Quo vadis Airline Revenues?
Only a couple of years ago it was still unthinkable to pay for checked luggage or to not receive a decent sandwich on a flight with a traditional airline such as United Airlines, and more recently Lufthansa or British Airways. An extra kilogram of luggage did not create any problems for the customer. Boarding was meant to be easy, without strict controls of size and numbers of hand luggage. Loyal customers justified to spend some more money with being treated with respect and feeling in good hands, Horror stories spread from customers having to pay €60 at the airport because they had not printed their boarding pass for the ultra low cost carrier Ryanair flights or Spirit Airlines, or of customers dressing with several layers of clothes and almost fainting when flying with low cost carriers.
Now, the world seems to be upside down. The traditional carriers have worked for many years on turning their frequent flyer programs into profit centres as the main ancillary revenue stream. But this was not sufficient to make up for increasingly decreasing core flight revenues. In a phase of panic they gave up their year long resistance and adopted the typical "low cost carriers policies" in terms of other ancillary revenues. In the States, they copied the à la carte offers for all key services already some years ago, or introduced branded fare bundles. More recently also in Europe carriers such as Lufthansa and British Airways have introduced restrictions on luggage, disguised with their “hand luggage only” fares.
Traditional network carriers are now very strict with hand luggage and any excess checked luggage. Catering has reduced to a little piece of something, with no option to buy anything else even if you would like to. Extra luggage at check in is charged at high prices. Booking fees were introduced, often differing by channel, and credit card fees have become quite common.
In contrast to this, low cost carriers moved into the opposite direction at the same time. Ryanair allows two pieces of hand luggage nowadays as part of their "always getting better" program. They have introduced family extra packages as well as leisure plus and business plus fares. Easyjet felt the pressure and followed by being more generous, allowing a second piece of hand luggage for Easy Jet Plus customers.
Time saving products such as fast track at the airport and priority check in as well as priority boarding can be bought à la carte with the so called low cost carriers now, whilst traditional carriers only make this possible for the diminishing number of business class customers.
If anything, in many markets customers got used to taking their destiny into their own hands and enhance their travel experience by choosing additional products they like. And they feel betrayed as there are lots of “bad surprises” with their former favourite airline. So why pay extra for the ticket if others are equal or even offer more options? Are airlines just losing out again by all doing the same and becoming interchangeable?
And customers get experienced. If they do not find the product with the airline, they will find it elsewhere - if it exists. Apps like Gogobot, Flio and others serve customer needs before, during and after their travel experience. Some GDS and PSS providers as well as travel agency chains developed specific apps helping customers to organise customers' flight bookings - benefitting at the same time from the insight of customer data from direct bookings and getting the opportunity to offer ancillary services such as hotels and car rental, thus increasing revenue. Airports have entered the game and start to make up by offering their own products. And needless to say that everyone is watching Google´s next step, when already today it tries to make the experience for customers easy by simply offering anything the client might be looking for in one step.
Ancillary revenues make up between 10% to more than 40% of revenue for most airlines’ in the meantime, often directly improving the bottom line. They include anything from checked bags and seats to third party travel related services as well as sales of frequent flyer miles and booking fees.
Airlines keep fine-tuning their approach to get any additional cent possible in a world of rapidly declining core flight fares. Some airlines have discovered flexible pricing for ancillary services to increase their revenue. For customers, this is not easily transparent. Ryanair for example charge higher bag fees during peak season. Jeju Air seat assignment fees vary by distance of the flight. Spirit airlines adapts fees according to the advance booking period and when payment is being made. Other airlines such as Monarch Airlines have started a fine-tuned dynamic pricing approach to ancillary services, similar to price variations of core flight fares. This often includes special bundled offers dependent on the specific persona of the customer and other offers based on predictive analytics including history of the customer from different sources and analysis of the real time behaviour. Latest trends also include geolocation analytics and offers being adapted accordingly.
Personalisation not only applies in terms of pricing, but also increasingly in terms of what is being offered and how. It seems that limitations are more set by technology constraints and degree of creativity of the airline than anything else. If airlines were more flexible, they could increase revenues significantly by offering all kind of ancillary services to specific segments, for example group traffic - which often in itself makes between 5 and 10% of their revenue and could double as a result.
Bookings via channels such as GDS were difficult to serve, with improvements now in place via the NDC initiatives.Baggage, paid seats and priority boarding can already be booked with Ryanair even in GDSs. With a lot of other carriers - even though the GDS is more of their home territory - this is not yet possible. But also customers who booked via the GDS often cannot buy ancillary services with the airlines directly. A lot of potential revenue opportunity is still not exploited. Booking fees tend to be driven by distribution cost and channel specific strategies as well as pure revenue generation. Social media or other channels we have not yet thought about will play an increasingly important role. It remains to be seen if any legal constraints will start to kick in as well.
A lot of potential still lies in the seamless approach and offering a relevant product and service at the right time, allowing ancillary revenues to be booked regardless in which channel the original booking was made in. Airlines will get increasingly picky for which channel and partner they will allow ancillary services booking - as otherwise they will lose the customer - and the revenue - again to direct and indirect competitors. More and more airlines have started to realise the potential to differentiate from competition through ancillary services - rather than just follow them and do the same.Third parties will continue to try and get a piece of the cake - via apps and other services, making life easy for customers. The more airlines manage to integrate third parties, the more advantages they will be able to offer to their customers to book with them.
Customer experience is crucial for loyalty and customer retention, yet loyalty and ancillary services are still separate departments in most airlines. The more integrated the thinking will be the more success is to come.
Personalisation will become a big part of this. Enhanced profiling according to lifestyle and customer specific preferences and better data analytics covering various channels and real time behaviour will get more sophisticated. And the Facebooks, Amazons and Googles of this world will continue to move into this sphere in the absence of good solutions from current parties.
The one with the best product and service provision - in line with their brand positioning - and a seamless digital experience will win. Customers want to feel in good hands and have a seamless approach as well as get interesting offers to enhance their experience. Innovation and technology will be the critical success factors for the future also in the ancillary revenue arena, as well as a holistic vision instead of small departmental thinking. Pricing and revenue management strategies for ancillary products and services will be more fine-tuned. And the product range will cover more and more the whole travel experience, before, during and after the flight.
True customer centricity and technology will be key for success, allowing commercial flexibility or limiting the potential and driving customers to other players.
Travel is redefining itself. And after all, ancillary revenues should not be called ANCILLARY revenues any more…. they have become substantial and will be even more so in the future.
It is in this context that airlines need to fundamentally review they way how they do business. How they want to be seen by their customers. And certainly what that means to their technologies that they have in place. In any case it is paramount that this industry no longer pursues what is possible with their existing technology stack but braces for radical transformation to occur.
by Ursula Silling, CEO and Founder of XXL Solutions – do things differently
for IBS Software