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

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?

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Showing 26 comments
  • Ahmed Sultan, ITC

    The ancillary revenue is both boon and bane depending on the type of carrier applying it.

    So, it is bane for legacy carriers which are already charging high rates for their services. Those air carriers are presumably providing the basic air service plus a reasonable amount of amenities depending on their service philosophies and their market competition. They are not supposed to collect additional charges (ancillary revenues) or otherwise they will negatively affect their brands. For Singapore Airlines to collect additional charge for the emergency-exit row seat is an example of a practice which is on conflict with the brand.

    On the other hand, the ancillary revenue is a boon for low-cost carriers. They are presenting themselves as providers of the basic flying services. For increasing their operating revenues, they have to consider ancillary revenues. Of course, collecting the ancillary revenues does not jeopardize their brands as long as they are staying away from asking the passengers to pay for using the toilet.

    Putting the nomenclature aside, the reality is that both legacy carriers and low-cost carriers are out there to make money. They are adopting various pricing policies in such a way to make them profitable. Legacy carriers are depending on traditional bundled air fares while budget carriers are depending on a group of unbundled fare components.

  • Patrick Daykin

    You are absolutely correct, but these carriers are limited, these “favorites” are domestic lines and have limited to no codesharing ablity for transoceanic travel. Now Virgin is doing something interesting in that they are buidling themselves thier very own little world wide network. Once completed they will need very few carriers for feeder flights as they will be present in all the major money making markets. They will renouce the extra fee and be the big shot for it. But the big boys and legacies are agin becoming complacent. Like the 90’s they are comfrotbale with what they are doing and we know they can;t change very rapidly. So those pax devoted to the big ones will always suffer these fee’s.

  • Patrick Daykin

    Not in this current market. The people who aren’t going to fly again due to anciallry fee’s are the people that fly once every 3 years and typically cost the airlines more in appeasement then anyone else. The business and regualr travelers know what they are getting and typically plan ahead of time to avoid these. I think ultimately the airlines will continue to role with them because they can, and the market is in no place to change that.

  • Shashank Nigam

    @Patrick: Even though many passengers still carry on flying the same airline despite how they’re being treated, I think it’s a matter of time until another airline comes along that treats them more “humanely” and passengers will switch. After all, airlines like Southwest, Virgin America and JetBlue are a hit for this very reason, isn’t it?

  • Tim Jacobi

    It is an absolutely flawed strategy for a legacy carrier. US carriers are slowly rescinding this thinking as others are adding it. It destroys the brand and makes the product, well, a product that is substitutable with any other carrier. They are highlighting cost/price vs service and differentiation.
    What ever marketing expert says this is good has no clue about consumer behavior and how to build a brand.
    For LCC like Easyjet it is easier to get away with, but it still diminishes the sandbox they play in to a cost game. Plane and simple.

  • Perry Rees

    There is a concept in Operations Research called Utility which attempts to evaluate services or events in monetary terms where there is no other quantitative measure. At some point cost = Utility and the individual is ambivalent whether he pays for the service or does not receive it at all. Budget airilines are applying this principle to check-in bags, extra legroom, food & drink, priority boarding etc and they have to get the price right in order to be sure that the cost for the service is less than the Utility. Having said all that I concur with Michael Jensen’s comment.

  • Michael Jensen

    While this may erode the brand or some of it, when buying a ticket, the vast majority of US passenger will still go for the price. They will whine and complain about everything, but they generally wont pay more for the brand.

  • Vinay Rajan

    Well thats true but like the ryanair says why do you need to pay for things which you dont use. So I would say the airlines need to diversify their product portfolio by offering a all included price for pax like Chantelle and a selction price (for wat services one wants) to others

  • Lance Frey

    Paying for essentials like toilets is going to alienate customers- . I also was upset when JetStar wanted to charge a $6 fee for buying a ticket on-line. But as long as they are optional or avoidable extras, and airfares keep dropping, I think the consumer is getting a fair deal.

  • John Victor

    Passenger perception has been pivotal to airlines, more so now, with so many airlines flooding the market.

    I believe that any form of packaging ancillary revenues will not really hamper the airline brand.
    The reason to say that, is the level of awareness and the information available to the customer though different streams.

    Presently, all airlines in India have different components built into the fare as taxes or surcharge. My experience with the market indicate that majority of the customers do not believe in ‘advertised” or “basic” fares and are asking for the “total price payout”.

    With the market stacked up the way it is, the customer is driven by what he perceives to be the “right total price” for his journey, irrespective of how the airline charges it. This choice is based on the individual “perception” of the traveler and would not necessarily erode the brand value.

  • Don Garvett

    not black and white, but I believe, in excess, it can degrade the brand with ill effects, unless it is the brand. Jensen’s observation seems to be more about what is than what should or can be

  • Jeffrey Hamilton Smith

    I don’t have much experience with airline/ flight branding either (although I once did a logo in the late 80s that made it on the tail of a 747).
    What I do have an abundance of, is the delightful experience of listening to my clients complain endlessly about their flights on the drive back from the airport. Such episodes are usually followed by a rapid succession of cocktails at ‘W’. It’s the only way to start anew, because I too share much of their frustration.

    Charging extra for “excess” baggage/weight doesn’t seem to be at the top of the list. It seems to be much more of a concern when it was first instated. What does urk them off more, is a combination of being charged such fees, and receiving less-than-adequate service during the flight. Faulty seats, TV screens which are much too close, lights that don’t work, food that is inedible, lost baggage, rude attendants, and the worst of all sins -delayed flights. In combination with these extra fees, it comes awfully close to abuse. For those of you who haven’t read this yet:

  • David Turney

    I speak without any knowledge of the airline industry, the commercial imperatives and the costs (nor with little more than a distant view of the competitiveness or existing brand in the US market), though with deep knowledge of brands & branding, and I say it stinks. Yes, it does erode the brand. Charging for services such as these, which for my mind are core services being paid for in the price of the ticket, is dirty. Here in Australia, the choices are far more limited so it’s surprising almost that this kind of thing hasn’t crept in more, though contacts tell me at least one of the choices is becoming more strict on their oversize bags (and human) policy where once a blind-eye may have been turned. Brand experiences are consistently low at the economy end (though during my corporate travel experiences, they aren’t much better there I can tell you, it’s just made less of an issue because you get e bigger, more comfy seat) with our airlines. They’re one of the most complained about services on offer. My rant, back to the question.

  • Roger Morrison

    I think the issue is that the airlines are attempting to unbundle variable costs that used to be “free” or included in the cost of the fare. I am sure from their perspective this makes sense; “Not everyone checks a bag so we will charge the people who do check a bag.” The only issue with this logic is that the passenger who does not check a bag, is not overweight themselves, does not consume the “free” soft drink and “snack” is not being rewarded with a lower fare, they are only avoiding surcharges. In addition the more valuable frequent flyers are given the privilege of checking bags for “free” and the other ordinary items that used to be part of a fare. The irony is that the full service airlines are leaving themselves wide open to no-frills airlines like Southwest who offer all the ordinary items and lower fares. Instead of choosing to provide more for less the full service airlines have hit on the unusual strategy of providing less for more. A strategy that might seem reckless in a booming economy and downright self destructive in a recession.

  • Shashank Nigam

    @Roger: Great point you make there. Full service carriers have indeed dragged themselves into the price competition so much, that they cannot differentiate themselves anymore. In fact, originally budget airlines like Southwest and JetBlue are looking much more of a complete package, than the “full-service” ones.

    @David: The number of times airlines in the US like United have filed for bankruptcy protection would give you an indication that they’ve hardly ever planned well for the long term. And even with these frivolous charges, they are focusing on the short term. Even though the fuel prices are now down (once used to justify the charges!), most of the charges remain. I don’t think airlines like these that claim to be “full-service” can fool the passenger much longer. It’s just a matter of choice – once the customer has a choice, he’ll fly with the airline that not only gets him from A to B, but also value him as a customer.

    @Jeffrey: All good points. If airlines want to charge for something, they need to add value to the customer experience too, not just “demand” it.

  • Jeff Ogden

    I believe it is a boon, but it must be handled carefully. There is a fine line between getting additional revenue and offending passengers.

  • Shashank Nigam

    @Jeff: Indeed! If it’s value-adding, I think it’s a boon. But unscrupulous un-bundling in pursuit of ancillary revenues without any regard for the overall brand strategy would result in a disaster in the long run. You got it right – it’s a fine line.

  • Tom Griffin

    I think that ancillary revenue through the right channels makes sense, the airlines need to look at themselves as a channel for advertisers to reach their customers. It’s better than having to pay for peeing.

  • Ronald Kuhlmann

    Patrick, your comments are bang on. The idea of paying for what you use–and at a reasonable rate–has validity. The biggest problem with the US majors is that they have not really changed the business model, just the part that benefits them and that is the crux of the frustration by many passengers. They see themselves being overcharged for goods in a captive environment. And the fees are often collected by surly folk who exhibit little if any warmth.

    There is also the observation that the liability for baggage and its timely delivery should have new boundaries if it is a paid service. If I borrow my neighbors car and it runs roughly, too bad. I hold Avis to a different standard for a rental.

  • Ralph Richardi

    I doubt it–they will bitch and moan but they will fly

  • Ken Botterbrodt

    The ancillary fees are just a cheap shot. I can’t believe the selling me a glass of water will make the airline profitable. Yes, I avoid these airlines.

  • Patrick Coval

    This is an interesting discussion that I can’t determine whether it’s the right approach or not. Intuitively, charging for services or goods that have an incremental cost makes sense for the airlines and for all passengers. Why should I pay the same as the person who checks 4 bags and consumes lots of items on the plane? Or stated another way, why should the airline give away these value added items for nothing?

    Part of the issue lies in the execution by the airlines. Instead of simply recovering cost, they are trying to make a large profit. I had the misfortune of traveling on US Airways while they were charging for drinks and it leaves a bad taste in your mouth, and not from the diet soda, to pay $2 for a drink they likely paid less than $0.25 for. The same with luggage. What is the realistic cost for slinging and carrying (fuel burn) each 25 lb bag. If they were really intent on covering cost, bags would be weighed and charged per lb. right?

    Ron’s comments are right on. I recall actually with fondness how on People Express you would pay for each item. But there, I think the cost of a “snack pack” was less than $1., not $6.00!

    Bottom line. Ring up the fees close to actual cost so that passengers don’t feel chewed to death by extra costs. It should feel more like a “tip” than a bill. Something you really feel the airline has earned.

  • Joseph Goss

    FYI .. VX has joined the other airlines. This is from yesterday’s SFO Business Times: “… Virgin America Inc. will begin charging $15 to check a single bag, joining other airlines that are turning to similar fees to generate cash as the recession drags down travel demand. …”

  • Shashank Nigam

    @Joseph: Very sad indeed.

  • Colt Cooper

    Like it or not, these fees are here to stay – especially with ultra low cost carriers. Some of these are practically printing money now that gas is cheap, but wouldn’t dream of letting AR fly out the window. The big carriers are just copying what the ULCC’s have innovated on.

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