Food is the new frontier for airline fees and competition
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Even if consumers have to pay for it, better airline food is better all around, and using a smart mix of technology and design could only help make user experience better.
The days of bland economy-class food are numbered, with Europe’s full-service carriers dishing up gourmet menus reminiscent of the golden age of air travel as they look for ways to squeeze more revenue out of passengers.
Air France is tempting economy-class customers with paid- for meal upgrades featuring foie gras terrine, and Austrian Airlines has Wiener schnitzel and sushi among its 15-euro ($19.60) in-flight nourishments. They’re part of a growing trend of carriers charging for auxiliary services, including lounge access or individual aircraft seat choice.
The move comes two decades after Ryanair Holdings Plc started a cultural revolution in Europe by making passengers pay for snacks and drinks. So-called ancillary sales ranging from food to overhead-bin space have jumped more than tenfold to $36 billion since 2007, amounting to 5 percent of the total $680 billion earned by airlines last year, International Air Transport Association Chief Executive Officer Tony Tyler said.
“The low-cost carriers have taken ancillary revenue from a normal way of doing business and turned it almost into an art form,” said John Dabkowski, managing director for airline technology company Navitaire Inc. “They’ve set the customer’s expectation, so people now are not offended by it.”
Ancillary sales will rise to $50 billion in the next five years, John Thomas, a senior managing director at L.E.K. Consulting LLC said this week in Cape Town, where IATA held its annual meeting to discuss industry trends. Revenue streams that remain untapped — in-flight entertainment, wireless access and shopping — could be worth about $5 billion, he said.
“When people get on board an aircraft, they’re actually in a great retail mindset,” Thomas said. “About an hour into the flight, they start to relax and their mind opens.”
Opening their wallets, too, has become a major ambition of airlines. Air Canada has seen ancillary revenues for services ranging from baggage fees to lounge access climb 30 percent annually since 2009, CEO Calin Rovinescu said.
“In terms of competing with new entrants, with folks who have a significantly lower cost than we do, the best way of competing was to give the exact same price on the base fare and then start incrementally adding to that,” Rovinescu said.
Air France sold more than 26,000 menu upgrades priced at 12 euros and 28 euros to economy- and premium-economy fliers in the nine months to March 31. The Paris-based carrier’s duck confit with mushrooms and sauteed potatoes, followed by Opera cake for dessert, costs 18 euros. EasyJet Plc, Europe’s No. 2 discount carrier, charges 8 euros for its “meal deal” featuring a sandwich, tea or coffee and a Twix chocolate bar.
“We’re moving away from historic all-in pricing,” said Donal O’Neill, an analyst at Goodbody Stockbrokers in Dublin. “For airlines like Air France, where the margins are so razor thin at the moment, every cost saving can be material.”
Pre-booking is key to boosting quality while trimming waste, helping to make the paid-for-food model cost effective, said Caroline Hanly, head of catering at Dublin-based Aer Lingus Group Plc, which began offering three-course upgrades to economy-class passengers on trans-Atlantic trips in February.
“We’re going to know exactly how many people on board are going to want certain meals,” Hanly said in an interview. By selecting traditional Irish fare such as soda bread and black pudding, it’s also an opportunity for Aer Lingus to highlight its status as an indigenous Irish brand, she said.
Regardless of the quality of food, catering also poses a design challenge to manufacturers Airbus SAS and Boeing, who must build galleys sufficiently large to cater for three meals on long-distance flights lasting more than 12 hours, said Tim Clark, president of Emirates, the world’s largest airline known for its lavish premium product including in-flight showers.
EasyJet sold almost one million bacon sandwiches in 2012 from its “Cafe in the Sky” range, plus 14 million drinks including Starbucks Corp. coffee, helping boost in-flight sales 10 percent.
“They’re commoditizing the seat and filling out the rest of the experience with retail offering of some description,” said Goodbody’s O’Neill. “The more they split those out and manage the cost base of each item, the more profitable they’ll be.”
Full-service carriers are taking note and following suit. British Airways in February started sales of cheaper hand- luggage-only tickets, a move consumer groups say amounts to charging for checked bags. As well as establishing checked luggage as a generator of revenue, the move has the advantage of reducing take-off weight, allowing for lower fuel consumption and faster turnaround times.
Passengers on European routes are prepared to pay as much as 40 euros for add-on items and, and airlines will ultimately demand cash for all aspects of flying beyond the basic journey, especially once they’ve exhausted options for paring expenses, said Bjoern Maul of Roland Berger Strategy Consultants GmbH.
“We’re just scratching the surface,” said Jim Davidson, CEO of aviation adviser Farelogix Inc. “You can actually democratize the back of the cabin and that’s pretty exciting, so someone who only flies two or three times a year, if they want to be treated like a frequent flier they have the capability to do that.”
–With assistance from Christopher Jasper in London and Richard Weiss in Frankfurt. Editors: Benedikt Kammel, Heather Harris
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