Tom Bacon examines some of the results of a recent annual report from IdeaWorks Company and CarTrawler to understand some of the latest trends in ancillary revenue
‘Ancillary’ revenue is, of course, a growing portion of airline revenue. Some airlines are even reporting more than 40% of their revenue from ‘ancillary’ services, which generally refer to the new ala carte pricing where checked bags, seat assignments, on board food and other elements are often no longer included in the basic fare. Instead, they must be purchased as additional, optional services.
IdeaWorks and CarTrawler assemble an annual report on ancillary revenue for airlines across the globe. In their report this year on 2016 results, a key source of ‘ancillary’ stuck out: the ala carte portion of re-bundled fares. The report includes in its definition of ‘ancillary’ revenue the fare premiums offered by select airlines that re-bundle some of the ala carte ancillary services back into a published fare, ‘the a la carte components associated with a fare or product bundle’.
A re-bundled, or sometimes called ‘branded’, fare, is sold as a package of features – a new fare that includes more amenities or features than the lowest fare. These fares may include a free checked bag, for example. Customers in many cases could pay the lowest fare and then, as an option, purchase a checked bag. With a branded fare, just like the old fares before unbundling, the customer receives the right to check a bag for free included in the fare he pays, not as an extra charge incremental to the fare. The report includes in its analysis of ancillary the fare premium associated with such branded fares.
Re-bundled fares are popular at both low cost carriers – famous for high ancillary fees – and some legacy carriers that typically don’t rely as heavily on ala carte ancillary services. Let’s look at two leaders in ancillary revenue namely UK low-cost carrier easyJet and US legacy operator Delta Airlines
1. How easyJet does it: #7 on IdeaWorks’ 2016 ranking with $2bn in ancillary revenue
For UK low-cost carrier easyJet, 26% of total ancillary revenue was actually for re-bundling features into higher fares. easyJet has two such ‘bundles’:
Flex fares – which include a free bag, free reserved seating, and certain changes
Inclusive fares – fares sold on the GDS that have free bags and free reserved seating
Both of easyJet’s bundles include free checked bags and reserved seating. The checked bag fee is reported as the largest single ancillary fee at 47% of the total, while the reserved seat fee is 7%. The bundled combination, along with certain ticket change flexibility, is another 26%. Obviously, branded fares, including both free checked bags and free reserved seats, have proven to be a popular option for many easyJet customers.
2. What Delta delivers: #2 on IdeaWorks’ ranking with $5.2bn in ancillary revenue
Ancillary revenue detail for Delta Airlines, a legacy carrier, shows that the ala carte portion of branded fares amounted to 21% of their total ancillary. With frequent flyer miles accounting for half the total, this means branded fares are larger than bag fees (17%) or reserved seat revenue (6% for economy plus seating) for Delta. Delta offers a menu of branded fares (economy, premium economy) and reports that most customers opt to buy a bundle rather than the lowest fare (basic economy). Their first bundle, like easyJet, includes free checked bags and reserved seating.
3 reasons why customers are buying the re-bundled fares:
Ease of purchase: As customers come to understand the re-bundled fares, they may opt to purchase the package rather than opt separately for each of the component parts. Some customers resist the new complexity caused by too much choice and appreciate the re-bundling of features they value.
Discount on the ala carte pricing: When we introduced branded fares at Frontier Airlines, we offered a significant discount off the ala carte pricing for the constituent pieces. A third of our customers immediately opted for the higher re-bundled fares.
Extras, not available otherwise: Sometimes airlines bundle into their branded fares features that are not actually available on an ala carte basis. Priority boarding, for example, may be available in a branded fare but not sold separately.
The movement to ala carte ancillary continues across the industry – IdeaWorks tracks the growth of ancillary for many carriers and for the industry as a whole. But, interestingly, one large ancillary revenue stream noted by their 2016 report is a return to re-bundling. As airlines continue to explore and introduce new ancillary fees, they may likewise explore new bundles of features. According to this ancillary report, rebundling already contributes significantly to ancillary revenue at some industry leaders.
Tom Bacon has been in the business 25 years, as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website