There seems to be no end to the ancillary revenue boom. Early adopters keep expanding their ancillary offerings. Carriers that were slow to join the trend are trying to catch up and looking to innovate themselves. Even those that remain reluctant, fearing negative passenger reaction and brand dilution, are carefully adding products that can provide new revenue sources without affecting their overall strategy.
The result is ancillary revenues across the industry continue to rise rapidly. In 2009 a leading group of 46 airlines generated €11 billion ($14.4 billion) in ancillary revenues, a 43% increase compared with the €7.7 billion generated by the same group in 2008, according to a survey by US consulting firm IdeaWorks. As part of a new study published by IdeaWorks and Amadeus, a larger group of 150 airlines generated an estimated €18.4 billion in ancillary revenues in 2010.
IdeaWorks and other leading consultants expect ancillary revenues to increase further in 2011. But while some airlines will report large increases as they roll out some of the easy wins, some of the pioneers could start to see ancillary revenue growth slow. Generally there is no shortage of ideas for potential new ancillary revenues streams. The issue is having the right technology.
"The technology does limit us at times," says Virgin America vice-president marketing Porter Gale. "Some of our wishes are beyond where the technology actually is."
Gale says Virgin America's biggest current technological barrier to growing ancillaries is the inability to personalise its offering to passengers, especially on board. Virgin America has been a pioneer in introducing on-board ancillaries, using its innovative in-flight entertainment system Red to offer a full range of products from food and movies to iPods.
The system is installed at every seat across the carrier's fleet and is upgraded twice a year, allowing Virgin America to progressively offer new ancillary streams. But even with the latest upgrades Gale acknowledges that "it is hard to individualise the purchase options or the offering to the guest. We wish we had an understanding of who that individual was.
"As we further develop our software I'm sure we'll be more advanced in being able to understand our guests," she says. "Software development and changing systems is a time-consuming and expensive process and we need to prioritise what want to do first."
Amadeus executive vice-president commercial Philippe Chereque agrees with Gale: the most opportunities for new ancillary revenue streams are onboard. "We don't have a captive audience, we have a trapped audience. It's a marketing dream," he told the Amadeus Horizons conference in October.
Chereque in particular sees opportunities offering premium drinks and meals in economy class. He points to All Nippon Airways offering beer on tap for ¥1,000 ($12) per glass and KLM offering premium meals for €10 in the economy class cabin. Qantas general manager of direct sales John Lonergan adds: "You have audiences, in particular with premium classes, that it's almost impossible for advertisers to reach in other ways." Lonergan believes "the biggest opportunities" for new ancillary streams will come through IFE systems, including gambling - possibly for frequent flier points rather than cash.
Air Canada director of marketing innovations Guylaine Lavoie says the carrier is also looking at opportunities to start using its IFE system to generate ancillary revenues. But Lavoie believes the biggest technological limitation facing ancillaries is the inability to offer products to passengers flying on tickets sold by partner carriers. "Within our own world we can do a lot, but what gets more complicated is when we need to exchange information with other carriers," Lavoie says.
New Industry Standards
She says there is currently no solution "to take these technologies across to other carriers". But Lavoie expects this to change over the next few years and says Air Canada is looking at using IATA's Electronic Miscellaneous Document to facilitate the sale of its ancillary products at other airlines, including its Star Alliance partners. She says Star is also starting to work on standardising its offering.
Lonergan adds: "Industry standards are important because there's only so much you can make off your own flights. [But] there's a lot of work to be done to make sure the standards work."
Qantas was able to sell its ancillary products only through its website until December, when it opened them up to travel agents for the first time using an EMD solution developed by Amadeus. Qantas oneworld partner Finnair in June became the first carrier to implement an EMD solution, which is now only available from Amadeus, although all GDS providers will eventually also offer solutions as part of an IATA initiative to have all agents using EMD by the end of 2013.
Pia Viljaniemi, Finnair's director of direct channels, commercial applications and GDS distribution, says oneworld members discussed adopting EMD across the alliance at a meeting in early October. She expects in about two years all its members will have implemented EMD solutions, facilitating ancillary revenue transactions across the members.
Air France is another early adopter of EMD, implementing Amadeus's EMD solution in December. Air France vice-president Nathalie Simmenauer says that, unlike Finnair, Air France opted to go for the full paperless EMD product. KLM will also implement the same EMD solution in 2011. "It will totally migrate to no paper. It will be quite advanced for the industry," Simmenauer says.
While the entire industry is moving towards EMD, Simmenauer says it will "take time" for all SkyTeam carriers to "fully scope" an EMD solution and an ancillary standard. She says it is important to work on EMD with all carriers and not just alliance partners because eventually the new standard will apply to all interline partnerships.
Despite the recent achievements with EMD, standardising ancillaries and marrying up IT systems remains a big challenge, according to American Express Business Travel vice-president global distribution solutions Jason Wynn. He says that while corporate travel agents have started to sell ancillaries there is still a lot of "complexity post-booking".
In particular there is confusion when a booking needs to be changed or cancelled as it is not always clear how to process a refund for an ancillary service. "The EMD and other mechanisms are allowing these things to be processed. But there's still a lot that needs to be figured out," he says.
It is early days as the industry's first EMD solution went live just over six months ago. And for the first five months the only airline initially with the product, Finnair, used it only to collect ancillaries at its ticket offices. In November it rolled out the technology to travel agents in Finland and agents from the rest of the world will follow.
Viljaniemi says that initially agents that previously were not able to sell any of Finnair's ancillary products will be able to purchase ancillaries such as premium meals and extra legroom seats. She expects agents will later be able to also offer ancillary products for frequent flier miles, an option Finnair already offers on its website. With EMD and other new IT solutions now available to facilitate ancillaries, Viljaniemi no longer sees technology as a major limitation. "Now the technology is ready. What is more challenging is to find a good partner," she says.
Corsairfly marketing and network director Sylvain Bosc also sees technology starting to enable rather than limit new ancillary revenue opportunities. The French leisure carrier in June became the pilot customer for a new ancillary services product from Amadeus and plans to implement EMD in June 2011.
Bosc says the Amadeus Ancillary Services product has enabled travel agents to begin selling excess baggage on Corsairfly flights to and from the French Caribbean and Reunion Island. Previously excess baggage fees could only be paid at the airport, which Bosc says created a bottleneck because the island airports served by Corsairfly are small and struggle to process the 582 passengers the carrier squeezes on to its Boeing 747-400s. "We really need the agents to facilitate the pre-airport process," Bosc says. Corsairfly is still unable to sell excess baggage on its website. But Bosc says this can be introduced after the carrier implements EMD.
TAM's front office systems manager Eloi Prado de Assis also says the technology gap for ancillary revenues "is closing very quickly" and "I'm now seeing technology providers go ahead of what we want". The biggest issue for the Brazilian carrier is that it simply takes time to implement all the ancillary products in its roadmap.
"The list is huge," Assis says. "Mostly it's just catching up with rest of industry, but we also want to leapfrog the industry. The aim is to introduce all the ancillaries globally - not just in the domestic market."
TAM now has a limited ancillary portfolio, focusing mainly on cross-selling opportunities such as hotels and cars. Assis says the airline also offers extra legroom seats, but these are only available for sale at the airport. He says this will change as TAM introduces new IT solutions that will allow the sale of a wide range of ancillaries across all touch points - the website, call centre and kiosk. "Moving towards 2011 we'll move to an ancillary solution across all channels," Assis says.
Cathay Pacific general manager passenger services systems Richard Reed also sees technology catching up with airline wishlists when it comes to ancillaries and other areas such as automating disruption and compensation handling. As Cathay goes through the process over the next two years of replacing its legacy IT system, there will be opportunities to improve its now limited ancillary offering. For example, Cathay's extra legroom product, which is only now available through the call centre, will become available through other channels. But Cathay does not have big plans to offer more à la carte options and will focus more on third-party cross-sells. "We've gone for horizontal ancillary revenues rather than vertical," Reed says.
Cathay, like other premium-focused Asian legacy carriers such as Singapore Airlines, remains cautious with its ancillary strategy. Reed says Cathay will not even consider selling lounge passes because it sees its ground product as integral to its brand.
Keeping The Process Clear
"Limitations for ancillary revenue can be both technology and also wanting to keep your process as efficient as possible," adds Virgin America's Gale. " For example, on our website we will be very specific in what types of offers we put in the booking path because we don't want to create a situation of book-aways. It's the same thing for check-in. We don't want to put in too many ancillary options [at the kiosk] because we don't want to slow down the queue and create a bad guest experience. There is a balance between guest experience and revenue driving."
Qantas has a similar strategy, focusing on selling all its ancillaries at the time of booking rather than at check-in. "We want all the selling done before you get to the airport," Lonergan says. He says Qantas is careful not to add ancillaries that could disrupt its overall customer service strategy, stressing that "Qantas has not trashed its brand".
Lufthansa head of e-commerce Marcus Casey agrees airlines need to have their brand in mind as new ancillaries are considered. He expects ancillaries will become harmonised at the alliance level but airlines will still be able to retain their own independence and carriers such as Lufthansa will not be forced by their partners to adopt à la carte pricing.
"I don't think we'll be forced to do it because US carriers do it," Casey says.
"The challenge for us is to implement things faster and be more innovative but not give up quality. Lufthansa is committed to being a full-service carrier. We won't strip products out in order to sell them."
Read our article on the new ancillary revenue study published by IdeaWorks and Amadeus