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Ancillary revenue: A boon or a bane for the airline brand?

Shashank Nigam — Mon, 16 Mar 2009 12:33:26 +0000

Continuing with the ancillary revenues special this March, I’d like to explore the issue whether ancillary revenues are good for the airline brand, or detrimental. We all know they’re good for the balance sheet, but what about the brand? To answer this question, let me segment ancillary revenues in two bands – charging for value addition, and un-bundling current product and services.

Charging the passenger for value-addition

A comment on the hotly debated article I wrote on RyanAir’s competition for charging passengers got me thinking. Here’s what Shyrose had to say:

“RyanAir should link up with the local taxi companies of the detination airports and agree a deal with them, whereby flyers can book their taxi on the plane so it’s ready and waiting for them the other side. Taxi companies give Ryannair a referral fee, and Ryanair will be positioned as offering greater value service for customers.”

And I think Shyrose is bang-on-target. Customers don’t mind paying for additional services they value. And this is especially true when the offer is in-sync with the brand expectation. There are ample examples of such value addition. Travel insurance and car rental are popular ones. The intelligent seating system I talked about in an earlier article is another. Singapore Airlines has “boarding pass privelages” for its flyers, where they get discounts at restaurants in major cities by presenting their boarding pass. And the airline probably gets a commission from the restaurant for this.

Such tactics are great for the legacy airline, since they’re anyway charging a higher fare for value-added service on-board, and the target customer would be the right one for such an offering.

Un-bundling the product and service

People mention RyanAir and easyJet as champions when it comes to earning ancillary revenues by charging the customer for everything other than the seat – 16% of easyJet’s revenues are from ancillary sources. But another airline that has done a good job with un-bundling the product is Air Canada. You can choose the fare based on your preference of the level of in-flight amenities.

Where this approach gets ugly is when airlines start charging for everything from a cup of water (US Airways) to even the loo (RyanAir?)! And this is where the whole resonance with the brand becomes important.

How far can the brand be stretched?

Everyone knows that RyanAir is a low-cost airline and you’re only paying for the seat. You can look at a simple chart of all additional fees on their website. RyanAir is very, very transparent about what you have to pay for, and what’s included in the fare. And this transparency only strenghtens the brand promise further – that of the cheapest seat.

Unfortunately, this is a something even legacy airlines are doing, but without the transparency. For example, information on additional charges is spread all over the American Airlines website, and you’re bound to learn of an additional charge at the counter. This creates a lot of confusion in the travelers mind and erodes brand loyalty.

Here’s a simple model I feel airlines should follow: legacy carriers should largely go for providing value-added services and then charging for them, and budget carriers should mostly un-bundle their offerings so that passengers can get some additional comforts, other than the seat. Of course, they should learn from each other. But at the same time, should avoid doing something absolutely detrimental to the brand. Need an example? Singapore Airlines charging $100 for a round-trip flight for choosing an emergency-exit row seat! I know for a fact that this move has annoyed even the most loyal customers!

What do you think? How can airlines earn ancillary revenues without resulting in a conflict with the brand? Does the solution I proposed make sense? Any examples of airlines doing this well?

King of ancillary revenues, RyanAir offers €1,000 for best idea on making money! (simpliflying.com)

Air Canada’s Robert Milton builds brand value through divide and conquer

Shashank Nigam — Mon, 08 Sep 2008 14:08:37 +0000

Image via Wikipedia

In his autobiography, “Straight from the top – The truth about Air Canada“, Robert Milton – the former CEO of the airline – concludes, “There is no reward in life without risk, and there are times in our lives when we must all balance risk against reward and make a decision accordingly, whether we want or not.” He has taken his own advice to heart.

Divide and conquer – the best way to win

Milton was making a risky bet in 2005 as he floated as an independent unit, Air Canada’s Aeroplan – their frequent flier program. It was the first time a major airline was separating from itself probably the most valuable part of the business. But his instincts have been proven right. Today,Â Milton has been successful in monetizing the once troubled airline and its subsidiaries and turning them into profitable entities through a holding company – ACE Aviation Holdings. As Airline Business describes it in an article about Milton, “The evolution of ACE from a struggling flag carrier into money-making holding company is the story of turning side dishes into main courses.”

In fact, not only have most of the individual entities pleased investors with their financial performance over the past few years, they have actually improved performance as independent companies. Essentially, working as independent divisions, these businesses sell services to a variety of customers, not just the parent airline, hence tapping on greater revenue sources than before.

The whole is greater than the sum of parts

The “componentization” of Air Canada’s business model is evident even on their website, as you buy a ticket. Almost every service and product available is broken down and one can choose them ala-carte style. For example, you can pay an additional amount up front if you want to use their lounge before the flight, or want a better seat or a meal on short-haul flights or want to earn 150% status miles. This caters well to the full spectrum of Air Canada’s passengers – the budget travelers, as well as the “travel-in-style” types. It allows the customer to pay for what he or she values the most.

Similarly, having separate business units for Aeroplan, the maintanence business and the airline allows investors to focus on what component of the company they value the most, and derive greater value out of it.

The brand value of the some of these parts increases too,Â since it’s broken down by the divisions as well. This break down into smaller, more tangible chunks allows each business to quantify its own brand value, rather than a large, intangible airline brand.

A model for other airlines to follow?

A number of airlines around the world, like Qantas, are considering floating or selling parts of their businesses to investors. But is it realistic to emulate Air Canada’s business model in different markets with different regulations and operating conditions? It may very well work for some, but how far can an airline move away from a “holistic” business model as its traditionally been, to an Air Canada-styled holding company? Would the brand strengthen or be more diluted because of this?

Let’s discuss…

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