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.

Real-time location based marketing – a new opportunity for loyalty?

There has been an increasing level of interest and debate in the topic of real-time location based marketing and this will only increase as Google and Facebook enter the space in a serious way. That said I have been surprised at how little of the conversation has focused on the opportunities this new technology creates for brands with established customer loyalty and reward programmes.  

For example, the mobile social network/game Foursquare was widely in the news after signing up its first national UK brands – Debenhams and Domino’s Pizza. The app detects player’s whereabouts, and when they visit the store or restaurant they gain points for ‘checking-in’.

Brands get involved by offering deals to users based on, for example, the number of times someone ‘checks in’ to their local branch. Businesses get increased footfall, and ideally, a network of brand ambassadors who will pass on recommendations. The consumer gets great deals that are relevant not only to who they are, but where they are. – E.g. Debenhams giving Foursquare members a free cup of coffee in the restaurant when they check in

So it’s no secret that smartphones and branded applications are an incredibly cost effective way of targeting and engaging consumers. By creating tools which engage and add value that your customer base can download and use on a regular basis, you can integrate with their lives in a way that advertising never has.

The iPhone is clearly the leader with repsect to the app marketplace, mainly due to it being the easiest to develop for. Whilst some point to the iPhone’s still relatively low penetration of the overall mobile market (at around 2%) and even of the smartphone market (14%), it is quickly starting to grow in a market that will also continue to grow exponentially. It is also worth recognising that the iPhone already accounts for 50% of all mobile web traffic.  

The next generation of apps will use smartphone’s GPS capabilities in a way that enables brands to hit a moving target. The key insight here is that loyalty programmes should connect with all the different stages of the customer journey, from planning to booking, and from departure to arrival. Mobile technology can actually be viewed as a very direct way to plug in to that journey, wherever the customer may be.

What this means is that brands will already have a good idea of where the customer is going to be and when, as well as knowing how much loyalty or reward currency they have. This can be matched against the various outlets that reward programmes have affiliate marketing relationships with. Also, as the customer loyalty programme provider, you already have a huge amount of customer data, including payment information. As a result the mobile device could actually be used, even offline, to facilitate some of the purchasing processes.

Say, for example, the customer uses a mobile app to find the nearest hotel where they can spend their loyalty points, they could actually book a room and check in via their smartphone. A key principle of properly developed reward programmes is that they use as much customer insight as possible to make sure that the services and products offered are exactly what the individual wants and needs. This data should be used not just to meet customer expectations, but to exceed them.

It’s also worth noting that there is a lot of trust inherent in the relationship you have with your customer base, which retail partners can benefit from. Furthermore, because the customer’s payment details are not held on the mobile device, but rather by you as the programme provider, no sensitive financial data needs to be transmitted. This resolves a major consumer fear and barrier to location based marketing with a lot of wif-fi related communication

Another capability that mobile offers, is to actually push messages onto the customer’s device. Relevance here is absolutely crucial, it is a disruptive technique that can increase engagement with the right insight, but can easily irritate if the correct principles are ignored. There is a clear benefit however to being able to message a customer to let them know that now they’ve touched down, there is a restaurant nearby where their reward points are worth double.

Utilsing highly accurate GPS capabilities will also create new data, with new patterns emerging of how your loyalty customers behave when on the move. It is effectively an entirely new way to observe consumer behaviour, and should potentially lead to us being able to pre-empt customer needs specific to where they are.

However, just as your communications with the customer must be relevant to what the customer actually wants, so must your offerings match your brand values and what the specific objectives of your loyalty programme are. That could be looking to reward and encourage high spenders, get low users to spend more, motivate your customer base to use more of your wider service and product offerings, and so on.

Finally, I think there is a real opportunity for reward programmes to use peer based social media capabilities. So instead of the app just saying ‘here are the closest five car hire outlets where you can earn or spend loyalty points’, it could say, ‘here are the top three in your vicinity accdording to ratings provided by your fellow gold card holding members’. Providing scores, notes, suggestions, related recommendations and so on from a group of people who have similar tastes, aspirations and levels of affluence creates a great deal of trust and authority. Obviously companies like Amazon have been doing this for years, but connecting it with your reward programme via mobile technology takes the concept to an entirely new level of relevance, utility and engagement.”