59.2 billion USD: this represents the estimate of ancillary revenue for airlines worldwide in 2015 according to industry experts. As a comparison, this is almost as much as the total revenue generated by Google over the same period. Despite this incredible potential, a thorough study conducted by Lufthansa Consulting reveals that many carriers – whether legacy, low-cost or hybrid - are not able to fully exploit this crucial source of revenue. It is a serious imperative for airlines on short- to medium-haul markets which are able to generate amounts lower than 10 USD per passenger, especially considering that the average net fare for most short/mid-haul sectors is below 100 USD.
In an attempt to help airlines making up for these lost opportunities, Lufthansa Consulting summarizes the top five ancillary revenue practices that every airline should know about in this article:
1- Master the basics
When deciding on potential sources for gaining ancillary revenues, top priority needs to be given to products and product components that offer an obvious added value to passengers and that are thus easy to market. Products – and product components – which cause additional complexity, either because they are difficult to implement or sell, should be given lower priority. Baggage options and seats that offer special comfort (e.g. seats with larger legroom) are thus the most obvious products. Commission-based products (car rental, hotel room...) are also easy to implement, as the airline is not the actual producer. Regrettably, those two categories are still not exploited by many carrier, especially legacy carriers. There is an indisputable advantage for a passenger to be seated in a seat with more legroom, or in the front part of the plane; this advantage has a value and should therefore be charged.
2- Devote efforts to finding the right place and promotion
To excel in the area of ancillary revenue sales, airlines need to focus not only on defining the ancillary products and adding a price tag, but also on several other aspects such as distribution and promotion. Promoting an airline’s own website or mobile app as a distribution channel and check-in tool is an excellent way to increase customers’ exposure to ancillary product offers. However, many airlines still focus mainly on “classic” tools such as pop-ups, interactive banners or personalized email offers, which in many cases may be counter-productive.
Options to market ancillary services by personalized offers sent to mobile devices or through social media channels are often neglected. Efforts should be directed more towards using data gained by an effective CRM (Customer Relationship Management) to offer the customer relevant products. The most efficient mobile and/or online practices must be identified by reviewing e-commerce metrics.
3- Adapt to your market environment
Generation of ancillary revenue was often associated with the idea of low-cost carriers, but this practice is no longer an exclusive feature of this category of airlines. The pricing model of many legacy and no-frills airlines have converged during the past years. While more and more legacy carriers have introduced flight-only fares or fare families offering different product components, many low-cost carriers have started to introduce fares that already includes services as seat selection of baggage into fares addressing specific customer groups.
Nevertheless, many airlines have still not introduced an optimum ancillary revenue strategy, which is in line with their business model, but still reflect the changed market environment and customer requirements. A significant number of customers on short- to medium-haul flights require to be able to select, whether they pay for a snack or baggage. Consequently, some classical full-service carriers such as Lufthansa, Austrian, Swiss, KLM and others have reacted by introducing new fare structures including flight-only fares.
Others, however, still struggle to find the optimum balance between unbundling and re-bundling, often due to insufficient knowledge of the customer expectations. Therefore, it is crucial to understand the needs and requirements of your (target) customer groups as well as of your market environment in order to develop an ancillary revenue strategy that satisfies the expectations of customers that might expect a full-service offer, while at the same time attracting customers that are only willing to pay for services they actually want.
4- Make the purchase easy, convenient, and smooth
Why does it have to be so inconvenient to pay for something during a flight? As a passenger, you need to take out your credit card, which is probably packed in a wallet inside your cabin luggage in the overhead bins. If, by chance, the card is in your pocket, it is still very inconvenient to lean over your neighbor to enter your pin code in the machine. A €2 snack is probably not worth the effort…
Airlines must make the process as smooth as buying a song on iTunes. During their flight, passengers should be able to order snacks/goodies with a few clicks, directly on an app on their smartphone/iPad (or any entertainment system) connected to the flight’s intranet network. There should be no need to attract the attention of a flight attendant or to use a credit card. The app would already contain all the necessary information (method of payment, seats) from the booking or from the user profile, and the orders would be received directly by the flight attendant in the galley. With such seamless payment in place, passengers would be easily seduced by cheap extras, especially if the promotion is app driven.
Ancillary product offers in the online booking, check-in and in the online booking management tool or app have to be designed and incorporated in the process flow in a smart way to make the purchase seamless. When an airline offers several products, the presentation of the extras should communicate their value, but it should not be disruptive in a form of excessive offers and many forced choices. There is a considerable risk that the potential customer will drop out of the booking flow of 150 EUR fare due to airline’s overdone attempts to sell 10 EUR product.
5- Seek innovation to always make your customer journey more exciting
Ancillary revenues are only limited by the creativity of your airline. Innovations are the best way to tempt passengers not only to spend some extra money but also to choose your airline over others for the special service you offer. Take, for example, companies such as Seatfrog, which is partnering with airlines to offer a bidding system for standby seat upgrades via a dedicated app. Millions of Premium and Business seats flying empty could be sold this way, keeping passengers happy and making extra revenue for the airline.
Since 2005 when United Airlines in the U.S. and Flybe in the UK introduced the first ancillary services on their websites, airlines have significantly increased potential customer exposure to ancillary products. The continuous development of online and mobile booking technology further facilitated the distribution of ancillary products. It is thus very likely that the further development of ancillary revenue streams will be closely related to IT trends, especially big data analysis, personalization, customization and new distribution capabilities. However, these practices are currently underexploited by many airlines and there is huge potential to make use of these sources of very high profit margins.
Lufthansa Consulting offers solutions for developing ancillary revenues while preserving the image and the brand perception of its client and accompany their implementation. If you face similar challenges and you are interested in learning more from our experience, please contact Lufthansa Consulting at firstname.lastname@example.org.