Marketing special: The perfect package

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How can airlines package car hire, hotels and insurance on their websites to boost their ancillary revenues?

It is rare in business and sounds almost too good to be true, but every so often the opportunity to earn money just by being in the right place at the right time comes along. Airline websites offer just that chance.

As the Airline Business/SITA 2006 Airline IT Trends survey found, web bookings are booming, with an average of nearly 30% of all sales made online. But why stop at selling just seats? Most carriers are waking up to the fact that the web consumer likes buying car hire, hotels, insurance and other products at the same time.

It seems the most effective way to capture ancillary sales is to make the offer during the seat-booking process. This transaction is much more than the customer simply clicking on an icon on the website after buying his seat. The product must be brought into the flight-booking process. The industry terms this dynamic packaging. The actual definition of dynamic packaging is vague and covers a variety of sales tactics, but the aim is essentially the same: to grab more revenue.

   
"For us it was important to give the customer all the offers on our own label" Radoslaw Dutkowski, head of e-commerce, LOT

"The economics are compelling," says Ron Peri, chief executive of software provider Radixx International. "Airlines wind up selling something where the incremental cost is almost nothing." His company began building systems to package holidays for ski resorts nearly a decade ago and has delivered elements of dynamic packaging to USA3000 and Air Iceland.

Airlines are switching on to forms of online packaging. They are following in the wake of tour operators and the unquestioned experts such as Expedia, Lastminute.com or Travelocity where it is their core business. This move could evolve into an important battleground between airlines and the leisure industry as travel habits change.

Tapping the market

"The inclusive tour market is shrinking and the tailor-made market is growing - it is one we are all trying to tap in to," explains Dean Yardley, general manager short-haul revenue management at British Airways. The carrier has been selling car hire and hotels on its site for a while, with customers able to add them to their shopping basket after selecting their flight.

BA is looking to expand to full dynamic packaging, which would allow it to add a very cheap flight element to the package without the customer knowing how much the seat costs. "It is a big opportunity to potentially sell distressed inventory," says Yardley. "In dynamic packaging there is no individual price point for each element."

BA will roll out its solution soon, but is taking the time to get it right. "We are still trying to work out how it will work and what it will look like," says Yardley. "We've got to learn how users navigate and purchase this way and we've got to market it well. There is also a need to work on the revenue management picture across the whole package, to optimise the dynamic package margin as well as we do the flight margin."

The ability to revenue manage the price of a non-flight element of the package depending on demand is critical, believes Bobby Healy, chief technology officer of Irish firm CarTrawler. It has developed a system enabling carriers to offer car hire within the booking process. The first taker is Poland's LOT, which rolls it out from late March. LOT pays no transaction fee to CarTrawler, with each firm taking a profit slice from the car rental price.

   
"Airlines are still trying to determine what makes sense to them" John Edmondson, director product management, Navitaire
The car offer is presented to the customer after flight selection. "For us it was very important to give the customer all the offers on our own label, we don't want them to go to other web pages," says Radoslaw Dutkowski, head of e-commerce at LOT. The carrier will also offer insurance in this way, but is more cautious on adding hotels to the mix. "Hotels are not the right thing to offer in this way, it needs more shopping around," he says.

Although untested, which makes accurate estimates of take-up difficult, Radoslaw believes two-thirds of travellers could take its insurance product while the target is for 5% of customers to choose it for car hire.

It is accepted that the take-up is far greater when a product is integrated in the booking stream. Ryanair found that when it brought insurance into its sales process its penetration rose fivefold from 2% to 10%, says Santina Doherty, head of marketing and ancillary revenue at the Irish carrier. "We would expect to see an uplift for any other service if we migrate it," she adds.

The take-up for dynamic packaging is generally 10 times that of click-through options, says John Edmondson, director product management at Navitaire, the popular supplier of passenger reservations systems to low-cost carriers.

   
"We've got to market it well" Dean Yardley, British Airways
Later this year Ryanair will most likely include car hire in its booking stream and is studying whether hotels will be added. The carrier is taking a cautious view of what is still a young art. "We would be very quick to switch it off if it started to compromise our flight bookings," says Doherty.

Since September, when it started offering car hire in its transaction flow, Aer Lingus has seen a 54% rise in bookings, says Enda Corneille, commercial director. It is working with Irish software outfit Datalex to bring in dynamic packaging. It ruled out building its own system or buying an off-the-shelf "white label" system from the likes of Expedia or Lastminute.com.

The key to success appears to lie in obtaining a technical solution that enables a carrier to retain control over the customer booking at a reasonable price. Some sound dire warnings of huge bills to develop dynamic packaging systems. "It is potentially a black hole of IT costs," says one airline executive.

"Most of the issues have been on the technology side. The solutions have not been broadly dispersed and have been expensive," says Ron Peri of Radixx. That is changing. "Airlines that waited are a bit more sensible," says Alan Lias, head of loyalty and business development at Virgin Atlantic. "The availability of off-the-shelf packages is coming."

Business transformation

   
"Aer Lingus has seen a 54% rise in bookings since offering packaged car hire" Enda Corneille, Aer Lingus
But not all carriers are convinced dynamic packaging will transform their business. "Airlines are still trying to determine what makes sense to them," says Edmondson of Navitaire.

For example, germanwings, which makes 94% of its bookings online, prefers the click-through option. "Our product is the flight," says the carrier. "Customers are smart enough to do their own package." In addition, under German law, germanwings becomes legally responsible for all elements of the package it sells. Carriers are investigating how to do the legal side right.

This can be offputting for airlines as they take the risk of parts of the package over which they have little control. As one expert says: "Airlines don't want their call centres getting the call from a traveller complaining that their hotel bed isn't the king size one they ordered."

There will be a wide range of dynamic packaging solutions emerging over the coming year or two. According to Cormac Whelan, chief executive of Datalex, whose firm is also developing dynamic packaging systems for Scandinavian Airlines and South African Airways: "It all comes down to how much effort and risk an airline wants to put in."

Find out why Kingfisher Airlines founder Vijay Mallya believes India is not the place for low-cost air travel. Read our blogs: www.flightglobal.com/ABblogs/Asia