IN-DEPTH: To what extent airlines are ready to expand their product basket as they try extracting the “overall value” of the guest

Published: 10 May 2011

IN-DEPTH: To what extent airlines are ready to expand their product basket as they try extracting the “overall value” of the guest

By Ritesh Gupta

Any discussion of ancillary revenue should also include a realisation of the how the core revenue is being sold. Any supplier can sell ancillary items, but it shouldn’t be without an overall retailing strategy.

“As ancillary is ancillary, not the core business - I think the guiding principle is that as long as the ancillary products can add value to customers and bottom line with marginal revenue out weighing
total marginal costs involved, it’s a good product to offer and core business will be beneficial,” says Lawrence Fong, Manager eBusiness, Cathay Pacific Airways.

It is also highlighted that as long as the products add value to the customer, it’s not important whether it’s a standalone product from the airline or if it’s in cooperation with a partner. As far as selling is concerned, the customer should never feel that the airline is ripping them off by adding something that they can’t decide freely.

For long, it has been felt that one of the most significant reasons resulting in airlines not tasting much of success in generating ancillary revenues is that they do not have a deep understanding of consumer retail behaviour. On the positive side, airlines have improved their insights into customers’ retail behaviour partly as a result of increased direct distribution. Not only has that given them more information about customer behaviour but has given them an incentive to trial offers of ancillary products to learn more.

“I think “not having good understanding of consumer retail behaviour” is not the primary reason but indeed the traditional airlines business and operating model are not working effectively with external business partners in offering and servicing ancillary products like hotel, rental cars, insurance, cruise, duty-free, etc... - pax are demanding plenty of choices, options, information and recommendations during the booking processes whereas most channels of airlines cannot support in a revenue/cost effective manner, not mentioned subsequent after-sales changes or requests made by pax,” said Fong..

Also, success in generating ancillary revenues is not just down to an airline’s understanding of consumer retail behaviour but also having the right ancillary partner that can drive sales.

“New technology and 3rd party business model should be able to help airlines get access/offer/service pax better and open up more revenue avenues,” Fong told EyeforTravel’s Ritesh Gupta.

Fong added, “On the other hand, for those ancillary products that can be offered by airlines itself like baggage, legroom seats, meal, priority boarding, ASR, etc..., airlines definitely understood very well how pax needs/wants these for decades. The issue is not how/what/when/who to offer/ service, but rather the overall pax preposition between bundling and unbundling services/products or to what extent airlines should be doing it to their pax. The preposition consideration would lead to many other questions/decisions in revenue management, pricing, segmentation, products, marketing, servicing culture, training, etc... That's probably the reason why traditional airlines are moving slow.”

For their part, low cost carriers like easyJet and AirAsia Group have come up with significant initiatives this year. One of the major European players in easyJet recently launched easyJet Holidays in conjunction with the UK-based online travel company Lowcosttravelgroup. This marked easyJet’s foray into the holiday market. The airline believes its network not only ensures that easyJet is well positioned to capture leisure traffic but also will enable easyJet to continue to build its share of the £18 billion per annum European short-haul air travel market.

Outside Europe, AirAsia and Expedia shared that they are set to launch a new joint venture company covering Asia Pacific and offering a complete range of value flights, hotels, and holiday packages. Under the joint venture agreement, a new company will be formed to operate Expedia branded businesses in Japan, India, Southeast Asia and other East Asian markets, as well as AirAsia’s AirAsiaGo and GoRooms businesses. The new venture will build on AirAsia’s local marketing expertise, along with Expedia’s technology. In terms of the highlights of this deal, the new venture will have the exclusive online third-party distribution rights in the region for AirAsia and AirAsiaX flights and travel packages meaning that with few exceptions in the region the only place to find and book AirAsia flights online will be AirAsia.com, AirAsiaGo.com and Expedia.

Assessing these initiatives, Fong said holidays/packages are not the core business/products of airlines - even LCC like easyjet/AirAsia who in principle should keep its own business model simple and straightforward in order to be cost effective.

Fong added, “However, in order to grow the business and stimulate more leisure demands, holidays/packages is probably an area where LCC can tap on by partnering with 3rd party package experts like Expedia. Maybe a JV can help highly integrating air and non-air offers/services to do a better job to pax in a cost effectively, one-stop-shop seamlessly manner rather than the old airline-package supplier model. In fact, many airlines like CX (Cathay), SQ (Singapore Airlines), BA and QF (Qantas Airways) have tried airline-holidays subsidiary approach, but (with) no real big success so far.”

Customer needs

Overall, merchandising and ancillary revenue are helping airlines in improving their bottom line results. Baggage fees, travel insurance and vacation packaging are rated among the highest revenue generators..

“Ancillary products and services should serve specific customer needs e.g. additional baggage allowance vs. hefty excess baggage charges at the airport or needing a hotel booking together with air ticket in a single transaction. Today it is often misconstrued as a revenue generating channel because of the variations of products and services, high take up rate and thus high revenue. Currently, airlines are challenged to be innovative in finding out what ancillary products/services truly serve a customer's need e.g. paying extra for a seat with extra legroom because the customer is very tall,” Nura Akbar, eCommerce Manager, Emirates told Gupta in an interview recently.

On how travel suppliers can make the most of third-party services to become better retailers, build brand differentiation, and deliver the types of services that travellers are demanding now and into the future, Fong said one should focus on leveraging the customer loyalty/trust and technology to deploy third-party services effectively as well as a robust business model evaluation methodology and governance.

Ancillary services are also key to helping travel suppliers find ways to better respond to and serve travellers’ needs for additional services or amenities in order to have more enjoyable, productive trips.

On how an airline should go about expanding their ancillary offerings, Akbar said the approach should always be customer-focused i.e. how can we improve to meet the customers' needs and the way to find this out is through customer engagement.

“With many airlines focusing on growing their business online, this interaction is now minimalised but opportunities are created elsewhere for e.g. when customers call the call centre or come back online to manage their bookings - these are key touchpoints between airlines and customers,” Akbar said.

Fong recommended that one should simply look from the customer perspective of what customer needs and how the airline can deliver and benefit from in terms of revenue and cost saving.

“We assess various ancillary revenue options first from the perspective of customer whether that is adding values, comfort and convenience to passengers, then followed by revenue and costs associated as well as whether that can help incremental air sales and operating costs saving,” shared Fong.

Travel Distribution Summit Asia 2011

Lawrence Fong, Manager eBusiness, Cathay Pacific Airways is scheduled to speak at the forthcoming Travel Distribution Summit Asia 2011, to be held in Singapore (May 18-19, 2011)..

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