price of jet fuel has greatly impacted the economics of the airline business with oil prices near 100 US dollars per barrel during late 2007. Citing ancillary services, ryanair quoted profits due to a combined 20% growth in passenger volumes, a 1% decline in yields, and ancillary revenues growth of 54%. Ancillaries were stated to account for approximately 16% of total revenues.

The following lists total ancillary revenue reported by these airlines for fiscal year 2006: easyJet €189,476,508,^[4] Aer Lingus €63,407,000,^[5] SkyEurope €10,827,000,^[6] AirAsia (Malaysia) €22,713,479.^[7]

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.^[8] 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%).^[9]

Passenger reaction

Airlines can differentiate their product and potentially boost their revenues by "unbundling" the travel experience by charging separate fees for services such as checked baggage and beverages served on board.^[10] 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.^[11] 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.^[12] These have led service-conscious airlines towards seeking ways to increase ancillary revenue without hurting their brand.^[13]

Types

A la carte features are separate amenities a consumer can order while travelling.^[14] 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.^[15]

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.

Airline-sold advertising relates to revenue from the sale of advertising in in-flight magazines and other customer communication channels (including advertising on the aircraft interior or exterior, or in airport or lounge facilities, as well as advertising on airlines' in-flight entertainment service.

Industry agreement largely exists that à la carte features and commission-based products should be counted under the "ancillary revenue" banner for accounting and reporting purposes. The inclusion of frequent flyer partnership activities is growing in acceptance.

References