In early 2000, ancillary income started out as an innovation among European low cost carriers; today it has virtually become an airline industry standard.

Published: 28 Sep 2009

In early 2000, ancillary income started out as an innovation among European low cost carriers; today it has virtually become an airline industry standard.

Ancillary income or revenue from sources other than the ticket price is categorised by the industry as a la carte features, commission based products and frequent flyer activities and today account for a substantial portion of revenue for airlines. Today, these features comprise as much as 10-15% of most airlines’ revenues. These are clearly numbers that cannot be ignored.

More specifically, ancillary income includes a wide range of items including cabin upgrades, excess baggage handling, onboard food and beverage services, and commission through car or hotel bookings. Low cost carrier Ryanair pioneered the concept in 2001 upon introduction of its pan-European services; maverick CEO Michael O’Leary commented in 2001 in the Sunday Times, UK: "Other airlines are asking how they can put up fares. We are asking how we could get rid of them." Though these charges, by virtue of their exclusivity have been criticized by passengers, they have become common across most of the world’s airlines.

Ancillary revenue for most of the airlines is to levy a charge for services which were otherwise offered free by full service carrier e.g. checked in baggage, seat preference etc. There are few ancillary revenues which are non-core to airline operation or passenger service but offers an opportunity for airline to earn revenue e.g. advertisement in-flight magazine, duty free sales – Onboard as well as on airline websites, commission earned from suppliers for selling holiday-packages etc.

Airlines are approaching the concept of ancillary revenue cautiously to avoid any adverse impact on customer perception that airlines are charging for services instead of charging a higher inclusive fare.

Since ancillary revenue as a concept is still evolving – airlines are trying to take control of the delivery of the product / service to manage passenger experience. Over a period, I expect that airlines will seek partners / specialists to manage the sourcing / packaging and delivery of product / service to generate ancillary revenue.

Preparedness

The question is this – are airlines geared to fully leverage ancillary revenues? Can airlines further increase their ancillary revenues? The simple answer is "yes they can" but there are some challenges in fully realising this revenue:

• Global Distribution Systems (GDS) are not yet fully ready to recognise this service. The codes for ancillary service just aren’t there in the systems, so how does an agent charge the passenger? The pressure to deliver a system capable of recognising ancillary income is immense and I am sure it is only a matter of time when GDS will be geared to support this requirement. But until then, the lack of a system represents a potential loss of revenue for the airline.

• Current model is not scalable - All the ancillary revenue earned by the airline comes through its own sales points i.e. airports, website, or direct sales offices. This model is not scalable as a large part of the passenger ticket sales for full service airlines take place through agents who rely on GDS to provide fare information including all taxes, surcharges and other ancillary services sought by the passenger.

• Interlining agreements are not in place - Quite simply put, if I were to travel from Mumbai to Munich via London on two different airlines, the second airline would not get the (prorated share) benefit of the ancillary revenue that the first airline charged me at my departure point.

These "losses of revenue" are certainly substantial for airlines and in today’s economic environment revenue enhancing sources must be optimized to ensure survival. Airlines should get their revenue management systems in place, push GDS to alter systems to recognize ancillary services, and develop and agree on revenue sharing models with interline and code share partners.

(This article has been contributed by A Raghunathan, senior vice president, Travel Services, WNS Global Services)