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Issued 01 April 2014
Top 10 Things You Need to Know About
Ancillary Revenue and Airlines
Reviewing the past, present and future of the ancillary revenue revolution in its 10th year
“We are here to celebrate something new”
Baggage is the king of a la carte
Branded fares are easier for consumers and better for revenue
Subscription programs create the best loyalty
High value customers happily consume a la carte services
The best ancillary revenue managers are diplomats
Greed is not good for new a la carte fees
Transparency is a virtue for consumers, employees, and your brand
Frequent flier programs provide big revenue potential
Create new products, not just new fees
A final point ─ A la carte shopping is good for consumers
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Issued by IdeaWorksCompany.com LLC Shorewood, Wisconsin, USA www.IdeaWorksCompany.com Top 10 Things About Ancillary Revenue IdeaWorksCompany.com LLC © 2014 Page 1 About Jay Sorensen, Writer of the Report
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Before relying on the information, you should obtain any appropriate professional advice relevant to your particular circumstances. IdeaWorksCompany cannot guarantee, and assumes no legal liability or responsibility for, the accuracy, currency or completeness of the information. The views expressed in the report are the views of the author, and do not represent the official view of CarTrawler.
Back in November 2007 more than 240 airline industry professionals gathered in Frankfurt to experience something new, the first-ever conference dedicated to ancillary revenue. Opening comments made by Jay Sorensen, who chaired the Airline Information event, included the words you see above, “We are here to celebrate something new.” It’s perfectly appropriate to open this backward-glancing and forward-looking report with the same words for airline industry professionals all over the world. This philosophy explains the purpose of this report ─ to use past experience to guide airlines on their ancillary revenue path for the future.
When defined in terms of online retail activity, the ancillary revenue revolution becomes ten years old this year. Airline lore credits Ryanair as leading the way for web-based a la carte sales... but au contraire. Back in 2005, United Airlines in the US and Flybe in the UK introduced ancillary revenue services at their websites.
It was a month later in January 2006 that Ryanair introduced its scheme for checked bag fees and cheaper fares.3 Over time the airline earned a reputation as the leading advocate for ancillary revenue. But 2013 brought something new again. Ryanair − having been chastened by relentless criticism of the way it treats passengers − publicly admitted it must improve its scandalous reputation for customer service.4 “For a Fee, United To Expand Access To Roomier Seats” dated 02 August 2005 in the Wall Street Journal.
“Flybe cuts ticket prices but introduces luggage levy” dated 16 December 2005 in the Guardian.
“Ryanair to Revolutionise European Air Travel” Ryanair press release dated 25 January 2006.
“Ryanair's Michael O'Leary vows to change 'macho' culture” dated 20 September 2013 in the Telegraph.
Top 10 Things About Ancillary Revenue IdeaWorksCompany.com LLC © 2014 Page 4 Ryanair has certainly learned risk is a companion of growth. Turning over every rock in search of revenue has often perplexed and frustrated the media, politicians, and consumers. Fortunately, these experiences can be used as teachable moments and provide an alternative to the painful method of trial and error. The ten tips offered in this report not only help airlines reduce the trips and falls they may encounter on the ancillary revenue path, but also boost the magical elixir of profit by providing better alignment with the expectations of consumers.
The Top 10 List ─ Ancillary Revenue Tips
Baggage is the king of a la carte.
Branded fares are easier for consumers and better for revenue.
Subscription programs create the best loyalty.
High value customers happily consume a la carte services.
The best ancillary revenue managers are diplomats.
Greed is not good for new a la carte fees.
Transparency is a virtue for consumers, employees and your brand.
Frequent flier programs provide big revenue potential.
Create new products, not just new fees.
A la carte shopping is good for consumers.
Commentary from the International Air Transport Association (IATA) demonstrates the global importance ancillary revenue has achieved, “Ancillary revenues are a key driver of improved financial performance... Without ancillaries, the industry would be making a loss from its core seat and cargo products.”5 An increasing number of airlines are becoming experienced ancillary revenue pros, while others are just beginning their journey. For the pros, novices, and every airline in between, IdeaWorksCompany offers its top 10 list for year 10 of the ancillary revenue revolution.
Baggage is the king of a la carte
The year following the Frankfurt conference marked the beginning of a global depression for the airline industry. Jet fuel prices in the US rocketed from $2 per gallon in 2007 to nearly $4 in
2008.6 That doubling of fuel prices caused an economic convulsion that required immediate action. When air fares failed to keep pace, most US airlines quickly introduced fees for checked bags on domestic flights. In 2007 US airlines generated excess bag fee revenue of $464 million...
the ancillary revenue revolution would push this to nearly $3.5 billion for 2012.7 Europe’s network airlines took a similar approach during 2013 when faced with their own economic travails. Air France, British Airways, Iberia, KLM, and SWISS broke from tradition and introduced various schemes to charge bag fees throughout Europe or at select hubs such as flights from London Gatwick (British Airways) or Geneva (SWISS). It’s a path well-trod by low cost carriers all over the world, which have long realized bag fees are a crucial component of their bottom line.
“Airline Financial Outlook Strengthens” press release dated 12 December 2013 at IATA.org.
U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB at the US Energy Information Administration website.
Baggage Fees by Airline, Bureau of Transportation Statistics at the US DOT website.
Top 10 Things About Ancillary Revenue IdeaWorksCompany.com LLC © 2014 Page 5 Positive things can happen when a company assesses a fee for a formerly “free” service. The revenue flow can encourage airlines to treat the service in a more business-like manner rather than as a “gift” given to the customer. This new revenue often allows an airline to reverse years of cost-cutting and invest resources to make a better product. For example, airlines worldwide are doing a much better job of handling customer bags. The rate of mishandled bags per 1,000 passengers has dropped more than 53 percent from 2007 to 2012.8 It’s notable that during the same period, passenger traffic increased 18.9 percent.
The US market provides a dramatic portrayal of the revenue power exerted by aggressive bag fee programs. Table 1 displays the revenue results for consumer policies ranging from stringent to generous. Spirit, a self-described ultra-low-cost carrier, implemented the first fee for large carryon bags. Ben Baldanza, CEO of the airline, disclosed, “On July 31, 2010 (the last day with no fee) 60 to 70 percent of our customers carried large roll-on type bags that required overhead bin stowage. Like a knife edge, this dropped to 15 percent on the first day of the new fee.”9
In 2011 IdeaWorksCompany estimated Spirit’s carry-on fee delivers more than $50 million annually for the carrier. It was a controversial move that has only been followed by Allegiant and Wizz Air. On the other end of the spectrum is Southwest, which has enjoyed a positive response from consumer advocates for its no bag fee promise. The investor community continues to challenge the wisdom of the decision... especially as annual domestic bag revenue at Delta is nearing $9 per passenger. Charging for every piece of checked baggage provides powerful attraction for investors and has become an accepted part of the US travel experience.
Branded fares are easier for consumers and better for revenue
More emphasis is being placed on how to better sell air travel and airlines are experimenting with different methods such as fare families and branded fares. The low cost carriers originally led the way with an array of a la carte items for sale at their websites. Airlines found it easy to add more items for passengers to click and buy during the booking process. These include pre-paid bags, early boarding, exit row seating, assigned seats, and pre-order meals. When offers for hotels, car hire, and travel insurance are added to the ancillary revenue buffet, the result becomes complex and often overwhelming. Branded fares have arrived to rescue consumers who have become confused by too much choice. Fortunately for airlines, the financial results have been very promising for this package-oriented method.
Baggage Report 2013 issued by SITA, Industry Surveys and Reports page, SITA.aero.
“Spirit Succeeds with the World’s Only Fee for Carry-on Bags” report by IdeaWorksCompany dated 19 December 2011.
Top 10 Things About Ancillary Revenue IdeaWorksCompany.com LLC © 2014 Page 6 Branded fares may share their origin with the successful “meal deal” methods used by fast food restaurants all over the world.
Consumers are comfortable and respond well to offers that bundle all the usual amenities in a single price. Of course, there is irony here, as that was the manner in which air travel was once sold. The difference today is the “seat only” price for traditional carriers has become more competitive with the The message displayed here is lowest fares in the marketplace. Consumers may upgrade to instantly understood in any language.
higher-priced bundles that offer more perks. Each bundle is always available, including high demand flights. This follows a retailer’s first rule to always keep every product stocked.
On 12 December 2012 American Airlines adopted the branded fare method in a very big way - by offering it on all flights within the continental US. The carrier filed three types of fares under an umbrella brand called travel options: Choice, Choice Essential, and Choice Plus. Branded fares apply retail psychology by assigning a simple price point to a better bundle of amenities. For $34 more, the consumer would receive a checked bag, priority boarding, and more flexibility. It might be a difficult concept for traditional airline folks to understand, but intuitively simple for most consumers. The Choice fare varied for each flight as determined by the revenue management process. The Choice Essential and Choice Plus prices were originally determined by a $34 or $44 premium above the Choice fare (double for roundtrip); the premiums are now higher.
Frontier Airlines was an early branded fares innovator when it introduced its AirFairs pricing structure in 2008.10 The merchandising platform developed by Datalex allows the airline to offer four branded fares: Basic, Economy, Classic, and Classic Plus. The method certainly presents consumers with choices, and 35 percent of them upgrade themselves by booking the Classic or Class Plus fare brands. The airline also attributes a 22 percent revenue increase to the branded fare approach.11 Positive results have also been disclosed by Air Canada. While the carrier uses a different revenue management approach, 46 percent of domestic consumers picked a fare bundle above the lowest price fare.12 Yes, you read correctly... nearly half chose more comfort and convenience over the cheapest price. These carriers are proving − when properly merchandised − airline travel can fetch a premium.
Subscription programs create the best loyalty
Frequent flier programs can’t motivate every member to spend more or remain loyal. The allure of points or miles can encourage the repeat purchase behavior craved by airline executives. But for a significant number of travelers, the perks sadly have little influence on how often one airline is chosen over another. For example, only 31 percent of travelers surveyed (sample size of 2,572) would stick with their preferred brand if a competitor offered a discount.13 But there is no mystery associated with customers who choose to pay for perks up front with their own money.
These consumers now have an economic interest and work to save money on a per trip basis by booking the airline more frequently. Executives at Air Berlin, United, and Vueling know their subscription customers will shop first at their airline before going “off the grid” to buy a ticket from another carrier. Table 2 offers examples of subscription products.
“A Whole New Way to Buy and Fly on Frontier Airlines” press release dated 18 Dec. 2008 at FlyFrontier.com.
Case Study for Frontier Airlines reviewed March 2013 at Datalex.com.
Air Canada 2006 Annual Report.
“Rising above the Clouds Charting a course for renewed airline consumer loyalty” 2013 report issued by Deloitte.