Airlines: Soaring on Ancillary Revenue

Ancillary revenue is what stands between profit and loss in the airline industry. Rising operational cost and competition have made non-ticket revenue the differentiator among airlines. For some of them, revenue from retail has already surpassed that from ticket sales.

The top 10 airlines worldwide in terms of ancillary revenue have increased their collection under this head from $2.1bn to $29.7bn in the 10 years to 2017, according to IdeaWorksCompany (IWC) and CarTrawler. The two companies predicted that the airline ancillary revenue globally would grow to $92.9 billion in 2018.

McKinsey estimates ancillary revenues at $50 billion to $55 billion a year (without counting the revenue from frequent flier programs), which exceeds the industry’s $31 billion 10-year average annual operating profit. Whatever your chosen index, there is no disputing the critical importance of ancillary revenue in the overall health of an airline.

Eye on Ancillary

Three-fifths of $5.8 billion ancillary revenue of United Airlines, which topped the IWC and CarTrawler ranking, came from “a la carte” sources, such as extra baggage charges and travel retail commissions. The frequent-flier program accounted for the rest of the amount.

United is not alone. Airlines across the globe are trying out various programs to make ancillary revenue count even more. If Etihad has announced an auction for passengers to upgrade cabin class, Ryanair aims to be the Amazon of travel. Whether ultra low cost, low cost or full service, every airline worth its ATF wants to maximize its ancillary revenue and gain a competitive advantage.

In the evolving vision of the leading airlines, a flier’s purchase of a ticket is only the start. The hotel room, rental car, guided tour, and even the evening entertainment must be booked through the airline’s gateway. Eventually, shopping too will be a bigger part of the mix, extending well beyond in-flight sales from a limited catalog. As Ryanair’s chief marketing officer Kenny Jacobs told Financial Times, it is about “using data to cross- and up-sell the products you already have to the customers you already have.”

For most airlines, the flexibility of choice that the unbundling of fares unlocks for customers is an added justification for ancillary revenue on top of the financial imperative.

The Way Forward

Disruptive technologies such as big data analytics, AI, robotics and augmented reality that help airlines overcome operational issues, enhance upselling and minimize revenue leakage play are the key to increasing ancillary revenue as well. The role of frontline employees is also important because they are ones responsible for selling or delivering most ancillaries.

For the growth of ancillary revenue, airlines must identify the right resources, provide them with the right tools and support, and align processes and structures. Even steps that seem simple, such as introduction of mobile terminals for collecting in-flight payment and visual dashboards, can go a long way in significantly increasing ancillary revenue for airlines.

Some of the areas that need to be tapped are:

Merchandising Intelligence: Airlines need to use data analytics and machine-learning models that add value to the services they offer. AI provides a structured, agile and data-driven approach essential for Merchandising Intelligence. The application of data and analytics must be aimed at defining how to sell a product at a reasonable cost at the right time and using the right channel.

Ancillary price optimization: Machine-learning algorithms can evaluate purchasing probability in a given context. Armed with analytics-driven insights, airlines can set and vary its prices for ancillaries. AI can then be used to identify the most significant variables that impact customer purchasing behavior.

Trip engineering and personalized services: Given the importance of ancillary revenue, airlines should create digital marketing platforms and utilize big data analytics through mobile apps, e-commerce, and automated business processes such as web check-ins to improve revenue growth in these areas.

AI-driven chatbots: Using chatbots for proactive communication during the whole customer journey can be the next strategic step. Using combinations of AI-run chatbots and customer support, an airline can offer a whole array of services, including upgrade options, vouchers/ offers and preferred taxi service booking, on the customer’s chosen messaging app.

Feedback analysis: Airlines can use AI to zero in on pain points in the airport and flight experience through feedback data analysis and market research and come up with targeted ancillary offerings that enhance flier satisfaction and increase revenue.

Creative campaigns for engagement: Innovative social media campaigns can improve brand loyalty and recall. Because most passengers book tickets online or on their mobiles, airlines must look at dynamic packaging to boost their ancillary revenue. AI and IoT elevates personalized service to the next level.