Ancillary revenue is crucial to the future success of airlines, but should be viewed as a ‘continuous series of new product offerings over time,’ writes Tom Bacon
Viva Aerobus, a growing Latin American airline, reports 41% ancillary revenue. Pretty impressive considering that when it comes to airline ancillary revenue, many carriers still receive closer to 10%.
However, the chief executive of Viva Aerobus notes that many ancillary fees have a lifecycle – each new fee follows a typical S-curve in take-up rates. It builds exponentially as customers learn about it and begin to value it, but generally levels off or actually dips in popularity over time as it reaches maturity or as customers assess alternatives more fully.
Actually this proved to be the case when we introduced bag fees at Frontier Airlines in 2008. As a new significant revenue source for the airline, bag fees proved critically important as we struggled with cash flow during bankruptcy. This new revenue source grew as the new fee applied to more and more passengers (the fee was effective with bookings as of a certain date, and took up to six months to apply to 95% of our flown passengers). However, the revenue source fell after 12-18 months as customers became more knowledgeable about the fee; passengers began to consolidate bags or they elected to carry-on their bags instead. So for Frontier, the new bag fees certainly followed a normal product lifecycle.
Unsurprisingly then, Viva Aerobus, with its heavy emphasis on ancillary, says they must launch new ancillary products every two to three months sustain a regular and growing source of ancillary revenue!
Lessons from others
Of course, such constant new product introductions are common in other industries. Technology and pharmaceutical industries, for example, each invest considerably in R&D with the clear objective of developing new products to keep the company’s revenue growing as older products mature or are replaced. The ‘pipeline’ is a key management focus.
Airlines, too, need to adopt this mentality with respect to ancillary revenue sources – especially as ancillary exceeds 20-30% of total revenue. So how should airlines approach the development of new ancillary products? Where can airlines look for new ancillary ideas?
There are, I believe, five opportunities that invite further exploration.
Bag fees: Bag fees are the largest single ancillary component at many airlines. And, although checked bag fees are quite mature, charging for carry-on bags is still mostly limited to ultra low-cost carriers (ULCC). Indeed, ULCCs use carry-on fees to help them achieve upwards of 40% of total revenue from ancillary. So, for many airlines, bag fees continue to be an opportunity for incremental revenue.
Other Service Elements: Other elements of ‘service’ also remain a tremendous opportunity. Many airlines continue to experiment with dynamic pricing for reserved seats; many customers are willing to pay much more for big seats or the enhanced premium economy product. In another move to capitalise on the value of flexibility, a few airlines offer an easy way to ‘hold’ a fare for a period of time. In the service category, I believe that there are opportunities for more products, for more dynamic pricing of existing products, and for improved packaging or rebundling of services.
Third-party services: Increasingly, airline websites are linking to third party services to respond more fully to traveller needs. Hotel and car rental links are common but some airlines also sell airport parking, ground transportation, and event tickets. This may be the fastest growing segment and probably currently represents the greatest creativity and innovation across airlines.
Technology/mobile: Of course, mobile offers new opportunities for merchandising many existing ancillary services. New location-based services include airport products (where to buy coffee or obtain business services) and destination products (ground transportation, last-minute hotel deals).
Broader Distribution: Finally, new ancillary revenue streams can come from wider distribution of existing ancillary products via travel management companies (TMCs), online travel agencies (OTAs), and metasearch, all of which currently have more limited ancillary visibility. This, too, represents a large growth opportunity for airline ancillary.
Ancillary revenue needs to be viewed as the sum of a multitude of products, each with its own unique lifecycle, which will likely mature over time. Airlines that rely heavily on ancillary – and those that want to see it grow – need to view this revenue stream as a continuous series of new product offerings over time. Airlines should be continually exploring new ancillary opportunities in bag fees and other service elements, as well as third-party services. They can also expand ancillary through exploitation of new technology, especially mobile, and through broader distribution.
Tom Bacon is a 25-year airline veteran and industry consultant in revenue optimisation and leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website