Ai Editorial: Spotting the next frontier for ancillary revenue

First published on 8th August, 2016

From bag fees becoming an integral part of economy fare to GDSs fully enabling the sale of optional extras to monetizing customer profile information, there are several avenues that can uplift ancillary revenue in the years to come, writes Ai’s Ritesh Gupta

 

Ancillary revenue generation is now a big game. Stakes are soaring higher. One needs to be swift, and make the most of traffic that’s coming their way.

A benchmark for ancillary revenue success, other than customer experience, is monetization.  United’s total ancillary revenue almost touched $6.2 billion in 2015. In case of Spirit, $52 earned from ancillary revenue represented a crucial 43.4% of Spirit’s total revenue per passenger.

One school of thought - travel isn’t a frequent buy, so when a traveller comes to a supplier, why not optimize the experience via relevant product offerings. Yes, the approach, staff training, infrastructure and fulfilment needs to be in line. Airlines today just can’t think in terms of air and non-air ancillaries. The industry is moving towards data-driven merchandising, and personalisation on an individual basis. Airlines are trying to curtail the learning curve, as quite often our industry looks upon the likes of Amazon to excel in retailing. The game is now about making the most of every interaction with the customer, predicting their next move, understanding the intent in real-time, and ensuring the number of clicks are reduced (certainly not 10-12 for a user to finish a transaction for an air ticket, seat, insurance etc.).  

We interacted with IdeaWorksCompany’s president Jay Sorensen about the latest trends in ancillary revenue:

Sorensen referred to 3 major drivers for ancillary revenue growth

·          First, there is plenty of opportunity left for airlines all over the world. Certainly the LCCs have covered almost every a la carte possibility.  But every other type of carrier from “regionals” to global network airlines have much work to do.  For example, bag fees will be almost universally charged for economy - currently they are not. 

·          Second, movement is occurring among the GDSs to fully enable the sale of optional extras.  Bookings by travel agencies and OTAs represent 40+ percent of the market that is largely untapped for ancillary revenue. (GDSs will continue to move away from their green screen presentation - which is really atrocious in today's world of user friendly interfaces - to a selling environment which mimics the display found at airline websites.  NDC will enable the transfer of price formulation from the GDS to the individual airlines.  We are far from that reality and even farther from airlines maximizing the opportunity).

·          Third, airlines are becoming better retailers. They are assessing their booking paths, cutting the unnecessary stuff, experimenting with pricing and positioning, and developing new products. 

Going forward what would be the next frontier as far as maximizing ancillary revenue is concerned? Would it be being data driven so that data such as flight and customer profile information can be used to dynamically offer customers the most compelling ancillary bundle to match needs?

Sorensen says monetizing customer profile information is “years away”. 

“NDC can be a conduit to link profiles to customized offers,” he says. 

“But airlines could largely be doing this now on their own websites, but are not.  The next immediate frontier is the revenue management - or today’s “cooler” phrase seems to be dynamic pricing - of optional extras.  This is especially true of the potential for managing the price points associated with branded fares.  The price distinctions of ‎20, ‎30, or ‎40 for the “good, better, best” method of branded fares can contribute millions in fresh revenue.  The revenue magic is determining the best price points – that’s always the case with effective retailing,” said Sorensen.

Becoming smarter in terms of selling

While carriers in the U. S. are much more well-versed, their counterparts, say in a market like China, are finding their way. When pursuing an ancillary strategy, airlines must not lose sight of the basic premise - the proposition has to provide value (monetary or otherwise) to the customer in order to be compelling. “Dynamic bundles are an effective way of providing such value. With bundles, airlines can use data such as flight and customer profile information to dynamically offer customers the most compelling air ancillary bundle to match their needs. For example, a frequent business traveller might be attracted to a bundle that includes seat upgrade, lounge access and Wi-Fi,” shared a source, based in China. “Fare Families, which involve retailing a flight plus a set of benefits for a transparent price, are also an effective way of communicating value. It may be a while before the Chinese carriers and their customers can fully reap the rewards from fare families.”

Sorensen says the “best” airlines understand they should not overwhelm the consumer with choices. 

He refers to analogy: Imagine going to a restaurant and ordering a meal. “I will have the breaded chicken”.  And then the waiter responds, “Do you want that breaded in flour, panko, or bread crumbs?  And regarding the seasoning, do you wish sea salt, regular salt, tarragon, rosemary, or paprika?” Some choices are simply better left to the chef and for the menu to describe the dish offered. That’s the same concept behind branded fares.  Consumers can choose from a menu of “good, better, or best” for their trip itinerary.  And, of course, being human, we are often lured to the safer middle choice.  And savvy airlines can price that product accordingly to deliver better revenue.  So for best retailing practice, my vote goes for branded fares, summed up Sorensen.

The case of Spirit and Ryanair           

$52 earned from ancillary revenue represents a crucial 43.4% of Spirit’s total revenue per passenger. What can the industry learn from Spirit’s way of handing ancillary revenue?

Sorensen says Spirit charges for everything and always remind the consumer they benefit from the lowest base fares. 

“It’s so very true.  In the absence of Spirit (or Ryanair in Europe) the global network airlines would immediately enjoy a big yield boost.  Consumers need these airlines to tamp down the overall fare level.  Spirit and Ryanair have an extreme natural advantage, almost all of their sales activity occurs within the completely controllable environment of their online store.  Ryanair has backed away from its reputation for ruthless efficiency and aggressive tactics.  They did this to attract business travellers,” shared Sorensen. He continued, “I think Spirit’s new CEO is showing signs of adopting the same image.  I give both carriers high marks for being very transparent about the process.  The trouble is, some consumers seem to sleep through the booking process and are surprised when they encounter a fee at the airport.  But - and this is important - the fee at the airport must be reasonable, and this is where many airlines stumble.  Being a few kilos over the limit should not generate a ‎200 overweight fee.  I think this is a generational factor which becomes far less frequent for younger travellers.  I will also add, when an airline charges for soft drinks and coffee, their overall food sales will increase.  Likewise, when an airline charges for large carry on bags, the revenue from hold baggage jumps.”

 

Gain an insight into latest trends at the upcoming Loyalty & Ancillary Revenue Conferences - 3rd Mega Event Asia-Pacific, scheduled to take place in Kuala Lumpur (23-24 August, 2016).

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