The strong focus by airlines on growing ancillary revenues seems to be paying off. According to some recent research these are up 66% in two years but can they go further still especially when it comes to new products and services. EyeforTravel’s Pamela Whitby takes a look

Once upon a time Michael O’Leary, the chief executive of Irish low-cost carrier Ryanair had a dream. In essence he wanted people to fly for virtually nothing, but pay for everything else. In other words, he hoped to replace airfares entirely with ancillary revenues.

According to recent research by IdeaWorksCompany and sponsored by Amadeus ancillary revenue reported by airlines grew to $22.6 billion in 2011from $13.47 billion in 2009. The research involved analysing the financial filings made by 108 airlines. In 2011, 50 of thosedisclosedancillary revenue activityversus 47 in 2009.

Of the airlines considered, United, Delta, American and Qantas came out tops. So what are the revenues made up of? It seems they come from a la carte services such as baggage fees, extra legroom and onboard catering. There are also commission-based products and, as in the past, some airlines have significant frequent flier programme activity as a component of their ancillary revenue.

Ancillary revenue is now a priority for many airlines worldwide and this is no longer limited to low cost carriers.

So is O’Leary’s dream – of replacing fares with ancillary revenue - finally coming true?  “I don't think that's possible,” says Jay Sorensen, president of the IdeaWorksCompanywho believes that Spirit's results “may represent the topping out of this activity at 33%.” While upward movement is still possible, and the overall average of ancillary revenues will certainly increase going beyond 40 or 50% “is likely impossible”.  In fact the big overall revenue numbers will be generated by the world's airlines as they move to an all fee policy for checked bags, he says.

Looking to the future trends  

Sorensen expects to see more bag fees plus higher price testing of existing bag fee price schedules. Fare clubs, which charge an annual fee for a small array of benefits, might gain traction as Wizzair and Spirit have done these. One of the advantages of these is early exposure to fare sales.  Another popular and relatively easy choice for airlines is offering early boarding. However, where things get a little trickier is in the arena of charging for seat assignment. These fees seem to be bumping up against some regulatory concerns associated with family travel and there is likely to be continued political and consumer pushback against these fees which some will see as unfair for families.  Overall, more clarity on fees will be required to avoid regulatory oversight, says Sorensen.

For Holger Taubmann, senior vice-president of distribution at Amadeus, the next wave of innovation in ancillary services will come from those airlines which develop new products that support their brand positioning and deliver value to the traveller by meeting their individual needs and preferences.
So going forward what practices are recommended. Sorensen has this to say: “Firstly don't attempt to fool your customers.”  In other words sell services with full disclosure for consumers. That is simply good business practice. Secondly he says it is important to determine what your brand is by conducting a branding exercise.  “This is difficult work that few airlines do,” he says, “but it will easily and effectively spell out the best ancillary revenue strategy.” 

Finally create products and not just new fees. In a world where differentiating in increasingly important, customer service should be top of mind. “Invest a portion of new revenue into new products to create a better service for the consumer,” he says.