—–

The latest study from Ideaworks, sponsored by Amadeus; shows that airline ancillary revenue is on the increase, up 45% on last year to €11 billion ($13bn), and that in order to be in the top 10 ancillary revenue generators an airline must drive €300 million in ancillary sales. Airlines cannot afford to ignore the rapid development of this trend but strategies to take advantage of ancillary revenue will need to vary according to each airline’s brand positioning, and this involves careful decision-making.

Unbundling translates into cash

As can be seen from the graphic above, LCCs have moved full steam ahead with unbundling, selling exit-rows, extra legroom and priority boarding. However, the story of the last couple of years has been the entry of the U.S. majors – United and American now generate around €1.5 billion each. Even Singapore Airlines has started charging up to $100 for exit-row seating on their long haul flights.

There are compelling reasons for an unbundled market position:

1. Unbundling enables completely new revenue streams as customers select services ‘a la carte’
2. In the world of price-centric internet searching, airlines are under pressure to advertise a low base fare
3. An unbundled approach enables greater customer choice, although airlines need to ensure transparency to avoid confusing and misleading their customers.

To unbundle, or to preserve the brand?

For airlines that have built brands on premium service the decision to impose charges is a big one. Emirates, for example, is resisting the trend and even Southwest airlines has bucked the LCC tendency by not charging for baggage fees. If an airline opts for this approach, it is essential that customers are informed at every point of sale because consumers are beginning to expect baggage fees and additional charges.

What’s certain is that brand consistency is a must. If an airline’s offer is unbundled in one channel but not another, the resulting customer confusion will hurt sales and defeats the object of brand differentiation. This requires careful thought and the integration of ancillary services within the selling process, including the travel agent booking flow in order to drive adoption.

Another potential brand and revenue pitfall is delivery –it is one thing to sell a service, quite another to ensure it is delivered, on time, every time. Imagine if there is a disruption and customers are moved to a smaller plane with less exit-row seats, but the airline has already sold too many! Issues such as this require planning upfront.

Integration with an airline’s CRM and revenue management system also help to track and operate ancillary services according to customer value, whilst ensuring maximum revenue capture.

At Amadeus we are working with airlines of all shapes and sizes to deliver ancillary revenue strategies across multiple channels and in line with industry standards.

Editor’s Note: Horses for courses

While the dilemma for choosing between unbundling to drive ancillary revenues or to preserve the brand is a very real one, the best solutions would be customized to individual airline’s specific needs.

For example, while almost every airline in the US is charging a bag fee domestically, Southwest has made it a competitive advantage by not charging one. Similarly, Delta Airlines charges a bag fee for domestic sectors, but none on cross-Pacific flights. Because no other competitors do. It’s horses for courses.

So, what do you think? How far can airlines push the un-bundling argument before seriously compromising the brand, hence loyalty? Let’s hear it in the comments, or over on Twitter (@simpliflying)

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Throughout the past year airlines have suffered massive financial losses due to record high fuel prices, a weakening global economy and declining demand for airline seats.

In an attempt to increase their financial stability many airlines in the United States, and around the world, turned to the ancillary revenue generated by charging passengers for their baggage.   As angered as passenger have been regarding the checked baggage fees they have helped major airlines in the United States collect more than US$1,145,385,850 in revenue during 2008…and baggage fees weren’t even initiated by most airlines in the United States until the middle of the second fiscal quarter of 2008.

The fourth fiscal quarter of 2008 saw airlines pull in US$498,600,000 alone!

Checked baggage fees have always provided a significant revenue source for airlines, however prior to the past year this revenue was for excess baggage and overweight baggage. Airlines that do not allow any free-checked baggage, such as American Airlines, now consider all baggage on domestic flights to be ‘excess baggage.’

Airlines that allow passengers to check baggage at no fee, such as Southwest Airline and its policy to allow up to two pieces of baggage at no charge, still generate financial benefits of excess baggage fees. Southwest Airlines raked in US$25,226,000 in baggage fees during 2008, or approximately US$69,112.32 per day.

American Airlines, the first ‘Legacy’ airline to begin charging for all checked baggage brought in US$ 277,991,000 in baggage fees in 2008.  To break this down, American Airlines’ baggage fees bring in approximately US$761,619.17 daily from passengers checking bags.

Two months ago I addressed baggage fees here, 28/03/2009 – Checked Baggage Fees : Will They Go Away? Can You Avoid Them? , and stated I that I thought baggage fees were here to stay.  Looking at the overall baggage free revenue break down I am now absolutely sure these fees are here to stay.

Wonder how much your airline earned in 2008 collecting baggage fees?   Check out the info below from the US Bureau of Transportation Statistics.

American Airlines (AA): US $ 277,991,000
US Airways (US) : US$ 187,081,940
Delta Air Lines (DL)** : US$177,063,000
United Air Lines (UA) : US$132,994,000
Northwest Airlines (NW)** : US$121,599,000
Continental Air Lines (CO) : US$99,315,000
JetBlue Airways (B6) : US$35,307,650
AirTran Airways (FL) : US$29,400,960
Southwest Airlines (WN) : US$25,226,000
Alaska Airlines (AS) : US$24,773,000
Frontier Airlines (F9) : US$15,155,820
Hawaiian Airlines (HA) : US$11,627,180
Midwest Airline (YX) : US$3,977,840
Virgin America (VA) : US$ 2,568,560
Sun Country Airlines (SY) : US$1,304,900

**Delta Airlines & Northwest Airlines are now one airline, operating as Delta Air Lines, under the airline designator “DL”

With airlines earning roughly US$3,138,043.42 daily from baggage fees, do you think we’ll see them go away any time soon?

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63% of airline executives think that ancillary revenues will be a major source of profits in the future. But are they getting it right with the short-term moves like charging for water and then reversing the charge? Probably not. And this was the issue I addressed in my webinar entitled “Airlines 2.0: 5 ways to unleash the potential of ancillary revenues in a downturn.” The webinar was very well received with some very interesting questions asked by the participants.

And I’m sharing the slides from that webinar here. The slides include a bonus video (see slide 14) which I couldn’t show during the webinar since it wasn’t possible to do it remotely. But I’ve integrated them here exclusively for my blog readers.

Here’s what you’ll learn from these slides:

• Make un-bundling work to suit your customers’ lifestyles
  
• Entice customers through “reverse-bundling” in the recession
• Maximize existing revenue channels, without compromising the brand
• Cultivate new revenue channels using Web 2.0 tools, like Facebook, Twitter and blogs
• Increase conversion rates for ancillary channels
• Keep the brand intact while earning more per customer

I’d love to have you feedback on the slides below and please feel free to share them with those you think would benefit from it.

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recently writting about, ancillary revenues, and what I will be covering in my upcoming webinar on April 16, 2009.

Here’s the interview, for your listening pleasure (click the title to listen).

______________________________________

Making ancillary revenue work with brand strategy

This subject is attracting ever more interest as airlines try to find news ways to separate customers from their money. In truth customers understand that airlines need to make money to stay afloat – but do they have to nickel and dime to such an extent? Is there no way to make the pocket pilfering feel less like an consumer funded industry bailout?

Shashank Nigam, CEO of Simpliflying.com takes a crack at explaining how this conflict might be resolved in a nicer and more cogent way. You can join Shashank’s webinar at www.simpliflying.com.

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I discovered this outrageously funny video about airline fees. The point to note is that this video is predicting airline fees in “the year 2007″! And true enough, by the end of 2007, and throughout 2008, we started seeing the rise in airline fees for everything from checking-in a second bag, to a cup of water (which I think qualifies for a human right violation). When ancillary revenues are pursued independently of brand strategy, here’s what happens. Enjoy!

If you aren’t following SimpliFlying on Twitter yet, you may do so here: http://twitter.com/simpliflying . Do subscribe to SimpliFlying by email or RSS, if you haven’t already done so as well!

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What does the future full service airline model look like?

Which airline is closest to the future? Southwest.

What do you think? What does the future of full-service airlines look like to you? Do you think Southwest is a good indication of the future or are there better examples too?

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I was reading through a popular airline forum this morning and was shocked the read the story of a United Airlines frequent flier, who was extremely frustrated by “hidden fees” the airline had imposed on him, and was desperately seeking advice on how to resolve the matter without further aggravation. Here’s Phil’s story (reproduced with permission):

“I purchased a ticket to Amsterdam last weekend with my miles. I booked over the internet and paid a $100.00 booking fee, along with the taxes on the flight.

I had to change my plans because of my mother’s surgery this week. So I called United and they said that I can do one of two things, hold my ticket without returning my miles -OR- pay an additional $150 to have my miles returned to my account.

Oh yeah, just to get the miles put back into my account and forget the hell about all of this, it’s an addition $150.00. I don’t get it, those are mine! And all they have to do is hit a button on a computer and wham, they are back into my account. God, I’m so mad. I don’t get frustrated with airlines that much, but this is ridiculous!

So I opted to save my itinerary. I was told on the phone that I could use my ticket to Amsterdam anytime I wanted, and there would be no fees charged as long as I used the same itinerary.

Well, problem with that is, their award tickets only come with certain seats and flying OKC-ORD-IAD-AMS and return the same way, is difficult to find.

I DID however manage to find, (after searching through tons of blackout dates) I found the same routing, with the available dates for me.

Now, they want to charge me $150.00 booking fee, for a change in itinerary (which was originally promised to not happen) and on top of that they want to charge me a $100.00 transaction fee, or something, not sure what that is.

The tax on this ticket was $125.00 of which “so kindly” they said they would waive for me on the new booking.

In total, I would have spent $400,00 on what was supposed to be a “free ticket.”

Now here comes the weird part, in my exploration to find new dates that weren’t blacked out, I called United several times….but I have a hard time understanding some of them (call center employees), and I’m usually good at it, and they weren’t understanding this entire predicament.

First, I was told that they would waive the $100.00 fee, but I would still have to pay an additional $150.00 fee, then I called back, and they would not waive the fee. It just got so frustrating that I hung up.

Does anyone work with UA that can either 1. Help me with this, or 2. Explain this to me?

I’ve spent so much money on United in the past year, and while I’m not anything but Elite status, it’s a lot for me. All my travel with them has either been in First Class or Business, to SE Asia (Bangkok) and Hawaii.”

There were ample replies to this appeal, some suggesting that Phil speaks “nicely” to the call center staff to get a fee waiver, or that he personally goes down to the airport to speak with a United Airlines agent in-person, to strike a better understanding and may be something can be done about it. As expected, some urged the passenger to read the fine print, where all of this fee is stated within twenty pages, in 8-point font.

But here’s what sums up the sentiments of a number of frustrated fliers today:

“Understand that airlines that are going broke, or close to it, the customer is the enemy. If you get that in your head, it will make what happens understandable. You are not a valued customer. Your are the foe.”

How sad it that?

Penny wise, pound foolish

Here’s a frequent flier who has probably spent something in excess of $20,000 with United Airlines in the past year alone, and probably would have spent a similar amount in the coming year. But because the airline tried to nickle and dime even the big-spenders, they’re likely to lose these customers. Brand loyalty? What brand loyalty?

Why not learn from RyanAir? Be transparent.

I wouldn’t be wrong in saying that most airlines around the world learn how to earn ancillary income from RyanAir. Fine. But at least learn it fully! Despite all the “cheap tactics”, something RyanAir does very well is that it comes clean on all its charges on its website. There’s a simple table of charges that customers can browse through, to get an idea of additional charges they might encounter. On most US “full-service” carriers, these exists somewhere within the 10,000 word agreement that the passenger “ticks” before booking the flight. I don’t think even the United Airlines’ sales reps have read it!

A lot of frustration can be prevented by being transparent about these charges. And transparency is something large US airlines lack. For a start, why not just have a simple table of charges on the website? So that even a 65 year old can understand it?

But before anything, I think United Airlines in particular needs to get its act together and figure out what it stands for. Is it a budget airline? Or a full-service carrier? If it’s the latter (as it claims to be), then why are even frequent fliers treated like this? I wonder.

What do you think? How can this situation be improved? What can airlines do to not upset their most cherished customers through these charges? Do you have any experiences to share that might be of help to Phil?

If you haven’t already done so, I’d like to invite you to subscribe SimpliFlying by email or RSS so that you can get the updates from the convenience of your inbox.

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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?

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Source: RyanAir

It seems like RyanAir folks read SimpliFlying! Just when we’re having an ancillary revenues special this month, they’re giving us all the fodder to write about!

The airline has launched a competition where anyone in Europe can suggest ideas by email to competition@ryanair.com on how RyanAir can make more money off their customers! The best idea wins €1,000.

Some of the wackiest ideas are already stated on RyanAir’s website:

• Charging for toilet paper – with O’Leary’s face on it,
• Charging €2.50 to read the safety cards,
• Charging €1 to use oxygen masks,
• Charging €25 to use the emergency exit,
• Charging €50 for bikini clad Cabin Crew.
  

An airline which laughs at itself

These days, companies, especially large, international ones that dare to laugh at themselves are a rarity. And an airline that can do that earns my respect. Others in those ranks? I’d say Southwest, JetBlue, Virgin America, Kulula.com, Indigo and AirAsia. Ironically, no legacy carriers made to this list. Do you know of any more?

A “cheap”, but authentic brand

Alright, many of you woul classify this RyanAir move as “cheap”. But isn’t RyanAir a cheap airline for the cheap traveler? Then, I’m sure the competition resonates well with its target market!

The true measure of how distinct a brand positioning is not just the number of fans, but also the number of detractors. Brands that try to be everything to everyone often fall flat! And through this competition, RyanAir has only further strengthened its positioning as the “cheapest” airline in Europe and done so very authentically too – by being very open about the fact.

What do you think? Good move by RyanAir or a PR disaster? How can legacy carriers be so open with their customers? Let’s hear it…

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But as I mentioned in my white paper on airline branding, Brand eXperience is one of the most important factors affecting the brand perception and the time spent in the plane forms the most important part of the eXperience. According to recent research, the most important factor determining the in-flight experience is not service or in-flight entertainment, but the person you’re sitting beside! 80% of passengers feel their seat neighbor’s bahaviour influences their overall flight satisfaction. And there lies the opportunity.

Bring in Satisfly – to optimize your seating in the plane

A friend of mine, Sergio Mello, has started up a company called SATISFLY, which solves the above-mentioned problem. They help passengers choose the kind of people they want to sit next to on a flight. Basically, they combine the best of social networking (Web 2.0) tools and online seat selection to help facilitate this. Passengers on an airline that’s powered by Satisfly will be able to choose one of these “zones” to sit in: social networking, business networking, business alone and relax alone.

Though the basic reason for using Satisfly is because airlines do not want passengers to feel uncomfortable due to their neighbours. But I feel the big advantage for airlines using Satisfly will be ancillary revenues.

Show me the money!

The first and most obvious way airlines can make money is by charging customers a fee for using this tool, which will only enhance their travel experience. Hence, it’s a value-added service, being offered at a price. Low cost carriers may prefer this option.

Something else that can be done is that airlines can “push” out higher fares where passengers can fly with their friends or a business prospect. So if I’ve bought a ticket on the 5pm flight but my business prospect is flying on the 6pm flight, I might be willing to pay another $50 for flying with him. This is demand stimulation at its best.

But the real value of the intelligent seating system is in gaining insight into the customer mindset. When passengers use this system, airlines learn valuable information about their clients. This can then be used to create personalized offers in the future and build greater loyalty by tying it into the frequent-flier program.

Enhancing the Brand eXperience and adding an X-Factor

Not only does offering a value added service through the intelligent seating system enhance the brand experience dramatically, it also adds an X-Factor to the brand that cannot be duplicated easily. And in the long term, this becomes a distinct competitive advantage for the airine.

In in times like these, I think airlines can do with one or two feathers in the hat. And SATISFLY is an easy way to do that.

What do you think? Will airlines invest in a system like SATISFLY in this recession, even if it means greater potential revenues in the long term? Will you be excited about using an intelligent seating system on an airline? Let’s discuss.

If you haven’t already done so, I’d like to invite you to subscribe SimpliFlying by email or RSS so that you can get the updates from the convenience of your inbox.

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