Revenue Window of Opportunity

Airlines that aren't selling ancillary products on their websites are missing their chance at a big payout

By Brian Straus
Air Transport World, April 2008, p.37 Buy this issue

PAY A VISIT TO RYANAIR.COM AND IT IMMEDIATELY will be apparent that it is no ordinary airline website. The large, flashing reminder that millions of seats are available for just £10--with "no hidden charges"--nvokes the mood of a used car dealership or a county fair. The bouncing cartoon bunnies on the right draw attention to the Irish LCC's Easter deals.

Sure, you can check an itinerary or book a fare. For a customer looking simply to go from Point A to Point B on the cheap, Ryanair.com is sufficient and user friendly. But why stop there when you can avail yourself of so many more bargains? Supplement your vacation with a hotel or hostel booking, automobile rental or ski pass. While you're at it, buy concert or football tickets, arrange for car insurance, save on your energy bill or indulge in a bit of online gambling.

Those options have little if anything to do with commercial air travel, yet they are just a mouse click away for the 16 million people who visit Ryanair.com each month, many of whom wind up buying more than just an airline ticket. In some cases, it would be like leaving the bakery with a loaf of bread and a set of tires.

Asked what Ryanair wouldn't sell, Head of Ancillary Revenue Santina Doherty answers, "Anything illegal."

Doherty tells ATW, "We recently launched our car insurance product in Ireland and to be honest, I was fairly skeptical about it just because it was really quite removed" from the travel experience. The company, FBD Insurance, wanted to launch a "no-frills" offering and was willing to pay for access to a sympathetic market. Enter Ryanair.com and its massive price-sensitive audience, and in the first six days FBD generated 16,500 insurance quotes. Thus Ryanair was in a position to make more money without purchasing a single extra gallon of fuel or hiring a single new pilot. In its first fiscal semester ended Sept. 30, 2007, the LCC generated €252 million in ancillary revenue, a 54% increase over the year-ago result. In FY07 it reported €362.1 million, which accounted for 16.2% of its total turnover.

"Not everyone should do what they're doing," says Jay Sorensen, president of a Wisconsin consultancy that recently released a guide to the global ancillary revenue scene. His company, IdeaWorks, estimates that airlines are generating €1.7 billion in ancillary revenue and that the figure represents just the tip of the cumulonimbus. It's a brave new world for carriers, that, according to Sorensen and several other industry experts, will find that rising fuel costs and falling yields will be more manageable hurdles if they are flexible enough to rethink the way they package and market their product and savvy enough to implement the right technology.

Certainly there is a continuum on which no-frills airlines like Ryanair and traditional full-service carriers must find their places, but for the most part it seems clear that the nearly ubiquitous presence of the Internet and a maturing traveling public have forged a market in which customers are accustomed to paying more for "extras" that formerly were integrated into the travel experience.

"Younger Internet-savvy customers, who are unfamiliar with a bygone era of air travel luxuries, happily embrace low fares and the ability to create customized travel through a-la-carte pricing," IdeaWorks says, while the Raymond James investment bank claims, "There is a greater willingness on the part of consumers to pay up for an ancillary offering than to absorb a base fare increase, which is particularly relevant in light of the industry's current fuel challenge."

Ahead of the Curve

Once carriers implement the technology required to charge for trip-related perks like checked baggage, onboard catering or extra legroom, they can put just about anything else up for sale. Companies like Amadeus have produced platforms enabling airlines to restructure and unbundle their fares or market and take commissions on products from third-party vendors. All drive revenue, allowing carriers to keep fares competitive. Some, like Ryanair, forward-thinking legacy Air Canada and US leisure carrier Allegiant Air, are ahead of the curve.

While it is conceded that traditional network airlines may find it more difficult to abandon the full-service model, there is no excuse for standing pat considering the current environment. "There are airlines all over the world who habitually ignore economic imperatives. It's against logic, but it exists," says Sorensen, who worked for Midwest Airlines before starting IdeaWorks. And the transition will be eased by two factors: Suppliers are responding to the demand for new, nimble technology and passengers are beginning to understand the realities of 21st century air travel.

Last summer, IdeaWorks surveyed airline executives around the globe and found that the number of assets still provided free to passengers is significant. Free online booking was offered by 95% of respondents, the first piece of checked baggage was gratis with 92% and assigned seating was free on 87%. It all represents unrealized revenue. Sorensen tells a story of a United Airlines flight he took from Chicago O'Hare to Honolulu before which the gate agent reminded passengers that they might want to purchase food in the terminal prior to boarding. "Here's an airline that's trying to practice ancillary revenue activities and they're failing in spite of themselves because there's something wrong with their system that's not ensuring that there's adequate food available on the flight."

The key can be as simple as priorities. "Airlines should consider themselves as an e-commerce company," says Raphael Bejar, whose Paris-based firm, Airsavings, has grown from a group purchasing and consulting concern catering to small and mid-size carriers into one that now provides an Internet platform, AirlinePlus, that can be installed in a matter of weeks and acts as the basis for an airline's ancillary activities. SkyEurope Airlines, Aer Arann and Atlas Blue are among Airsavings' clients.

Carriers can use AirlinePlus to pitch one-time lounge access, SMS itinerary notification, gaming, catering and other ancillary items in addition to what Bejar calls the "big three" that "the general public has come to expect from popular online booking agents"--hotel rooms, car rental and trip insurance. The technology already is adaptable to Navitaire, Lufthansa Systems and SITA and can boost sales by pitching more appropriate solutions--a five-star hotel for weekday business travelers or a three-star option for weekenders, for example. But an airline must be able to make those basic trip add-ons available. "Without these, it is nearly impossible to capture a customer with the more esoteric ancillaries," he argues.

Key to the Kingdom

Capturing that customer is the key to the ancillary kingdom. Airlines, especially legacy carriers and those based in the US, slightly miscalculated the effect that the Internet revolution would have on revenue streams. Enamored of the unprecedented reach and penetration of online travel agencies like Orbitz and Expedia, they worked to make as much of their content as possible available to those sites. Much of the traveling public became accustomed to buying their tickets from those third-party merchants. Certainly an Irish motorist looking for an insurance deal will not find one on priceline.com.

"Ancillary revenue opportunities are in part driven by the extent to which carriers directly control the customer booking process, which is best managed on an airline's own website," Raymond James says in its January "Growth Airline Outlook," adding that many third-party reservation systems simply cannot support the more advanced options and permutations that airlines now can offer.

"The power of the online travel agencies has startled the airlines. They are realizing slowly that 'we can do this too'," Sorensen says. Ryanair and Allegiant accumulate ancillary revenue because their customers buy from them. The former sells 98% of its tickets through its own website while 87% of Allegiant's customers buy at allegiantair.com, helping it realize $21.53 in ancillary revenue per passenger in 2007, higher than Ryanair and a 33.6% year-over-year increase. Its Trip Flex product, which allows for reservation changes for $7.50-$10 per segment, has been especially successful. In this new ancillary age, it is incumbent on airlines to make their websites the first destination for any potential traveler.

This is especially true in the US, where legacy carriers traditionally have relied on selling miles and/or loyalty program points to anchor their nonticket revenues while remaining wary of offending passengers by "nickel-and-diming" them. "This fear of offending customers is misplaced . . . and has left margin on the table for carriers slow to the punch," Raymond James says. Bejar says an e-commerce revolution, not consolidation, is the key to fixing the industry's American ills. "They should completely change their vision," he argues. "If you do not have the Internet tools, you will not have the right business model."

The network carrier that arguably has adopted this outlook more enthusiastically than any other is Air Canada, which received ATW's Market Leadership Award in 2007 in recognition of its branded fare program. "What Air Canada has done is frankly amazing," Sorensen says. "It's so advanced that the GDSs aren't there yet."

Working with AC on cementing its website as a destination is Amadeus, whose e-Commerce Airline Suite is used by more than 75 airlines to power in excess of 250 websites in approximately 80 markets. Half of the world's top 50 airlines have selected Amadeus to provide their e-commerce solutions, with 80% of those outsourcing their user interface as well as their booking and shopping engines to the technology giant.

According to Amadeus Global Director-Airline Direct Channel Philippe Der Arslanian, AC has "developed a set of products that allow us to upsell and still promote and entice end users to buy more." It even offers customers the option to reduce their fare by opting out of certain elements, which he says is "quite unheard of" but will contribute to customer loyalty. IdeaWorks says that AC's unit revenue has risen 22% since it launched its branded fares in 2003 and 48% of customers buy up at some point during the process.

Power Shift

"They are creating a unique selling proposition for their own website," Sorensen says. "I believe that is going to be a trend we're going to see more of in the future, shifting the power away from the big travel agency sites back to the main airline sites." Der Arslanian claims carriers can enhance their sites' indispensability through concentrating on post-sales servicing such as rebooking, loyalty program or voucher redemption and "any additional opportunities that only the supplier you've used has the capacity to do."

Delta Air Lines is another legacy carrier making an effort and is the most advanced among the US majors, Sorensen claims. It has integrated hotel, car rental and lounge access into the booking process while taking an approach "entirely consistent with the airline's reputation for professional and businesslike product branding and customer service," according to IdeaWorks. No bouncing bunnies here, but if DL is able to sell add-ons to 5% of those buying tickets on its website, that will equal more than 1.3 million customers per year.

Doherty will not apologize for what she calls her "shop window," especially now that there is more to it than meets the eye. Ryanair upgraded its Navitaire platform in February and can offer more ancillary options throughout the booking process rather than just at the front or back end. She affords space on the home page to those partners who can guarantee the attractive minimums and says the LCC is looking to add kiosks with ancillary functionality and handheld computers to track and expedite buy-on-board sales of everything from foreign currency vouchers to liquor.

US low-cost counterpart JetBlue Airways went to a cashless cabin last November and has recorded robust results: Project Manager Sam Kline says onboard revenue doubled in the first week and rose more than 100% through January.

Although integration of mobile phones into the reservations, booking and boarding process has been slower to come online (although it has picked up steam in Japan), Web-based applications are advancing and soon will be limited only by an airline's imagination. "It's a very creative environment," Doherty concludes. "I can take a risk on a product and if it doesn't work it doesn't matter. We can come back. It's important to keep up a high degree of activity and keep exploring every avenue. It's a fantastic advantage when we're going into unfavorable economic times."

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