Most people believe that airlines make their money mainly from selling flight tickets, and this is justified by the fact that this is the first fee they see and have to pay in order to travel. However, while many airlines actually make good money from their ticket sales, there are other areas of their business that provide a great part of an airline’s revenue.
Moreover, with the advent of low-cost carriers, the business models have been changing, and these low-cost carriers have found a way of competing with super low ticket prices by getting revenue from what is called ancillary revenues.
Before we get into more details let’s see what an airline ancillary revenue represents and why is it important for any organization to compete and succeed in the airline industry.
What is an airline ancillary revenue?
Ancillary revenues represent the income generated from other business activities aside from passenger transportation from the point of origin to their destination.
Air travel is primarily based on seat placements for flights within the aviation industry. However, airlines have learned that they can generate more revenue by offering add-ons to improve the travel experience.
An ancillary revenue report from CarTrawler and airline ancillary strategy firm IdeaWorksCompany showed that airlines earned an average of $27.60 in ancillary revenue per passenger in 2021, which added to total ancillary revenue of about $65.8 billion globally through that same period.
With the pandemic having hit the airline industry hard, making demand go lower, the most profitable airlines such as Delta Air Lines and Southwest Airlines are moving into pricing strategies that allow them to take advantage of these ancillary revenue streams.
As Aileen McCormack, Chief Commercial Officer at CarTrawler said in 2020, “Covid-19’s impact on the travel industry cannot be understated, but ancillary revenue has been a much-needed silver lining during an unprecedented year. Even though the average fare has dropped steadily over the past decade, we have seen significant growth in ancillary revenue per passenger – a figure that has grown by over 200% since 2010 and whose trajectory has been unaffected by the pandemic. This shows that airline customers’ appreciation of a true end-to-end travel experience is here to stay, and gives us a solid foundation on which we can recover and thrive again in 2021 and beyond.”
Let’s now see where the airlines can find ancillary revenue.
What are the sources of airline ancillary revenue?
Ancillary revenue can come from a series of sources that will represent an improvement to the passenger’s travel experience. Here we will mention only a few which we consider are the most popular ones.
Extra leg room seating
This is a popular option when it comes to ancillary revenue champs such as Ryanair and Wizz Air. Low-cost carriers have airplanes that fit a significant number of seats but leave limited space to move and sit. Therefore, they have selected areas with more space which they use to sell seat selection on a per passenger basis to increase ancillary revenue.
This became especially valuable after the pandemic started since travelers are more aware of the importance of social distancing.
An important part of ancillary sales in recent years has been onboard sales. In the past, and even now some traditional airlines offer products and services such as food, entertainment, and other comfort alternatives included in the ticket fare.
However, it has become a popular practice to offer those product bundles and services on board where they are charged with an increased price to leverage the urgency and desire of the passenger to improve the travel experience.
Ancillary sales also include baggage fees. Traditionally, these fees were charged when the passenger was carrying excess baggage. However, this is a declining trend since airlines’ revenue management has changed the strategy, especially when it comes to Wizz Air and other carriers that offer very low ticket prices.
A common practice now is that tickets with the lowest prices only include carry-on luggage, so to carry more bags, the passengers need to pay an extra fee. The result is two benefits for the airline, increased passenger traffic from the lowest ticket fares and increased ancillary revenue from the luggage fees.
While car rentals suffered a significant drop due to the pandemic limiting mobility, airline executives can really take advantage of this aspect. Car rental organizations need to get more exposure to compete, so becoming partners with US-based airlines and other carriers can be the best way to do it.
From these partnerships, airlines can add a car rental to their list of ancillary products, thus increasing their total revenues.
The list of a la carte services and products airlines can offer also includes travel insurance. This is not only an improvement for the travel experience, but it is also mandatory to enter some destinations. Therefore, insurance for travelers can be a crucial source of extra revenue for airlines.
Why do airlines need ancillaries?
Every organization within the airline industry is always aiming to increase its revenue streams by simplifying the purchasing of goods and services at various stages during the trip. To be successful, aside from increasing partners’ networks, they should also provide more relevant additional services to travelers. And ancillary revenue is what makes it possible.
According to Aileen McCormack, Chief Commercial Officer at CarTrawler “Four airlines also broke through the 50% threshold, which placed ancillary revenue as the predominant revenue source. This has been an elusive objective for top-performing low-cost carriers since the ancillary revenue revolution began.”
In other words, without ancillary revenue, airlines may not survive.
How do airlines increase ancillary revenue?
The main idea is to be able to identify where the ancillary product should be offered within the traveling experience. To do so, airlines are starting to widen the tools to learn more about the behavior of their passengers, as well as the trends passengers are taking when it comes to purchasing tickets and add-ons. Among the most popular tools in the list, we can mention:
Expanding the partners’ network but with a focus on the top-selling destinations.
Improving the user experience (UX) and user interface (UI) for online sales.
Frequent flyer programs are a great boost for airline ancillary revenues
One way airlines have to try to differentiate themselves from the rest is by offering special frequent flyer programs. Moreover, this provides the possibility of securing ancillary revenues.
In the United States, most airlines offered their programs in partnerships with credit card programs in a co-branded way. The largest category of airlines in the country, including American Airlines, was able to generate revenue of $19.5 billion from their frequent flyer programs in 2019, or an average of $25.71 per passenger. But the top performer was Qantas with $40.48 generated on a per-member basis.
Conclusions on ancillary revenues
It is clear that ancillary revenues are vital for any airline trying to see annual increases in their total revenue. Flight tickets are not enough to be profitable, and passengers are eager for more opportunities to customize their travel experience.
We are grateful you have come to this point, and now is a good time for you to take the next step to unlock the full potential of ancillary revenue for your airline. We invite you to see and enroll in Airline Ancillary Revenue – Pricing for Profitability, a course that will provide you with a combination of industry revenue management (RM) and pricing best practices, tailored specifically for your bespoke requirements.
As always, feel free to contact us with any questions. We’ll be glad to help you clarify all your doubts.
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A mechanical engineer and aviation enthusiast dedicated to share some knowledge by creating top-notch content, especially in engineering and aviation topics.
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