Airlines needed to find some way to make money. It seems they’ve finally found it. If passengers stop buying based on published fares and start buying based on the products offered, the airlines’ new dependency on ancillary sales could drive improvements to the passenger experience.
IdeaWorks and CarTrawler have released their latest report on airline ancillary revenue, projected to reach $59.2 billion in 2015.
This figure represents an increase in ancillary revenue gains of 18.8% from 2014 and 163% from 2010.
U.S. airlines are top performers in ancillary revenue among their peers worldwide.
$18.1 billion (30.6% of the global total) is generated by just six carriers: Alaska Airlines, American, Delta, Hawaiian, Southwest, and United.
“These carriers rely upon their frequent flier programs to generate a significant share of ancillary revenue. For example, more than 62% of Delta’s ancillary revenue is produced by its SkyMiles frequent flier program,” the report states.
Major carriers are also reported to generate strong ancillary revenue through baggage fees.
“Baggage fees for US carriers represent approximately 20% of their ancillary receipts. The remaining revenue is produced by an array of a-la-carte and commission-based products,” the report states.
Globally, ”Nearly 24% of the increase was generated by traditional airlines improving their ancillary revenue results, mostly through the addition of bag fees.”
Other ‘a-la-carte’ and commission-based ancillary airline revenue sources include onboard sales of food, beverages, Wifi, and the commissions airlines make from car rental bookings.
The ‘a-la-carte’ category grew to 20% (from 15% in 2014) from comfort-related products and services such as premium economy seating with more leg room, buy-on-board food, and priority screening and boarding.
The report finds that airlines now rely on ancillary revenue to sustain their operations.
IdeaWorksCompany estimates overall ancillary revenue will contribute $16.72 per passenger and ‘a-la-carte’ ancillaries alone represent $10.36 per passenger. IATA has projected a global net profit estimate for the industry of $8.27 per passenger.
Jay Sorensen, President, IdeaWorksCompany also identifies a major trend by traditional European carriers successfully adopting unbundling practices to compete with low-cost competitors with resulting gains in ancillary revenue.
“Major players, such as Lufthansa, SWISS, and Austrian, have embraced a particular method called branded fares,” Sorensen says. “This allows airlines to present distinct product options to consumers. In effect they can choose a fare that meets their needs, such as seat-only without a checked bag, or a fare packed with all kinds of extras. Look for this retail style to be adopted by airlines all over the world, which should boost ancillary revenue even higher for 2016.”
Smart fare packaging has already been adopted by other airlines around the world. Etihad Airways introduced new fare tiers this year which offer a range from full-service tickets to fully-unbundled, letting passengers choose the features they value most.
The Daily Newsletter
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