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Airlines

When cash is king

Following the IdeaWorks annual ancillary survey, Keith Mwanalushi highlights the best performers, but also discovers that the way passengers earn and redeem miles is coming at a cost
 

For the eighth consecutive year, airlines tracked by the IdeaWorksCompany reported substantial increases in revenue gained from retail activities and the sale of à la carte services and frequent flyer miles. The report reveals that in 2014 airline ancillary revenue leapt to $38.1 billion, up almost 21% year on year. LCCs jumped more than $2.9 billion, or 32.8%, compared to the previous year.

 

IdeaWorks researched financial filings made by 130 airlines from around the world, 63 of which disclosed qualifying activity that reveals where their ancillary revenue stream came from.

 

"Ancillary revenue is an increasingly important indicator of commercial success, and a major contributor to the bottom line of airlines across the globe,” says Michael Cunningham, Chief Operations Officer at CarTrawler. ”The secret to unlocking this revenue stream can be found in the data that customers generate with every transaction. It is no longer just the preserve of low-cost carriers – it is something from which all airlines are benefiting. The question is not who is doing it, it’s how well it is being done.”

 

In fact, in North America it is the network carriers that top the list in terms of revenue earned from ancillaries. United, American/US Airways and Delta, not surprisingly, take the top three positions. But clearly, when ancillary revenue is measured as a percentage of turnover, the report shows that it is the LCCs that rise to the top of the chart. Since 2011 the top slot has been held by US-based Spirit Airlines.

 

”My report has Spirit generating $748.2 million from ancillary revenues for 2014,” Jay Sorensen, President at IdeaWorksCompany tells Low Cost & Regional Airline Business. He notes that the distinction between Spirit (and fellow LCCs like Wizz Air, Ryanair, AirAsia and Tigerair) and other airlines is sheer aggressiveness.

 

”From an easy to identify perspective, they all charge for drinks – nothing is poured for free. This alone does not define an ancillary revenue champion, but it is an indication of a carrier being very serious about ancillary revenue generation. 

 

”It's always easier to offer a free coffee or Coke. When you do that, you give the consumer permission to keep their wallet closed. Most importantly, however, it reflects an overall culture for the airline. Do you give things away or charge for every optional service? And of course, there is no such thing as a free coffee or Coke…The price of providing it is always reflected in the fare charged to the consumer,” Sorensen specifies.

 

European ancillary revenue champ Ryanair once boldly sought to replace passenger fares with ancillary revenue; a dream that now seems elusive for all LCCs. The fine tuning of fees and the tweaking of product design may allow top carriers to surpass 40%, assuming that it might prove difficult for them to convert ancillaries beyond a 40% share of revenue. However, attempts among the most fee-conscious carriers to reach even higher percentages now seem stalled just below that mark, according to Sorensen’s report.

 

”Baggage is the major à la carte revenue generator; nothing else can come close,” Sorensen says. Other optional extras, such as more legroom or enhanced services in the economy cabin, are very attractive and will certainly boost ancillary revenue.

 

”However, the goal set by Michael O'Leary a few years ago to offer zero-fare seats subsidised by ancillary revenue remains elusive. This does not define the overall limit of ancillary revenue however, as there is much more to accomplish. Network airlines will work on the distribution side, because corporate travel departments want GDS access to à la carte services.  NDC will also provide an opportunity to fine tune the generation of more revenue through offers tailored to different types of consumers,” he continues.

 

Over in the Middle East, flydubai are toying around with new technologies to drive their ancillary offerings. In August, Farelogix announced that it had completed the initial integration of its FLX Merchandise solution for the airline. In implementing its new ancillary services programme, flydubai will first use FLX Merchandise to create more flexible choices in both business and economy class.

 

”Product and service differentiation is a key part of our strategy as our network continues to grow,” says Ramesh Venkat, Chief Information Officer of flydubai. ”Integrated solutions are becoming an important part of the aviation industry, and with the FLX Merchandise engine flydubai is able to offer more flexibility and choice to our passengers.” Airline merchandising is seen as a key ingredient to continued ancillary revenue growth. ”We have a number of projects that are underway to deliver these services,” says Venkat.  >>


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