Shop while you fly: how airlines plan to ride out turbulence

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Ancillary airline sales are forecast to reach $130 billion by 2020, which Ryanair sees as a natural progression. Sally White reports

Michael O’Leary’s wish to be ‘the Amazon of air travel’ is looking prescient. Latest indications for October’s air traffic from brokers Jefferies show global growth continuing to slow. Airlines are gloomy and even Ryanair has just pulled back profit guidance for next year. Over at Amazon, however, the business is looking like a cash machine. At least one of its special promotions this summer saw sales rise by over 50%.

For Ryanair (along with its major as well as low-cost peers) it is the non-flight sales that are pulling in increasingly impressive profits. So Ryanair has made it clear to its investors that it is streaking for growth in passenger numbers at all costs. Certainly at the cost of its airfares (which fell 10% in H1 2016-17)! And the price of a lot of investment in connectivity!

True, there is some way to go before it reaches Amazon’s customer numbers - which were well over 300 million at the end of 2015.  However, it now expects membership for its ‘My Ryanair’ app to rise from the 15 million at end-September to 25 million by the end of next year.

Selling and sharing

“More and more customers are looking to Ryanair for products other than flights, and we see this as a natural progression towards becoming the Amazon of air travel,” is O’Leary’s rationale, as reported by Reuters. While it is by no means top of the airline list for ancillary revenue, Ryanair’s take was $1.7 billion last year, over 20% of its total. The plan is to increase that “to 30% of revenues over the next four years.”

Its Ryanair Labs (a digital and IT innovation hub) has delivered “a significant upward shift in web visits, app bookings, as well as ancillary services”, said the press release with the H1 figures earlier in November.  The strategy is to boost “the sales of reserved seats, Business/Leisure Plus products and fast-track services which customers can buy at discounted rates during the booking process”.

Nor is an anticipated boom in online sales the only reason that Ryanair talks repeatedly of free flights, admittedly in ten years time! (Though it is promising a price fall of just 7% over the next six months.)  Speaking at the Airport Operators Association conference last week (23/11), Michael O’Leary, as reported by The Guardian, said that “European airports are offering Ryanair increasingly attractive deals:  the possible reduction or elimination of the air passenger duty tax“ could lead to free flights.

“We will be making our money out of sharing the airport revenues, of all the people who will be running through airports, and getting a share of the shopping and the retail revenues at airports,” said O’Leary.

Actually, Ryanair is only fifth in the list published by Statista of airlines with the highest ancillary revenue as a share of total sales, and all top rankers sell low-cost flights.

Given the tough industry background, all of the industry is now working the market as hard as it can. Top ancillary earner last year was US ultra-low-cost carrier, Spirit, at 43% of revenues, followed by fellow American Allegiant (38%), then Hungary’s Wizz Air (36%) and the UK’s (29%), according to IdeaWorks, the aviation researcher group. Pulling in the big dollars, however, were the US majors - United ($6.2 billion), American ($4.7 billion) and Delta ($3.8 billion), which are adopting the business models of their low-cost competitors.

It’s a fast growing market, worth $59 billion last year, calculates IdeaWorks (in a report for online car rental group CarTrawler), up 14% on 2014. The split was, it says, $36.7 billion on onboard food and beverage sales, checked baggage, premium seats, early boarding, and so on. The remaining $22.5 billion came from such as frequent flier miles and commissions on the sale of services - hotel accommodations and car rentals.

For example, more than 62% of Delta’s ancillary revenue, says IdeaWorks, came from its SkyMiles frequent flyer programme, but it also offers a ‘Delta Comfort’ package. Qantas took $38.38 per passenger with its Frequent Flyer programme. An increasingly popular service with both airlines and flyers is in flight Wifi. (The data is already available to Google, so the airlines’ profit scope may be limited.)

By 2020, according to Airbus’s latest industry review, ancillary sales could reach $130 billion. Airbus sees much of the growth coming from real-time purchases on aircraft over connectivity pipes rather than in the booking channel. As it notes, airlines ‘do’ connectivity because of the sales, and virtual reality on line will give much better product retail results than products hidden in trolleys!

Jefferies says October saw a 1.6% rise in air traffic in October, versus 3.2% in September and 7.6% in October 2015. Based on those numbers, Jefferies says, the IATA traffic volumes for October could be slowing to a 5 - 5.5% rise on October 2015. (The IATA September number was a rise of 7.6%). The US experienced an October slow-down from 2.7% in September on the Jefferies numbers to 0.6%, with only JetBlue and SouthWest showing traffic rises (6.5% and 5.2% respectively) against falls of over 1% for the majors.

Bumpy times ahead

Tough conditions for airlines are expected to continue in 2017, with airfares forecast to grow barely at all, according many commentators, including travel management consultants Advito. Intercontinental flights should see a global rise in business class of 1 per cent, it says, with 1 per cent for North America, Europe and Africa, but only Europe is expected to see any rise in economy class. Regional prospects look better in business, with Asia and the Southwest Pacific having rises of three per cent, and North America and Africa of 1%. But only SouthWest Pacific is expected to see any increase in economy.

Capacity discipline, says Jefferies, seems the focus among the international airlines (such as Delta and SouthWest), but the Middle East carriers “seem more intent on capturing market share”.  The fight for market share is global, hitting revenue per seat - JetBlue is planning European expansion, discounters Norwegian Air Shuttle and Singapore’s Scoot are expanding, as are Alaska Air and Wizz Air (which reported profits up 39%). Lufthansa and Air-France-KLM are moving further into the low-cost sector. SpiceJet is increasing its margins and capacity. Emirates, which saw profits plunge 64% in the first half, is considering adding cheaper long-distance flights to fend off aggressive competition from low-cost carriers. 

So, that $130-billion forecast can’t be reached too soon for many airlines!  As any ancillary fee increase, at Ryanair, at least, seems to be matched by media tips on how to avoid them, online shopping with home delivery might be a more robust income source!

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