Ancillary Revenues:The only way is up

For a long time , traditional airlines winced at the notion of ancillary revenue streams and their potential to ‘dilute the brand’. It was only a few short years ago that the labor unions at United baulked at the idea of charging passengers for drinks. “It’s degrading to our profession. We are safety professionals, not grocery story clerks.” However, as the ill winds of falling consumer sentiment and ever-increasing fuel prices eroded their profitability , airlines scrambled to find new ways of extracting more pennies from their passengers. It is no longer a question of whether legacy carriers will simply charge for baggage, but how far they will go in charging for every services and products that is not flying you to your destination.

There are generally thought to be three streams of ancillary revenues
 Traditional Commission- based Cross-selling – ie hotels, car hire, travel insurance etc.
 A La Carte- ie baggage , holding seats, flight change fees, sporting equipment, SMS confirmations, reserved seating, lounge access, seat selection.
 Frequent Flier activity.

Of these, the biggest growth are has been in the ‘A la Carte’ stream. Every LCC airline in the world has climbed on this bandwagon, albeit some with more success than others. The greatest winner, according to a 2010 survey by Amadeus has been Allegiant airways, who manage to extract an impressive €24.89 per passenger.

Rank Ancillary revenue per passenger (Euro) Airline
1.Allegiant €24.89
2. Jet2.com €22.51
3.Spirit Airlines €22.35
4.Qantas €20.37
5. United Airlines €18.76
6. Air Canada €17.23
7. Aer Lingus €16.72
8. Alaska Airlines €16.47
9. American Airlines €14.43
10. EasyJet €14.43

Allegiant
Allegiant was founded in 1997 under the name WestJet Express. Along with Southwest, the airline was the only major United States airline to make a profit in the first quarter of the oil-driven 2008 recession. Allegiant’s routes are primarily leisure traffic,ancillary-driven strategy has allowed the company to remain profitable every quarter since 2003.

Basic Model

 Focus on Ancillaries
 Small cities, Secondary airports Warm-Weather Leisure Routes
 Warm-Weather Leisure Routes
 Low Operating Costs

While their model is simple, their ancillaries are relatively complex. They have five versions of ‘Change Fees’ and their list of baggage charges varies by route and by number of bags. For passengers it must be bewildering, but for the airline it seems to be one of their key success factors.

Other airlines are simply trying to keep up, often with mixed results.
Vueling -Seat Reservations vary between €3-30.
Air Berlin – Meal Selection  from well-known German restaurant.
Ryanair -Charging for electronic cigarettes fo €6. “Smokers favourite airline”
AmericanAirlines- Wifi on-board
JetBlue – Charging for pillows

The way forward

 Offer something that people want and are willing to pay for it.
 Know your customer.
 Sell it at the time of booking.
 Find things that are mutually beneficial.
 Consider bundling Ancillaries to get higher take-up.

References
http://www.airsavings.net/whitepapers/AIRSAVINGS%20AR%20Survey%20Results%20Whitepaper%20120710%20FINAL.pdf
http://www.tnooz.com/2010/07/22/data/study-winners-in-airline-ancillary-revenue
http://www.allegiantair.com/aaFeesForOurServices.php
http://en.wikipedia.org/wiki/Allegiant_Air