Ancillary revenue this year will be 22% higher than 2016 and reach $82.2 billion, with $57 billion of that figure coming from a la carte activity according to a report.
The IdeaWorks and CarTrawler Worldwide Estimate of Ancillary Revenue shows this represents an increase of 264% over the 2010 figure of $22.6 billion for ancillaries worldwide.
The ancillary report looks at various streams of revenue including sales of frequent flyer program miles to partners, commissions from hotel bookings, and a la carte add-ons such as baggage fees, seat assignments, and sales of food, beverage and duty free onboard.
Ancillary revenue per passenger is valued at $20.13, a significant increase from the $8.42 ancillary revenue per passenger in 2010. A la carte revenue per passenger (from ancillaries other than frequent flyer programs and commissioned-sales) is $13.96 per passenger, far more than the $4.54 the industry earned for a la carte products in 2010.
While some of the ancillary revenue may be viewed as punitive earnings—fees for services that might once have been rolled-into ticket prices and considered part of the standard product by customers—airlines have become increasingly more sophisticated retailers, offering pleasurable, value-added ancillaries that encourage consumers to spend.
Some examples highlighted by IdeaWorks of leading “ancillary revenue champs” focus on attracting more business travelers:
- AirAsia added a 24-hour business-style airport lounge at its Kuala Lumpur home to attract premium passengers.
- EasyJet achieved a 14% increase in flexible business fare sales during 2016.
- Jetstar introduced its “Business Hub” booking site and FlexiBiz bundle for corporate agents and business travelers.
- Ryanair offers a total of 16 a la carte products to reach corporate travel agencies via Amadeus, Sabre and Travelport.
As the report states:
“The economic boon of ancillary revenue has proven to be a highly useful tool to fix airline finances. It delivers profit-boosting results during times of severe economic distress, and works effectively to lift profits even higher when airlines are achieving investment-grade margins. But airlines should tread carefully. A la carte pricing works best when consumers are truly free to choose the product that best meets their needs.
“Good retail practice ensures the ability to easily remove unwanted products from a shopping cart and place them back on the shelf. But some carriers continue to treat ancillary revenue as an opportunity to simply charge new fees without creating a better product. Fortunately, a la carte pricing magnifies the power of the marketplace to reward good value and punish bad products. This year’s global increase illustrates that principle admirably.”
Unbundle to push bundle works
Another key revelation of the IdeaWorks report is that US airlines have had great success pushing customers towards more profitable fares through the introduction of basic economy fares which unbundle the ticket to offer little more than the right to ride, charging fees for features like seat selection and baggage.
Airlines offering these basic economy fares have found that more than 50% of passengers opt for higher priced tickets with bundled services instead.
The improved retailing and merchandising strategies airlines have deployed and the resulting boost in revenue from ancillary sales may one day buffer airlines from future fluctuations in fuel, IdeaWorks suggests.
The $82.2 billion in ancillary revenue earned in 2017 is near enough to the $129 billion spent on fuel in 2017 to give that theory credence if good retail practices continue.