Airlines are moving from a “grab every buck” approach to more innovative ancillary revenue strategies, according to a new report from Amadeus.
Goodbye to ‘Gold rush mentality’
The airlines’ “gold rush mentality of ‘grab every buck, quid, or kopek while you can’ from consumers is becoming a relic of the past,” according to the Amadeus Review of Ancillary Revenue Results. The report was researched by IdeaWorksCompany, based on financial filings from 108 airlines around the world.
The gold rush mentality grew out of the fuel cost spikes of 2008, inspiring U.S. airlines to introduce checked-bag fees and to scramble to further unbundle fares.
The airlines have gotten better at dealing with fuel cost fluctuations and are taking a crack at true retailing, which focuses more on offering products and services that customers will be happy to pay for.
Examples of innovation
IdeaWorksCompany identified several instances of airlines that have taken an innovative approach.
• KLM offers economy passengers the option of pre-ordering upgraded meals on intercontinental flights from Amsterdam. They can choose from five selections, such as the Indonesian rijsttafel meal or an Italian dinner, for around $15 to $18.
• AirAsia is a low-cost carrier that provides elite-style perks, including fast-track security, lounge pass, early boarding and a ride to the plane in an electric cart. The “Red Carpet Service” starts at about $25.
• Spain-based Vueling offers early boarding, a drink and a snack and an adjacent empty middle seat for about $73.
Growth in ancillary revenue
Airlines’ ancillary revenue grew to $22.6 billion in 2011, up from $21.46 billion the previous year, the report found.
IdeaWorks’ definition of ancillary revenue includes the revenue airlines receive from financial institutions in exchange for frequent flier miles, which represents a huge chunk of the total.
The U.S. Department of Transportation, on the other hand, currently collects only data on baggage fee and change fee revenue. It has proposed collecting additional information, such as seat selection and travel insurance revenue.
Top three in ancillary revenue
By IdeaWorks’ definition, United, Delta and American occupied the Top 3 spots in ancillary earnings in 2011, as they did in 2010.
United’s ancillary revenues totaled $5.17 billion, up from $5 billion; Delta, $2.53 billion, down from $3.7 billion, due to a change in how it discloses revenue results; American, $2.11 billion, up from $1.95 billion.
Southwest in Top 10
Southwest made the Top 10 for the first time, occupying the No. 5 spot, despite not charging checked-bag fees.
Southwest’s ancillary revenues come from EarlyBird check-in, which allows passengers to check in automatically 12 hours before general check-in begins, improving the chances of getting a coveted “A” boarding position; from Business Select, whose package of services includes priority security screening, early boarding and a free drink, and from its revamped Rapid Rewards program.
Low-cost carriers earn high percentage
Low-cost carriers score the highest when it comes to ancillary revenue as a percentage of total revenue.
Spirit Airlines, which introduced the overhead bin fee to the U.S. market in August 2010, bumped Allegiant out of the No. 1 spot on that list, with 33.2%. Jet2.com, based in Leeds, U.K., grabbed the No. 2 spot, with 27.1%, edging out Allegiant’s 27%.
Spirit occupied the No. 2 spot, with $41.75 in ancillary revenue per passenger in 2011.
In 2010, AirAsia X, AirAsia’s long-haul counterpart, took top honors in the category, with $41.60 per passenger.