Research findings released in early June by IdeaWorks, a leading ancillary revenues consultancy, not surprisingly showed substantial growth in ancillary revenues as part of the commercial airlines sector in 2012, based on 53 airlines that disclosed these profits.
The report estimated that in the last fiscal year ‘extra’ fees and satellite services have earned airlines worldwide somewhere in the ballpark of US $27.1 billion. These figures represent more than double the US $13.47 billion reported for 2009 and correlate to a significant increase in the percentage of overall profits that ancillaries now represent.
While North American and Asian carriers such as United, Delta and American Airlines (coming in first, second and third, respectively) and Qantas and Korean Air (placing fifth and tenth) took the lead in this survey.
Even legacy European carriers, which have generally been slower to move away from a full-service business model, are joining the pack and have posted ancillary gains. Regional leader Air France-KLM placed seventh on the list and reported collecting in excess of US $1 billion in ancillary revenue for 2012.
IdeaWorks is just one of many firms watching this marketplace closely and publicising numbers collected from carriers around the world. Yet, despite keen interest and widespread analysis of this rapidly evolving sector, the precise breakdown of an airline’s ancillary revenues by source is difficult to determine, perhaps even for the carriers themselves. One thing that is clear to a number of industry experts, however, is that most carriers have reached a plateau in terms of what gains can be achieved through first-generation ancillary propositions, such as checked baggage fees or plastic-wrapped sandwiches for sale in economy.
“Most low-cost carriers cannot operate without ancillaries, we know that for sure. Right now, if you look at some of the bigger legacy carriers, especially in North America, you can observe most profitability coming from the likes of checked baggage fees,” says Brett Proud, CEO of GuestLogix, a Toronto-based provider of full-service transaction capabilities for travel operators and provider of onboard store technology and merchandising solutions. “However, we feel strongly that the ‘low hanging fruit’ of second bag or checked bag fee programmes has been pretty much picked now, so you’re going to see folks getting more creative.”
Proud’s forecast seems well supported by some interesting numbers obtained by Hudson Crossing, another consultancy to the world’s airlines with expertise ranging from travel and hospitality to financial services and technology.
Through its own research, Hudson Crossing found that the average percentage of overall revenue coming through ancillary channels across all network carriers was just 6% in 2012. That number is expected to remain almost flat in 2013, hitting a possible 7% if things go well. Low-cost carriers averaged around 15% of total revenue coming from ancillary channels last year and similarly anticipated lacklustre growth to just 15.1% in 2013.
So has the gravy train stopped? Thankfully, no. But it might need to jump the track. Though projections for this year don’t exactly excite, ancillary gains for 2016 should rocket to 15% for network carriers and to nearly 26% of overall revenue for low-cost carriers. And these estimates come straight from the horses’ mouths.
A probable explanation for this anticipated stall in sales followed by robust growth later on, is that over the next several years, airlines intend to invest time and money into breaching the new frontiers of ancillary marketing. The future of ancillary innovation will be inextricably connected to web portals, mobile apps and interactive inflight entertainment (IFE) systems. The carriers polled by Hudson Crossing have collectively predicted 2016 to be the year that they will successfully integrate these touch points to create more intuitive and successful sales platforms.
“An airline, or almost any type of travel company for that matter, is something of an accidental media company,” explains Henry Harteveldt, veteran travel industry analyst and strategist with Hudson Crossing.
“They know who their customers are, they know intent, and they know actual behaviours and location. The passenger has shared this information with them, especially if they have downloaded the airline’s app. There is an enormous opportunity to leverage, through mobile, more selling opportunities and to make those opportunities more relevant.”
One example, says Harteveldt, would be to use road traffic information to determine if a passenger might encounter a delay due to road conditions and offer him or her a warning to leave for the airport sooner via text or email. The airline could then add a suggestion for a car or taxi service and link the passenger directly to a partner provider. This type of adaptive marketing is often seen in a retail environment, where during a rainy day, umbrellas might be relocated to the front of the selling floor, and possibly marked up in price.
“Airlines’ preferred point of sale is still during the initial reservation process,” Harteveldt reveals. “Our research shows that 25-50% of the ancillary selling opportunity exist after the initial reservation has been booked, but this varies based on the item. This is not the only opportunity however. Just because the passenger doesn’t go for offers at the time of booking, doesn’t mean they won’t open their wallets later.”
According to Shashank Nigam, CEO of Simpliflying, a well-known consultancy that advises airlines and airports on customer engagement strategy, Air Asia is currently doing a good job of capitalising on the passenger’s natural inclination to move on to hotel booking immediately after confirming an airline ticket. “At the very last step of the confirmation page, AirAsia dangles a promo code for its AirAsiaGo hotel bookings, as well as hotel suggestions,” he explains. “Using a promo code as a carrot is very much aligned with Air Asia’s positioning as a ‘budget’ low-cost carrier, and subscribes to the purchasing behaviour and mentality of its target customers.”
Many Asian low-cost long haul carriers like AirAsia X and Scoot are leading the way to ancillary conquest, earning almost 20% of their total revenues from ancillary sources, Nigam says. This illustrates that ancillaries are a key component of the business model and not just an add-on service. JetStar, the low-cost subsidiary of Qantas, also services this busy region and is in direct competition with the likes of AirAsia and Scoot.
It, too, operates a sharply designed web portal that openly engages the passenger to browse a range of additional offerings. Passengers accessing the airline’s webpage from a smartphone or tablet will come to a portal fully optimized for easy navigation with their device, thus making location of additional services easier and increasing the odds of a post-booking sale.
“For mobile, the airlines will have to rethink both back- and front-end processes,” says Harteveldt. “In all likelihood, they will need to create parallel processes and experiences that are streamlined for the mobile environment, so the customer can proceed through steps quickly. Some steps may need removal as they are found to be unnecessary or slow the process down.”
In addition to traditional and mobile web portals, the airline app has become increasingly popular, as mobile phones become more sophisticated and tablets continue to replace the notebook computer for many travelers. Most of the larger airlines have their own app and have developed these with varying levels of success.
To date, most airline apps available for download feature functionalities geared mainly towards completing activities like trip management, check in, airport navigation and flight status monitoring. Some have evolved to offer mobile booking, while far fewer have options to buy ancillary products and services.
“The airlines have yet to figure out a really good ancillary strategy for mobile,” comments Proud. “Download any airline app and you will see very quickly that there is really no ancillary strategy that takes into account personalization or itinerary and puts customised offers in front of someone.”
There are a gaggle of forward-thinking mobile application developers to be found around the world with the capability to design truly slick and effective airline apps. International payment technology and ancillary marketing specialists like GuestLogix can easily embed secure transaction processing engines into mobile apps, and consulting firms like IdeaWorks Company, Simpliflying and Hudson Crossing are all more than enthusiastic about the immeasurable potential of selling to the connected passenger.
Travelers have expressed that they want to have more control over their journey and most (China leads the way here with 87% of passengers carrying smartphones and 53% carrying tablets) of them have a mobile device while travelling, plus Wi-Fi access can be found at more than 500 airports worldwide. All this begs the question, why are the airlines not profiting more from ancillary propositions through the mobile channel?
According to Harteveldt, it has lot do with mentality. “Airlines admit that their customer targeting is terrible. In fact 54% of the airlines we recently surveyed said that their customer targeting was not at all effective,” he says, adding that he was recently prompted by a large North American carrier to purchase economy-plus product after booking a business-class ticket.
“They are going to have to invest some time and money into improving this. They need to understand who has bought what and who is likely to buy what, and that isn’t easy because every traveller has multiple traveller personalities. I think ultimately, everything will need to be developed to the lens of mobile as the central technology platform. It is a sizeable market and will continue to grow, especially over the next few years.”
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