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| Are airlines geared to fully leverage ancillary income? |
| By Raghunathan Thyagarajan on 6/10/2009 3:58:33 AM |
In early 2000, ancillary income started out as an innovation among European low cost carriers; today it has virtually become an airline industry standard. Ancillary income or revenue from sources other than the ticket price is categorized by the industry as a la carte features, commission based products and frequent flyer activities and today account for a substantial portion of revenue for airlines. Today, these features comprise as much as 10-15% of most airlines’ revenues. These are clearly numbers that cannot be ignored.
More specifically, ancillary income includes a wide range of items including cabin upgrades, excess baggage handling, onboard food and beverage services, and commission through car or hotel bookings. Low cost carrier Ryanair pioneered the concept in 2001 upon introduction of its pan-European services; maverick CEO Michael O’Leary commented in 2001 in the Sunday Times, UK: "Other airlines are asking how they can put up fares. We are asking how we could get rid of them." Though these charges, by virtue of their exclusivity have been criticized by passengers, they have become common across most of the world’s airlines.
To dimension the revenue potential, in 2007, Ryanair raked in approximately USD 485 million from ancillary income, EasyJet earns almost USD 6 per seat on ancillary revenue while AirAsia saw a 77% rise in income from ancillary revenue.
According to airline magazine Flight Global, “One US carrier that seems to be taking great strides to blur the line between the traditional, full-service network airline and the no-frills, pay-for-all-your-extras carrier is US Airways. The Arizona-based airline aims to generate $400 million to $500 million from its ancillary revenue programme in 2009.”
The magazine adds, “United Airlines has also been boosting its ancillary revenue streams through a number of measures traditionally associated with its low-cost competitors. By increasing fees for changing tickets and charging for extras that used to be complimentary, United expects its ancillary revenues to reach $1.2 billion in 2009, a 140% increase over 2005 and up a third on 2008. Broken down, the carrier expects to raise $600 million from ticketing fees, $250 million from first and second bag fees, $250 million from up-selling seats and $100 million from additional travel options, such as its door-to-door baggage service".
The question is this – are airlines geared to fully leverage ancillary revenues? Can airlines further increase their ancillary revenues? The simple answer is "yes they can" but there are some challenges in fully realizing this revenue:
• Global Distribution Systems (GDS) are not yet fully ready to recognize this service. The codes for ancillary service just aren’t there in the systems, so how does an agent charge the passenger? The pressure to deliver a system capable of recognizing ancillary income is immense and I am sure it is only a matter of time when GDS will be geared to support this requirement. But until then, the lack of a system represents a potential loss of revenue for the airline.
• Current model is not scalable - All the ancillary revenue earned by the airline comes through its own sales points i.e. airports, website, or direct sales offices. This model is not scalable as a large part of the passenger ticket sales for full service airlines take place through agents who rely on GDS to provide fare information including all taxes, surcharges and other ancillary services sought by the passenger.
• Interlining agreements are not in place - Quite simply put, if I were to travel from Mumbai to Munich via London on two different airlines, the second airline would not get the (prorated share) benefit of the ancillary revenue that the first airline charged me at my departure point.
These "losses of revenue" are certainly substantial for airlines and in today’s economic environment revenue enhancing sources must be optimized to ensure survival. Airlines should get their revenue management systems in place, push GDS to alter systems to recognize ancillary services, and develop and agree on revenue sharing models with interline and code share partners.
According to Jay Sorenson, President of US Consultancy Ideaworks’ partnership and marketing practice: "I'm amazed at how quickly a la carte pricing has been adopted by US legacy carriers, and I'm also amazed that there hasn't been a passenger revolt. With unbundling, the indications are that the base fare should drop, but what's odd in the US was that the product was unbundled and the overall price went up. Passengers were asked to pay a higher fare and to pay for things that were once included."
He adds: "The world has been watching with tremendous interest what's been happening in America with the major carriers and waiting to see if they were able to pull it off. We will see more of this activity worldwide," Sorensen says neither Europe nor Asia is "immune" from the ancillary revenue phenomenon because "airlines have a need for the revenue and consumers have more or less accepted their fate". 2va59wfxt4 |
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