Ancillary revenue

In the airline industry, ancillary revenue is revenue from non-ticket sources, such as baggage fees and on-board food and services, and has become an important financial component for low-cost carriers (LCCs) in Europe, the United States and other global regions.^{[citation needed]} Ancillary revenue has been defined as, “Revenue beyond the sale of tickets that are generated by direct sales to passengers, or indirectly as a part of the travel experience.”^[1] Ancillary revenue has been further defined to include these categories: à la carte features, commission-based products, and frequent flier activities.^[2]

History and rationale

The most aggressive proponent of ancillary revenue development within Europe has been Europe’s largest low fare airline, Ryanair.

While ancillary revenues were not invented by Ryanair, the extreme business model envisioned by Michael O'Leary, the Ryanair Chief Executive, proposed to use commissions from pay-per-view entertainment, onboard shopping, internet gaming, car hire and hotel bookings to eventually replace the revenue from selling airline seats.

He described ancillary revenue during a 2001 interview in the UK Sunday Times.^[3] “The other airlines are asking how they can put up fares. We are asking how we could get rid of them.” While it may not be realistic to anticipate that consumers will systematically be able to “fly for free,” airlines already benefit from the additional profit provided by ancillary revenue. O’Leary’s radical idea catalyzed an industry-wide trend to coax more revenue from the profit-challenged airline business.

Management at competing airlines often ridiculed the path pursued by Ryanair. Traditional carriers defined their product distinction by bundling many amenities into the price of an airline ticket. At the same time, not all low cost carriers had embraced the option of selling an unbundled airline experience.

The unrelenting increase in the price of jet fuel has greatly impacted the economics of the airline business. When combined with other factors, the outcome has created considerable challenges for traditional airlines and low fare carriers. 2007 had been especially difficult as the price oil reached the neighborhood of $100 per barrel during late 2007. Concurrent with this, Ryanair announced record half-year profits.^[4] Announcing these results Ryanair’s CEO, Michael O'Leary, said: “These record profits reflect a 20% growth in passenger volumes, a 1% decline in yields, and strong ancillary growth. Ancillary revenues grew by 54% to €252 million, due to improved penetration of car hire, hotels, travel insurance, as well as strong onboard sales and excess baggage revenues. Ancillaries now account for just over 16% of total revenues as we make steady progress towards our 20% target.”

Ryanair’s €408 million profit, along with ancillary revenues of €252 million, is an example of the potential significance of ancillary revenues in airline profits.

Other airlines all over the world also report ancillary revenue from legacy airlines to low cost carriers. The following lists total ancillary revenue reported by these airlines for fiscal year 2006: easyJet €189,476,508,^[5] Aer Lingus €63,407,000,^[6] SkyEurope €10,827,000,^[7] AirAsia (Malaysia) €22,713,479.^[8]

The importance of ancillary revenues has further increased. According to a study published by Amadeus and IdeaWorks, airlines’ ancillary revenues will increase from $ 13.5 billion in 2009 to $22.6 billion in 2010.^[9] In 2009 United Airlines had a total of about $ 1.5 billion in ancillary revenues; for many airlines ancillary revenues accounted for a huge part of their total revenues, like Allegiant (29.2%), Spirit Airlines (23.9%) and RyanAir (22.2%).^[10]

Passenger reaction

Airlines can differentiate their product and potentially boost their revenues by "unbundling" the travel experience by charging separate fees for services such as checked baggage and beverages served onboard.^[11] Low cost carriers such as easyJet and Ryanair have generated significant profit from ancillary revenue. However, the consumer backlash from charging fees (for services included in the price of a ticket by other airlines) can damage a carrier's reputation. For example, "European Skyway Robbery" was the headline written by noted travel columnist Peter Greenberg to warn consumers of abusive overcharging for baggage fees in Europe by easyJet and other carriers.^[12] The world's largest carriers are not immune from the public backlash against aggressive ancillary revenue actions. British Airways also wanted to boost its ancillary revenue with higher baggage fees during 2007. The carrier eventually backed down after the public outcry became too great.^[13] These have led service-conscious airlines towards seeking ways to increase ancillary revenue without hurting their brand.^[14]

Types

A la carte features are separate amenities a consumer can order while travelling.^[15] The list continues to grow and the following lists typical activities: 1) onboard sales of food and beverages, 2) checking of baggage and excess baggage, 3) assigned seats or better seats such as aisle seats, 4) call center support for reservations, 5) fees charged for purchases made with credit cards, and 6) early boarding benefits.

Commission-based products refers to sales of products and services such as hotel accommodations, car rentals and travel insurance for sales commission. These primarily involves the airline’s web site, but it can include the sale of duty-free and consumer products on board aircraft.^[16]

Frequent flyer programs are defined by the sale of miles or points to program partners such as hotel chains and car rental companies, co-branded credit cards (co-branding), online malls, retailers, and communication services.

Airline-sold Advertising relates to revenue from the sale of advertising in in-flight magazines and other customer communication channels (including advertising on the aircraft interior or exterior, or in airport or lounge facilities, as well as advertising on airlines' in-flight entertainment service.

Industry agreement largely exists that à la carte features and commission-based products should be counted under the "ancillary revenue" banner for accounting and reporting purposes. The inclusion of frequent flyer partnership activities is growing in acceptance.

References