4 Innovative Types Of Airline Ancillary Revenue Management And Why This Is Changing The Industry

Airline ancillary revenue is an integral part of airline management. But what does airline ancillary revenue mean and why is it so important? Read on to learn more…

Contents

An introduction to airline ancillary revenue management

Airline ancillary revenue has become a prominent part of the airline industry. Different types of airlines are struggling to make a profit nowadays more than ever before. High taxes, landing fee, fines for delays, fuel costs amongst others are all contributing to airline profit margins being increasingly squeezed. This has stimulated the market to react by finding new and innovative ways to increase their revenue. But what is airline ancillary revenue management?

What is Airline Ancillary Revenue Management?

Airline ancillary revenue management is essentially the management of sales that are made beyond the core product. In the case of airlines this is anything above and beyond the sale of a seat on a particular route. According to Ideaworks, ancillary revenue can be defined as;

‘Revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience’

Airline ancillary revenue is not a new concept. In fact we have seen it in various contexts in the travel and tourism industry throughout history.

Do you remember when you used to book your holiday in a travel agents? And that agent would offer you a travel insurance as an additional purchase? That’s an ancillary product.

Remember that package holiday that you went on as a kid and your parents purchased a day trip to the water park from the Holiday Rep? Yep, that was also an ancillary.

Travel and tourism businesses and entrepreneurs have relied for many years on ancillary sales, but it is only in recent years that the opportunities for revenues through ancillary products have really taken off within airlines.

Increased competition in the airline industry

Airline ancillary revenue all started with the introduction of budget airlines. These airlines were based on the premise that they would provide passengers with the bare minimum, expecting them to pay additional fees for any extra products or services that they would require.

Over the past two decades budget travel has really taken off and we have seen the rapid expansion of airlines such as EasyJet and Ryan Air throughout Europe (the rest of the world have followed suit too). This has changed the face of the aviation industry.

With their competitors offering discount rates for the same flights, scheduled and charter airlines have had a really difficult time in recent years. This has meant that they too have turned to airline ancillary revenue as a means of staying afloat in a challenging and turbulent industry.

Increasingly we now see airlines such as British Airways and Qantas unbundling their products and charging for the likes of food and baggage, often to the detriment of their brand image in order to remain competitive in the current marketplace.

Airline ancillary revenue management has now become a core part of most airline’s business models.

Examples of airline ancillary products

Airlines can charge passengers for all sorts of things.

Whilst there are the obvious ancillary products such as duty free items, food and drink and baggage, there are also many new and innovative products and services that airlines are offering such as the economy skycouch offered by Air New Zealand or the sleeping pods currently being designed by Airbus and Zodiac Aerospace.

There are many ways that revenue can be enhanced and airlines are really starting to capitalise on this.

Fundamentally, airline ancillary revenue can be categorised into four ancillary types: a la carte, commission-based products, frequent flier activities and advertising sold by the airline. This post explains more about these types of ancillary revenue products and how they are used.

How does ancillary revenue management impact profit?

Airline ancillary revenue is big business, really big business! In fact, for some airlines it makes up around 50% of their profit. This chart below shows some of the top ancillary-earning airlines and their profit make-up.

Source: Ideaworks

Unbundling

Before we get into the details of exactly how airlines use airline ancillary revenue to increase profits, we must first understand the concept of unbundling.

What is unbundling?

Back in the days when things were simple, we would get a ‘bundled airfare’. We bought a ticket to fly with a scheduled airline and in exchange we typically got a place to sit, a baggage allowance, some food and drinks. Simple.

Then came along the disruptors (aka the budget or low cost carriers).

These airlines, quite rightly, identified that not all passengers wanted all elements included in this traditional ‘bundle’ and they introduced the fare-only ticket. The title speaks for itself- it is a ticket with no additional extras included.

What’s complicated about that? I hear you ask. Well, nothing actually. In fact, it is even more simple than the bundled fare. The complexities started when scheduled carriers started unbundling and low cost carriers started to bundle.…

The concept of unbundling is really quite self-explanatory. It is when an airline takes elements away from what would usually be included in a traditional bundle. These elements are then offered instead at an additional cost to the passenger, allowing for the price of the base-fare to be reduced.

This is an important part of ancillary revenue management.

The benefits of unbundling

Unbundling products in this way can do wonders for an airline.

It allows them to gain revenue from selling products and services, many of which may not have been available before. It also allows them to differentiate their products more effectively- passengers can simply opt in or out of purchasing a particular product or service. For example, for someone whois pregnant and so would not opt to take advantage of the all-inclusive alcohol that continues to be offered by many scheduled airlines. On this basis, it would be better for them to pay less for their ticket in exchange for no alcoholic drinks.

Product differentiation in this way is actually very popular.

In fact, as consumers we have become very picky in our wants and desires. We now live in a world where we can tailor products and services to suit our personal preferences in many different regards so there is most certainly an argument to say that airlines should move with the times and provide the option too.

They do this through unbundling.

Ultimately, unbundling allows scheduled airlines to more effectively compete with low cost carriers.

With profit margins being squeezed more than ever before, airlines are now turning to ancillary revenue as a strategy for remaining competitive in the aviation marketplace. There are different categories of ancillary revenue used by budget and scheduled airlines, as outlined below.

The disadvantages of unbundling

When it comes to airline ancillary revenue, there are some disadvantages too.

It might be a necessity for many airlines to stay afloat, but unbundling can have negative consequences on the airline. Remember I said that the airline industry has become a mess? Well this is a direct result of unbundling.

Do I get to take a bag onboard this flight with me?

Should I buy a meal deal from Boots at the airport or is food included?

Do I need to pack blankets for the kids or will there be one on the seat?

These are the types of questions that passengers are now asking, often without a clear answer. We are confused. British Airways offers fares with baggage and fares without, Ryan Air offers fares with free cancellation and fares with cancellation fees. United include soft drinks in the price but not alcohol. It’s all incredibly confusing.

And it gets worse.

Many airlines operate code-share schemes, meaning that you may book with one airline but fly all or part of your journey with their partner. This happened to me when I flew to Ecuador from London. I booked my flight with British Airways who operated the first outbound leg to Madrid, where I then boarded an Iberia flight to South America. All food and drink was (at the time) included on this first BA sector. The return journey consisted of two Iberia flights. Having been fed and watered on the outbound flight to Madrid I assumed I would have the same service on the return, only to find that there were no complimentary items, not even a glass of water. I was confused and quite frankly a bit annoyed at the lack of consistency and transparency in my journey.

This has become an all too often occurring example felt by many passengers across the aviation industry.

Ultimately, unbundling is known to reduce customer satisfaction, particularly when it comes to loyal customers. People who have enjoyed a glass of wine on their flight for many years generally do not respond well to that privilege being taken away, for example.

Since the introduction of food and bag charges, British Airways have had many complaints from previously loyal passengers who have likely subsequently chosen to fly with a competitor for a lower price.

Whilst the goal of unbundling is to reduce fares, airlines operating out of primary airports such as London Heathrow will always struggle to compete with airlines who are able to offer comparative flights at significantly lower costs out of secondary or tertiary airports where the fees are substantially lower.

At the end of the day, the aviation industry is evolving and the airlines need to change with it, what exactly is the best approach, however, is yet to be determined.

What are the categories of airline ancillary revenue?

Airline ancillary revenue has become an integral part of any airline’s business model.

Originating with the introduction of low cost carriers, the sale of ancillary products and services has revolutionised the aviation industry in many ways. Society has become more ‘choosy’ in what we want.

We don’t want to pay for alcoholic beverages that we won’t drink.

We don’t want to pay for a sandwich that we won’t eat.

We don’t want to pay to check in a bag that we don’t need.

These changes in consumer demand have resulted in airlines developing a range of ancillary products and services that are available for sale both on and off of the aircraft. Here are the four categories of airline ancillary revenue.

A La Carte Ancillary Products

A la carte ancillary products are products and services sold to supplement the travel experience by airlines. There are two main “types”:

1- Unbundling – Charging for products and services which were traditionally part of the ticket price. Allowing passengers a “pick and mix” option of products they want. One size does not fit all.

2- Value-added – Selling ancillary products and services which may “add” to the travel experience, but that were not generally included in ticket price.

Why do airlines use a la carte ancillary products?

A la carte is a prominent example of airline ancillary revenue. Ultimately, airlines sell a la carte ancillary products to increase the likelihood of commercial survival. Synder (2014) stated that

“When the legacy carriers all put this into place — it was around 2007, 2008 — they were just desperate for money because they were bleeding so bad. They couldn’t reduce fares because they needed to stem the tide.”

By relying less on the base fair and selling a range of additional products and service on an a la carte basis the airline increase the likelihood of greater profitability. As you can see in the graph below, airlines make very little profit from the sale of the seat itself, so it is very important to explore other revenue opportunities.

By making money through alternative means, airlines are able to lower fares, which in turn stimulates demand. In reality this may only be a matter of perception. By the time you add on payment, baggage, check in and seat selection fees, for example, your Ryan Air flight may indeed be the same cost as the equivalent British Airways flight. But because the initial price was lower, it sparked your interest and thus secured your business.

Examples of a la carte ancillary products

These most commonly examples of a la carte airline ancillary revenue come in the form of in-flight retail. For budget airlines, there is often a big push in this regard, with frequent advertisements and Cabin Crew who are trained in sales techniques. Other airlines may place less of a priority on a la carte ancillary product sales.

Here are some examples of the types of a la carte ancillary products commonly offered by airlines:

Food
Drinks
Fragrances
Cosmestics
Jewellery
Watches
Sunglasses
Toys
Games
Duty free
Scratch cards
Headsets for in-flight entertainment (IFE)
Onward travel tickets
Attraction tickets
Check in Baggage
Hand baggage fees
Excess baggage fees
Credit debit card fees
Speedy/priority boarding
Flight change fees
In-flight entertainment

Why different airlines offer different a la carte ancillary products

Different airlines have different business models and it is important that they tailor their a la carte ancillary products and services to suit the needs and desires of their particular type of customers.

Take British Airways, for example. They now charge for food and drink onboard their short-haul flights, but they have chosen to team up with Marks and Spencers in order to offer a premium product that they think would suit their customers.

It is also important to recognise that he offering of ancillary products and services will change regularly depending on consumer demands and the state of the industry as well as the wider economy. Ryan Air, for example, will shortly be introducing hand baggage fees as an additional revenue earner, we are yet to see if other airlines will follow suit.

Frequent flyer programmes

Another example of an airline ancillary revenue strategy is leveraging the benefits of a frequent flier programme. Lets take a look at how this works in practice…

What is a frequent flyer programme?

Frequent flyer programmes, or FFPs, are customer loyalty programmes offered by many airlines. These typically allow customers to accumulate (or “earn”) points for flights taken or services bought from the airlines commercial partners. Members can then redeem their accrued points for free air travel tickets or for other products and services.

Frequent flyer programmes can be critical to legacy carriers facing fierce competition from budget airlines. It encourages return business and offers something that many of the competing low cost carriers do not.

In addition, a frequent flyer programme should be viewed as a powerful marketing tool that allows airlines to collect value added information (precise members profiles, consumer habits, etc.) on a population with high spending capabilities.

More and more frequent flyer programmes are becoming a business of their own rather than just “nice to have”. These programs can provide airlines with a source of recurring and low volatility income, which is especially important given the increasingly competitive nature of the aviation industry.

Here is a handy timeline taken from the Centre for Aviation that shows how frequent flyer programmes have grown and evolved over the years.

How do airlines use frequent flyer programmes to make ancillary revenue?

How airlines make money from their frequent flyer programmes as an ancillary revenue product is not always clear cut.

Whilst customer loyalty is great, there is limited evidence to prove that frequent flyer programmes do, in fact, make the airline a profit taking into consideration logistic and management fees alongside passenger rewards. This may be the reason that we do not see many budget airlines using frequent flyer programmes.

What is clear, however, is that airlines can use their frequent flyer programmes to drum up business with commercial partners and directly with passengers, thus making this an important airline ancillary revenue strategy.

Relationships with commercial partners

Airlines will often sell their frequent flyer points to commercial partners. These partners will then offer the points to their own customers as a sales incentive. This can be a very successful method of using airline ancillary revenue.

Perhaps one of the best examples of this is the commercial relationship between British Airways and American Express. British Airways sell points to American Express. American Express then entice new and existing customers to use their credit card by offering points as rewards.

Just by using the credit card, customers can collect a substantial number of frequent flyer points which can then be redeemed on a flight or other travel products and services. You find out more about how this works for the consumer over on The Points Guy website.

Whilst credit cards do seem to dominate the frequent flyer ancillary revenue market, these are not the only commercial partners who are interested in doing this type of business.

Tesco, for example, have also teamed up with British Airways, offering frequent flyer (known as Avios) points to their customers instead of Tesco Clubcard points. Again, the anticipation is that customers will choose to shop with Tesco as opposed to other supermarket retailers because they wish to collect the frequent flyer points.

It is difficult to know exactly what agreement an airline with make with a commercial partner, but it is thought that large sums of money change hands in order to set up such a deal. This can be, therefore, a very lucrative type of ancillary revenue for airlines.

Relationship with passengers

Aside from the obvious relationship in terms of loyalty that is developed through a frequent flyer programme, there is also a monetary relationship.

Customers can purchase frequent flyer points directly from the airline. These can be purchased as a gift for a friend or relative or for personal use. Sometimes it may be more cost effective to pay for a flight or other service with points rather than cash, so this would entice the customer to buy points. When customers buy points, it helps to make the airline more money.

Why don’t low cost carriers use frequent flyer programmes?

If frequent flyer programmes can make the airline such a significant profit, it begs the question ‘why don’t low cost carriers follow suit?

Well, it appears there is no straight forward answer to this question. Perhaps it is because budget airlines do not rely on loyalty, but instead of price as the motivating factor for drumming up business? Or perhaps it is because most budget flights are relatively short and therefore would not lend themselves to the collection of points based on a mileage system?

What we have seen in recent years, however, is a new type of loyalty scheme offered by some low cost carriers.

Rather than taking on the traditional frequent flyer model, where points are collected and redeemed by passengers, they appear to be offering subscription-based services. easyJet, for example, have a scheme called ‘easyJet plus’, which provides the customer with additional services such as fast track through security, an additional cabin bag and speedy boarding for an annual fee of £199 a year.

Commission-based ancillary revenue products

Lets take a look at another airline ancillary revenue strategy that involves using a commission-based model…

What is commission-based ancillary revenue?

Commission-based sales are exactly that- sales which make the airline a commission. These will typically include products and services that are offered by third party providers (i.e. outside companies). In exchange for promoting said products and services, airlines yield a commission when a purchase is made.

Commission-based airline ancillary revenue can be an excellent source of passive revenue for the airline. All the airline needs to do is refer customers to the third party provider and then they can watch the money coming in, easy as that!

Commission-based ancillary revenue sales has effectively enabled the airline to become a ‘one stop shop’. This means that customers can buy many of the things that they need from the airline, without having to shop around, otherwise known as dynamic packaging. For more on dynamic packing in aviation, visit this post- ‘Are airlines the new tour operator? Dynamic packaging in aviation’.

Commission-based ancillary revenue sales are facilitated through airlines tapping into various inventory systems. Air travel is typically the smallest part of an overall travel itinerary and by airlines attacking the total spend, the possible revenue from any individual customer can exceed three to five times the average airfare value! This shows that there is a lot of money to be made and that this can be a lucrative airline ancillary revenue strategy.

Examples of commission-based ancillary revenue products

There are many examples of commission-based ancillary revenue products within the aviation industry. These can generally be segregated into five categories, as outlined below.

Travel related services is the biggest category of commission-based ancillary revenue. Here are some examples:

Activity packages
Airport lounges
Airport coach transfers
Airport parking
Car rental
Hostel booking
Hotel booking
Theme park tickets
Hotel booking
Train tickets
Tours and activities

Consumer services

Consumer services tends to focus on things that they consumer wants, but that might not be directly travel related. Examples include:

Foreign currency exchange
Home insurance
Life insurance
Overseas property
Holiday home sales
Credit cards
Travel insurance

Entertainment

Some airlines will make money through selling entertainment options to consumers. These include:

Online gaming
Scratch cards
Theatre tickets
Concert tickets
Tickets to sporting events

Retail

Airlines sell a range of items both onboard and off of the aircraft. Whilst many of these will be sold on an a la carte basis, sometimes companies will agree a commission-based deal.

Paid advertising

Some airlines will invest in advertising-based agreements that pay on a commission-based level. This could include items such as travel guides or brochures.

Why different airlines offer different commission-based ancillary products

Different airlines have different business models and it is important that they tailor their commission-based ancillary products and services to suit the needs and desires of their particular type of customers.

Ryanair, for example, have been known to have links to online gaming websites on their website and sell scratch cards onboard. Whereas a premium airline, like British Airways, would likely avoid such business deals for fear that it would negatively impact their brand image.

Advertising as an ancillary revenue strategy

This is one method of airline ancillary revenue that many people are not familiar with. So lets take a deeper look at the role that advertising plays in airline ancillary revenue.

Airline marketing versus ancillary marketing

Every airlines will undertake significant marketing efforts to advertise their business. They might have TV adverts, adverts on the Internet or posters, for examples. In order to do this the airline will pay money to place an advertisement. See below advert as an example.

Please note- THIS IS NOT ADVERTISING AS AN ANCILLARY REVENUE PRODUCT!!!

If any airline is PAYING, how can this be a way of MAKING MONEY? Seriously, just think about it, that makes no sense at all!

So, if this is not advertising as an ancillary product, then what is?

Advertising as an ancillary product is when an airline SELLS advertising space to a third party company. They may money from selling this space and so it is therefore an ancillary revenue- ding, ding! Makes sense, now, right?

Methods of advertising as an ancillary revenue strategy

There are lots of different ways that third party companies can advertise with an airline. Some of these you may be familiar with, others you may not be. Below I will provide some examples of this airline ancillary revenue strategy.

Website advertising

Advertising as an ancillary revenue strategy is perhaps most prevalent online.

Websites effectively sell advertise space to third party companies. This could be a banner ad, a side ad, an affiliate link, a review or any number of ways that a company can be promoted on the website. Some airlines may offer spaces on the home page or on other pages.

Ancillary revenue can be made from a number of sales techniques. This might include pay per click agreements, daily, weekly, monthly or annual rates or rates per impressions. The exact nature of the commercial relationship and how much money changes hands will not usually be known to the general public.

Magasine advertising

Airlines often sell space to advertisers as a means of ancillary revenue in their inflight magasines. This could be a page advert, half a page advert or a small feature. It could also include link advertisements.

IFE advertising

In-flight entertainment is something that is generally offered by scheduled carriers on long haul flights. It provides the perfect opportunity for ancillary revenue income, yet to date is largely under exploited. Just like YouTube or ITV, some airlines will place adverts created by third parties before or during entertainment facilities, such as films. However, many airlines are missing an opportunity here.

Seatback advertising

We can’t help but look at the seat in front of us while on a flight! Therefore, this can make for a perfect advertising space for an airline to sell.

Livery/exterior wrap advertising

Some airlines will allow advertisers to paint the exterior of their aircraft to promote their own brand. Whilst an airline can make a lot of money from this, they need to weigh up the costs against the benefits. Ryanair, for example, stopped selling exterior wrap advertising some years ago as they deemed the lost opportunities to advertise their own brand outweighed the money that could be made.

Headrest advertising

Some airlines will have removed headrest covers. This can be a convenient place for an external company to advertise their product and for the airline to make a little extra ancillary revenue.

Tray table advertising

Similarly, some airlines will allow for adverts to be placed on their tray tables. This can be on the back on the tray table so that the customer can see it while it is folded away, or it can be on the inside of the tray table. Some airlines will also place a paper insert on top of their food trays with an advertisement on it.

Boarding pass advertising

Airlines can make money through ancillary revenue advertising on their boarding cards. For traditional boarding cards, adverts tend to appear on the back. For online check in, where boarding cards are printed at home, adverts tend to follow the main flight details.

This can be a useful way to make money, but it can also cause some confusion when passengers are looking for important details on their boarding card.

Overhead locker advertising

Some airlines, typically budget airlines, will allow advertisers to use the space on the overhead lockers. Some airlines avoid this practice, however, as they think that it looks untidy and is not in keeping with the brand image.

Airline cup advertising

Ever noticed advertising on cups? Maybe you will next time…

Sick bag advertising

Yep, airlines have thought of it all… sick bag advertising is a real thing!

Should an airline allow any old company to advertise with them?

When selling advertising space as an ancillary revenue product, it is important that airlines choose the right companies to work with. It is essential that the airline assess the opportunity costs i.e. will the negative impacts of this advertising outweigh the positive?

Airlines need to consider their long-term strategy when planning their airline ancillary revenue ideas. Just because an advertisement might bring in money in the short term, doesn’t mean that it might not drive away customers and in fact lose the airline money in the long term. This is something that airlines must consider when choosing to work with an advertising partner.

Airlines should choose commercial partners which align with their own brand values and which are appropriate to their business when planning their airline ancillary revenue strategies.

Hilton Hotel, for example, might be a good fit for a page advertorial in the British Airways magasine. This is because their brand image is similar to BA’s- premium quality etc.

British Airways may, however, turn down an offer from an online casino company who wishes to advertise on their website as this may have negative impacts on sales. Casino gambling companies are not aligned with the BA values and is unlikely to be of interest to the customers, who instead are likely to view it as spam.

An airline must carefully consider who they carefully consider who they choose to work with and why to effectively optimise their airline ancillary revenue.

Airline ancillary revenue- To conclude

As I have demonstrated throughout this article, airline ancillary revenue is an important part of an airline’s business model. What is the future of airline ancillary revenue? I do not have the answer to that question, but I expect we will continue to see new innovations across the industry. How important is airline ancillary revenue? Very!

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