(Last updated on: 07/04/2020)
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?
For more info on ancillary revenue management and airline management in general I recommend the texts Airline Operations and Management by Cook and Billig and Air Transport Management: An International Perspective by Budd and Ison. You’re more than welcome to cite anything that I have written in this post, but if you’re doing research for an academic piece of work remember that you will need a range of sources in your reference list- I’ve added the links to these two recommended books for you here and here.
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’
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
It 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 year. This has meant that they too have turned to 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.
So, as you can see, ancillary revenue management is a big deal for the airline industry and provides huge potential for enhanced income. What are your experiences of ancillary revenue management? Join in the discussion- please leave your comments below!