Ancillary revenues used to be largely driven by frequent flyers, who were incentivised to redeem their air miles on seat upgrades and on a limited range of airline partner offerings such as discounted hotel and car rental bookings.
Now things are different.
“Loyalty led ancillary revenue originally, but today ancillary revenue [from product unbundling] directs loyalty,” JetBlue Airways director, loyalty and partnership marketing David Canty told attendees at the recent Airline Information FFP Loyalty and Ancillary Revenue Mega Event in San Diego.
As airlines’ bottom lines have diminished with increased fuel costs, ancillary products – sold directly and through commissioned partnerships – are keeping airlines afloat. In 2007, ancillary revenue generated by 23 reporting airlines was worth a modest $2.45 billion, notes IdeaWorks consultancy president product, partnership and marketing Jay Sorensen. That figure grew to 50 reporting airlines and $22.6 billion in 2011, as airlines generated big returns on baggage fees, extra legroom and on-board catering.
In recent years airlines have begun offering increasingly innovative products to passengers during the booking process, or “flow”, such as pre-ordered inflight champagne, discounted travel tours, upgraded meals and duty free product delivery. High-quality and relevant ancillary products drive the bottom line through partner commissions, whilst creating loyalty to the airline brand, and ultimately re-booking, which combine to create “a beautiful machine”, says Canty.
Even the nature of airline loyalty has changed, taking a lead from the traditional retail model. The concepts of up-selling and retailing are becoming more important. And passengers are more likely to be loyal because of the value of ancillary products more than mere miles or points collected, suggests InterContinental Hotels VP of loyalty programmes Don Berg. “People are loyal to brands, not programmes,” he says, noting that 40% of InterContinental’s revenues come from ancillary products, namely food and beverage.
But loyalty “only drives loyalty to the degree your brand is strong”, he says.
To accurately up-sell to passengers requires booking systems that are reliable and flexible, offering relevant products at the right time and the right price. The “machine” that drives ancillary revenue has to be accurate, reflect the status of passengers and offer the right rewards, whilst linking loyalty, incentivisation and ancillary product sales in the same system.
Airlines “must make the most of their passenger data and then act on this”, says former Ryanair director Sinead Finn, who now serves as director of ‘affinnity’ consulting. “Airlines need to evaluate their data and then offer products back to the customer based on their needs. We need to know the customer a bit better. Find who the customer is and offer them what they ask for.”
Outside the booking flow, the other loyalty mechanism for driving sales that has developed almost beyond recognition is the airline credit card. The first airline cards appeared in 1986 enticing frequent flyers to travel more to get the upgraded flights, spawning the phrase “bait and switch”, notes IdeaWorks’ Sorensen.
Perhaps one of the most innovative products showcased at the Airline Information FFP Loyalty and Ancillary Revenue Mega Event was the OneSmart Card by Air New Zealand head of loyalty products and relationships Nick Judd and Rev Worldwide executive director, strategic partnerships and market Simon Hilton. The ‘triple play card’ acts as a reward card linking to the passenger’s air points, which can be converted into a dizzying array of opportunities: flights and upgrades, ancillary product purchases, or conversion of points directly into the card. The MasterCard is even tap-and-pay enabled.
Passengers can use the card as a pre-paid foreign exchange card – four currencies at any one time from a choice of eight, as well as New Zealand dollars. This product would seem to veer as far as possible from the “bait and switch” model, almost encouraging loyalty programme members not to redeem points for rebooking, given its unrivalled ability to convert miles to hard cash.
But with 750,000 cards issued, this loyalty model is working, giving the passenger flexibility with their reward redemption and driving loyalty back to the airline. A beautiful machine indeed…