25 years of Ancillary Revenue, what will the future hold?

Airline Business 25 years issue; article by Collinson Latitude, business planning director, Janet Titterton

When ancillary revenue first began in the late 1930s, it was motivated by operational constraints, as opposed to any sense of commercial opportunity. On the pre-war trans-Pacific Pan Am Clipper flights, excess baggage beyond 77lb (35kg) was charged at $3.25 per lb – a generous price given that the island-hopping journey from San Francisco to Hong Kong took six whole days.

The next significant development was the offering of in-flight duty-free sales, introduced in the 1970s, followed by car and hotel bookings. Although these “extras” were available, they rarely sold successfully. Pre-internet, it was difficult for telephone reservations clerks to convince customers that an airline could reliably sell anything beyond plane tickets.

When the dotcom boom happened in the late 1990s, airlines realised they could now use their websites to drive ancillary sales of other travel-related products and services. This, combined with soaring fuel prices and an increasingly competitive market, first saw the low-cost carriers seek to generate new revenue streams with bag check-in charges, which, given its success, quickly spread to the legacy carriers too.

Today, however, the term “ancillary” can be applied to two different elements of airline revenue.

First, there is the revenue from unbundling. This really is nothing more than changing the pricing structure in an effort to avoid having to raise ticket prices.

Although unbundling charges have been reluctantly accepted, there is no easy way for customers to compare the true total cost of their own specific itinerary. Unbundling continues to be profitable, and some carriers continue to innovate, motivated by the margin available from packaging their own inventory. However, unbundling can be developed only so far. Continental Airlines recently reported that 70% of its business customers now choose not to check in their bags at all.

Second, airlines are generating more and more revenue by offering added-value products and services from third parties throughout the online booking process. Brands such as easyJet, Air Asia and British Airways all present relevant, useful hotel and car hire options as an integral part of the online customer journey.

At the recent Aviation Outlook conference in Singapore, one travel insurance supplier noted that 99% of its success comes when the sale is seamlessly incorporated as an integral part of the booking process, and only 1% from the extraneous “book insurance” tab on the home page. Offering customers a choice of destination-relevant insurance just after they have booked their flight is a great example of how to provide the right message, to the right audience, at the right time, allowing for ancillary offers to be further tailored to the choices the customer has already made.

This approach represents the true future of ancillary revenue and will see airlines thinking beyond journey options and towards adding value to the customer proposition. The most valuable asset any business has is its customer base, and with their long history of frequent flyer programmes (FFPs), most airlines are sitting on an untapped gold mine of customer data. Also, airlines are in a unique position because they have permission to use this data, presenting the opportunity for predictive data modelling that can be used to forecast trends and provide customers with products and services tailored to their needs.

One way for airlines to capitalise on this is to consider the success of the banking industry in offering customers added-value accounts. In the UK, banks collectively earn about £800 million a year from charging current account customers a small monthly or annual fee for additional services, which include banking services as well as lifestyle and travel-related benefits. The fact that many customers now buy their travel insurance and airport lounge from their bank should be a major wake-up call to airlines that are missing out on this revenue stream.

Providing consistently branded online shopping portals, where customers can pay cash or redeem loyalty currency, also has huge potential. Both Cathay Pacific’s Asia Miles and Virgin Blue‘s Velocity shopping portals are excellent examples of where third-party goods as diverse as homeware, jewellery, iPods, clothing and even food and drink are offered in return for customers’ points, thus generating shared revenue and customer engagement regardless of whether consumers will actually be flying with the airline.

Finally, as the world goes increasingly mobile, the future of ancillary revenue, combined with real-time GPS technology, will see airline brands offering customers additional products and services based not only on who they are, but where they are.

The key to adding value though ancillary revenue, and building a relationship with customers, is relevance, both to an airline’s brand position and also to its customers. With that in mind, the next generation of ancillary revenue or, as we call it, AR2, will be centred around creating profitable customers for life, by adding value, not adding costs; by rapid implementation of new technologies, products and ideas; and by seamless targeted customer interaction.

Ever heard of Hotel Haggle?

HotelHaggle.com, a new site that lets consumers negotiate hotel prices, has been launched.

Launched by Ronan Carr, an entrepreneur based in Cork, Ireland, the company says its site’s value lies in the consumer-driven travel itinerary and the consumer-tailored results. Rather than putting the burden of finding a hotel bargain squarely on the shoulders of the consumer, HotelHaggle creates a collaborative approach to finding the best deal.

Users create an account, log in, share the details of their travel itinerary and the price they are willing to pay for lodging. HotelHaggle’s software filters the results, contacts the appropriate hotels and then puts the user’s business up for ‘bid.’ The resulting list of hotels that meet the location, schedule and price parameters is supplied back to the user for final decision and online booking.

The site says it offers a safe environment for confrontation-free bargaining and puts the customer back in the driver’s seat. Hotels in turn, enjoy a broader reach, receive valuable insight on consumer priorities and can book unsold rooms at an acceptable rate.

The site says it is possible to save anywhere up to 70% on a single hotel stay, with some bidding as low as $20 per room.

HotelHaggle.com will focus solely on hotels in the beginning, but will soon expand to include B&B listings, vacation rentals and timeshares. There are more than 120,000 hotels in the HotelHaggle.com database, according to the company.

www.eyefortravel.com reported on this yesterday, could be a great way for customers to save money on their hotel bookings, but more interestingly for the industry its a very innovative way for hotels to reduce distressed inventory!

Airline industry facing up to death of Airmiles

New research we commissioned, in conjunction with Airline Information, shows that 90% of airlines are being forced to find new, more profitable ways for customers to redeem their frequent flier currency.

These include partner offers such as hotels and insurance, with less than 50% of Airmiles programmes reported to be profitable.

Respondents cited accounting pressures, such as the need to record loyalty currency on balance sheets as a taxable liability, rising operational costs and shrinking seat capacity as a combination of factors causing the majority of airline brands to lose money on every seat they give away.

This shift to airlines seeking a broader range of redemption platforms is reflective of a wider trend in Airlines’ ancillary revenue and loyalty activities.

Consumers today demand more choice of how they redeem loyalty currency, and airlines are increasingly able to offer additional products and services from partner brands, seamlessly and securely, via their own sites. This allows airline brands to both enhance the customer value proposition and deliver enough revenue for redemption programmes to be, at the very least, self-funding.

Airline brands are clearly being forced to continually adapt their loyalty programmes in what is still an incredibly tough business environment. New models demand high levels of customer engagement, with tailored reward and recognition content that drives loyalty from a wider customer base.

Whilst broadening their redemption offering to consumers, it will be crucial for Airlines to add value by using their customer data, developing genuine insight and applying it to offer customers more relevant benefits, products and services. Airlines are uniquely placed to leverage their customer data, as they not only have a large volume of data collected about their customers but more importantly they have permission to use it.

Offering memberships via unique bundling of, for example, travel insurance or wi-fi and airport lounge access provides a platform for airline brands to build a relationship with customers. It’s by focusing on the relationship instead of the revenue, that the airline industry will be able to develop additional sustainable streams of income.

 

Airline Redemption Opportunities Survey

Thought it might be interesting to update you on our recent redemption survey. Working in conjunction with Airline Information for the 6th Annual ARAC / FFP Mega Event in Montreal this year we surveyed attendess and found some interesting results.

The survey revealed that:

• 100% of airline industry respondents wanted to have more redemption content in their portfolios
• Only 50% have redemption offers which deliver them profits rather than costing them money
• Two thirds feel that customers who engage with a redemption programmes are more loyal to the core loyalty programme

It seems that airlines are starting to look into how effective redemption programmes are, as well as considering additional partners and methods of delivering content to customers, perhaps to widen programme appeal, so its not just frequent flyers that get value out of FFPs. This should be great for the not so frequent flyer, but also should provide even more benefit for frequent travellers!

If you want to see the full survey results and report please give me a shout.

Paul

Ailrine ancillarys set to soar

Even the Telegraph are joining the airline debate: http://www.telegraph.co.uk/travel/travelnews/8078219/Airlines-extra-charges-continue-to-soar.html

As Jay Sorensen rightly says, “the ancillary revenue movement is gaining strength”.

It is clear the ancillary revenue generated from unbundling is a necessity in order for low cost airlines to survive. However, what is also evident is the growing consumer and regulatory demand for transparency in additional costs.

It is crucial for the future of the industry that airlines act now to  add value to their ancillary revenue strategy; it should focus less on the baggage and credit card fees, and more on additional services and benefits offered to their customer base to enhance the customer experience and increase brand value. By analysing their customer data to develop insight airlines could offer relevant, bespoke benefits to consumers, such as travel insurance or wi-fi and airport lounge access.

Airline brands should concentrate on a return on  relationship with passengers then new, sustainable revenue should follow.