The Extras That Count
Sales of ancillary products began when low-fare airlines wanted to continue to attract the most cost-conscious travellers with the lowest fares possible, while offering those who sought some amenities the opportunity to buy these separately. This common-sense approach was soon mimicked by major carriers, especially in the US, where heavy taxes were placed on air fares but not ancillary sales.
By today, ancillaries have simply become an essential part of the way almost all air travel is sold. Fares are unbundled into basic and optional flight-related services and sometimes re-bundled into branded fares or fare families that offer packages of items frequently taken together. This makes it easier for consumers to pick the package of journey-enhancing items they like. And airlines continue to sell third-party products such as travel insurance, rental cars, hotels and destination attractions for a cut of the sale.
The ancillary consultancy IdeaWorks estimates ancillary revenue was a hefty US$82.2 billion in 2017, nearly triple the $22.6 billion sold just seven years before in 2010 and 11% of airline revenues. Bag fees remained the largest single ancillary, accounting for 27% of the total. All other flight-related ancillaries were 40%, and sale of frequent-flyer miles were 12%. Third- party ancillaries accounted for 15%.
Airlines are selling more ancillaries, figuring out more products to offer, being smarter in their offers and becoming better at delivering the right product. There’s much more to come as better systems boost revenue and profits further, but let’s look first at what some clever carriers, low-fare and full-fare, large and small, are doing right now.
LEADING THE WAY
“Ryanair continues on our journey to becoming the Amazon of Travel,” a spokesman says. Non-flight ancillaries include Ryanair Rooms, offered by five partners with 250,000 hotels and 7.5 million rooms; Ryanair Transfers, with CarTrawler offering ground transfers in taxis, buses and trains; Ryanair Holidays, packaged holiday services; and travel insurance.
For business travellers, Ryanair’s Flexi Plus offers free airport check-in, one 20 kg checked bag, a premium seat if available, priority boarding, fast-track security at many airports, text-messaging of flight details and the flexibility to change flights.
These and many more ancillaries can be purchased individually or bundled on either Ryanair.com or the Ryanair app. The app, MyRyanair, had 30 million users in September 2017 and is expected to have more than 40 million by March 2018.
IdeaWorks president Jay Sorensen calls MyRyanair the most advanced airline app for selling ancillaries. “For instance, Ryanair provides an exceptional example of seat assignment done right. As the consumer scrolls through the rows, the icon and pricing change to reflect the seats being viewed. Colour coding readily indicates seat pricing, while double arrows indicate more leg room.”
Ryanair also practices good retailing by using personalised messages to alert consumers to on-sale pricing for à la carte ancillary items such as seat assignments and product bundles.
The famous low-fare carrier has transformed itself in the past two years to be not only an inexpensive and successful airline, but a much friendlier one. And a smarter one. Differential seat pricing reflects data from an intelligent booking system that shows which seats are most desirable, are thus taken first and command the highest prices. This is in contrast with US carrier Southwest’s traditional policy of not reserving specific seats, although Southwest now allows customers to pay to opt out of indiscriminate boarding.
Unsurprisingly, ancillary products accounted for 27% of Ryanair revenues in fiscal 2017, up from 24% in the previous year. The airline expects that portion to continue growing.
BEYOND AIRCRAFT
Perhaps the most ambitious ancillary play is by Allegiant Air, which wants to not only sell hotel rooms for a commission but own the hotel in a symbiotic relationship with its airline business. The ultra-low-fare carrier is building a combination hotel-condo resort on Florida’s west coast. The resort in Port Charlotte, Florida will include a hotel, nine condominium buildings, restaurants, bars, shops and a marina.
If memory serves, isn’t this a similar strategy to how All Nippon Airways once invested in hotels around the world before it had to sell them to make ends meet? And didn’t United Airlines try to become a travel company, unsuccessfully, a long time ago?
But Allegiant is doing it differently, significantly so. For one thing, Port Charlotte is near Punta Gorda Airport, which happens to be served exclusively by Allegiant. The airline estimates that the resort will add 300,000 visitors a year to the area, and if they fly, they will fly with Allegiant. And those condo sales will mean a huge increase in the passengers who depart from and return to Punta Gorda regularly as well, practically an annuity for the airline.
Of course, Allegiant must run the hotel, condos and the resort successfully. But the airline has always billed itself as a travel company that happened to own an airline. The TUI Group has a similar business model, but does not sell those annuity- generating condos.
While Ryanair was becoming friendlier and developing a great ancillary app, low- fare rival easyJet came up with a different smart move – its Worldwide by easyJet service. It is now selling connecting flights at easyJet.com between its home market in Europe and the US, Canada, Argentina and even Singapore. The Canadian routes are flown by WestJet, which does not compete with easyJet. But the other connections are operated by Norwegian, which does compete in Europe.
It’s a little like a codeshare and apparently works because London Gatwick provides easy connections. easyJet is happy to provide the short-haul component of a trans- oceanic trip, as long as it gets more traffic, which the arrangement should provide.
Sometimes the best results flow not from big ideas, but from doing small things very well. Take Delta Air Lines’ innovation in baggage handling. It’s fair to say that travellers are annoyed at paying bag fees, even as airlines have come to depend on these fees for a major chunk of revenue. So Delta decided to give its customers something in return for paying for checked baggage.
First, the carrier invested in a simple, foolproof device for its bag handlers on the ramp. The device scans bags and shows different colours according to whether a bag should go on the plane being loaded or not. The device minimises loading errors and tracks bag progress. Then Delta connected the tracking data with a new baggage app that lets passengers know where their bags are in the system. The reduced bag errors also allowed Delta to offer 2,500 frequent- flier miles when a bag takes more than 20 minutes to get to the carousel. So passengers are actually getting useful benefits from those baggage fees they have to pay: better service and the security of knowing where their bags are.
The original purpose of frequent-flier miles was to build some consistency in an airline’s passenger revenue. Brazil’s GOL has taken that purpose a step further by creating a subscription programme that earns customers extra miles, plus some other benefits. For about $13 per month, Clube Smiles members get an extra 1,000 bonus miles, for $95 they get 10,000 miles. They also get discounts on airline and retail rewards, and a guarantee that mileage will be honoured for 10 years. GOL customers must sign up for a minimum of six months. Like those annuity sales Allegiant is looking for, this is the best kind of ancillary, a regular stream of revenue.
TOOLS FOR PERSONALISATION
With its stated aim to increase ancillary revenues by improving passenger experience, CEO Mike Abramsky says Guestlogix offers the most user-friendly technology for selling on-board ancillaries throughout the day of travel. Its flight attendant app lets attendants take orders, track sales and process payments of many kinds. Its passenger experience app lets customers browse the on-board catalogue, order and pay with multiple methods and currencies. It can also store mileage points, making it easy to integrate loyalty programmes with ancillary merchandising. Finally, a management console gives marketing managers dashboards, reports and insights to run personalised sales campaigns.
All this goes way beyond traditional point-of- sale hardware, disconnected from passenger systems and usually appealing to only 8% of passengers. “Passenger-centric analytics is uncharted territory for airlines,” Abramsky stresses. “This is what sets Guestlogix apart from competing point-of-sale solutions.” He says launch partners and existing airline customers will be deploying Guestlogix’s new platform throughout the first quarter of 2018.
Abramsky believes most carriers still know too little about their customers, largely because of legacy technology for distribution and passenger. But there are signs airlines are beginning to “consumerise” the passenger experience. The ones who do it best will get the largest share of an estimated US$30bn in additional ancillary revenue by 2035.
The Guestlogix executive sees his platform as the on-board equivalent of IATA’s New Distribution Capability, and it can integrate well with NDC, as both are based on the same individualised approach to passengers.
Supporting Guestlogix and other platforms, CellPoint Mobile provides mobile solutions to travel companies, including airlines, railroads, buses and hotels. According to SVP Noel Connolly, supports booking, conventional and alternative payments, ancillaries, loyalty transactions, communications, stored payments, real-time reporting, reconciliation and connection to payment service providers. The technology makes it fast, easy and secure to book and pay for travel, including ancillaries, on mobile devices. Airlines can thus increase revenue at every mobile touchpoint, which is crucial. “Travellers carry smartphones everywhere, so opportunities for ancillary revenues are everywhere,” Connolly states.
Especially as biometrics become widespread in air travel, mobile solutions will become essential to frictionless travel. “Ancillaries will be integrated tightly into travel, with mobile wallets tied to loyalty programs,” Connolly predicts.
Further, CellPoint’s Travel Innovation Hub will help airlines stay on the cutting edge, for example, exploiting Blockchain technologies in several areas: passenger identification, loyalty schemes, security and payments. Connolly believes, “the holy grail of frictionless, higher-revenue travel may come when customers have a single ID secure on a public Blockchain. Every transaction would be tied to a single digital profile, giving airlines a less fragmented view of each customer.”
He too sees Guestlogix as complementing NDC in integrating on-board and on-ground ancillary selling with passenger-specific data on needs, wants and behaviours, including purchasing histories and travel plans.
Switchfly is a travel commerce platform that drives maximum loyalty and revenue for its clients. Through a global network of ancillary products and services, Switchfly facilitates redemption of more than 40 billion mileage points for US$3bn in revenue annually for airlines such as American, jetBlue and LATAM, explains Justin Steele, VP of product development. The company offers a white- label booking engine, customised for each airline and following its business rules, but accessing all of Switchfly’s ancillaries.
Steele says airlines need help to connect all their systems and thus maximise both loyalty and revenue. Switchfly can create profitable connections at every point in a traveller’s experience and access many supply sources complete with images, descriptions, ratings and virtual tours. “Switchfly overcomes limitations of legacy distribution, using global travel inventory for much more personalised and profitable ancillary merchandising.” It also helps airlines integrate their own ancillaries into dynamic packages and branded fares.
The Switchfly executive says travellers are accustomed to highly curated digital content via apps such as YouTube and expect the same when searching for travel. Switchfly meets that expectation while personalising offers from many sources. “Switchfly targets the right customer, through the right channel, at the righttime, with the right incentives, offers and rewards.”
TAILORED FOR BUSINESS
The business share of total air travel has been declining slowly for two decades, partly due to the internet and partly to the success of low-fare airlines in stimulating more personal travel. But business is still a substantial and extremely profitable segment of air traffic, and carriers, both major and low-fare ones, have been fighting vigorously for this lucrative market.
How lucrative? In the US nearly half of business travellers buy first- or business-class seats for international trips, and more than a quarter do for domestic journeys. Data from the International Air Transport Association (IATA) covering all regions indicates that while first-and business-class passenger accounts for only 5% of passengers, they provide 26% of revenue. Across the expensive North Atlantic and Pacific Oceans, premium-seat passengers are only about 12% of traffic yet account for 37% to 47% of revenue.
So low-fare airlines are fighting for the cost-conscious segment of business travel with a host of ancillaries. For example, Southwest Airlines has historically obtained about a third of its traffic from businesspeople, and the carrier pays a lot of attention to pleasing these travellers. Its SWABIZ corporate booking tool allows clients to manage and track travel programs for free. Travel managers can book and change reservations on behalf of their business travellers. The tool instantly generates online air and rental-car travel reports for the past 13 months. And Southwest’s business travellers get free Wi-Fi and do not pay fees for changes up to 10 minutes before departure. A-listed Southwest customers also get low boarding numbers so they can select preferred seats.
Other low-fare airlines are following suit. Frontier Airlines offers its WORKS and PERKS bundles of business-oriented ancillaries for $59 each way. WORKS gives business travellers no change fees, seat selection, a free carry-on and checked bag plus priority boarding.
In the Asia-Pacific region, Scoot offers a ScootBiz package of ancillaries. Business travellers get roomier seats, 30 kg of free luggage, plus plenty of free food and drinks and priority disembarkation. Jetstar’s Flexibiz bundle of business ancillaries lets each passenger catch a flight either earlier or later than the one booked. In addition, Flexibiz travellers do not pay fees for date, time or name changes and they receive credit vouchers when they are obliged to cancel. The Qantas subsidiary has also launched a special business hub booking service, and AirAsia has added a 24-hour business lounge at its Kuala Lumpur base to attract even more business fliers.
TIP OF THE ICEBERG
“Airlines have barely touched the tip of the iceberg when it comes to ancillary sales,” argues Surain Adyanthaya, SVP at revenue- management firm PROS. The iceberg is personalisation and frictionless experience. Adyanthaya says personalisation will both help sell ancillaries and increase customer satisfaction. He cites a survey by eMarketer that estimated 40% of US retailers enjoyed a revenue increase of more than 10% through personalising their websites or apps. And it is possible for airlines. Even with anonymous online buyers, technology can make offers more relevant by interpreting contextual clues, such as the requesting channel, point- of-sale and travel itinerary.
Beyond second-wallet spending on hotels, rental cars, seat upgrades or lounge access, the PROS executive says there’s a much bigger story. Airlines are looking at partnering with online retailers that can fulfil travellers’ needs during a trip. “Let’s say the customer is booking a February trip to Norway. They may need a new carry-on suitcase, warm gloves and socks for the cold weather.” A relationship with online retailers gives the airline first crack at these purchases during a single transaction.
Ancillaries have become a major part of revenue management, which PROS has been doing for 35 years. But airlines are expanding their definition of revenue management beyond maximising seat revenue. They now focus on the total revenue potential of passengers. So PROS uses technology to personalise offers, bundles and prices dynamically.
Adyanthaya predicts a broader set of ancillaries, much more sophisticated personalisation and better targeting of branded fares. Next will come map-based inspirational shopping. “Let’s say Christina clicks on WeChat for trips during Golden Week in China. The airline creates an individual package based on the trips she’s taken, the occasion, and her habits in checking bags, using airline lounges or buying at duty-free shops. This individuation is in its early stages and will become far more prevalent in the next five years.”
Individuation is possible, but not easy. For it must work in an environment in which look-to-book ratios are rising exponentially.
Elena Avila, EVP and head of airlines for the Americas at Amadeus, also believes ancillary revenue can be increased. But she cautions that airlines must add value for travellers and improve the travel experience. “There is a fine line between generating an offer that appeals to the traveller and the traveller feeling he must pay extra to escape a bad experience.”
Like Adyanthaya, Avila sees personalisation as the key. “The biggest opportunity is using customer data, purchasing history, habits, demographic information, and so forth, to provide a better experience. Amadeus’s customer experience management tool calculates and uses metrics such as customer value and disruption score to personalise offers. Avila says it is also important to understand touchpoint and offer the right ancillary through the right channel at the right moment. “For example, offering an upgrade a week before a trip is less effective than offering it when the customer checks in, is tired and a first-class seat is more appealing.”
Another requirement is setting the right price for each ancillary, which can depend on willingness to pay, the competitive landscape, market data and airline pricing strategy. Airlines are moving in this direction, and Amadeus can help apply dynamic adjustments based on each set of conditions.