Ancillary products and services are already an established part of the seat-vending mix for most airlines, but an exciting trend is emerging that points to increasing gains to be had by those willing to embrace the full potential of e-commerce methodology and detach themselves from the siloed thinking of the past.
Partitioned thinking will continue to be part of the airline business as long as there are security and mission-critical requirements. However, this contrasts starkly with the needs of ancillary sales that benefit from engaging all possible resources in a holistic way. There is a case to be addressed for these ancillaries to become an entity in their own right. Rather than treating them as an “also-ran”, airlines may benefit from evolving ancillaries as an enterprise separate to and potentially equally important enterprise as the ticket-vending process.
IdeaWorksCompany and CarTrawler estimate that airlines reaped $67.4 billion of income from ancillaries in 2016, which equates to 9.1% of global airline revenue. This is not to be dismissed, particularly when you take account of the almost 200% growth this represents since 2010. Using IATA’s estimate of almost 3.8 billion passengers in 2016, the total ancillary spend corresponds to $17.86 per passenger.
It is not impossible that one day the income from ancillaries will account for a much greater slice of the revenue pie. Some companies are clearly thinking this way, Ryanair for one. Chief executive Michael O’Leary’s ambition, widely reported in the press in November 2016, is to offer seats at zero fares, paid for by ancillary income.
A global study by travel technology provider Sabre in October 2016, based on a pre-defined basket of extras such as seats, bags and food, revealed that passengers would actually be willing to spend up to $99 to personalise their experience.
Unlocking this rich seam demands a deeper understanding of your customers, a robust personalisation strategy, and an omni-channel approach that connects with passengers across all the retail touch points, which is no doubt easier to say than to implement.
Sabre’s vice-president EMEA, Dino Gelmetti, says personalisation and intelligent, data-driven systems will be key to understanding the traits and habits of each individual customer. “Currently airlines use just 12% of the data they store on their passengers. By harnessing the full extent of the data they store, they’ll be able to personalise their offerings to a specific individual,” he says.
“A Sabre study determined that the extra income generated for airlines by using technology to create a personalised, consistent and omni-stage passenger experience would be more than $163 million during the first five years for a mid-size carrier with an average percentage of international traffic; that’s a 90% yield.”
Aileen O’Mahony, chief commercial officer at the B2B travel technology platform CarTrawler, points out: “Amazon has proven to great effect the positive impact that data science has on its business, with an estimated one-third of total sales now coming via their recommendation algorithm.”
The other side to this coin is that consumers’ expectations about the ancillary sales experience have been shaped by the digital economy trendsetters. We expect immediate search results, rich user experiences and a super-fast check-out process. By contrast, airline purchase processes serving up ancillary offers as obstacles before check-out are sub-optimal and annoying.
Seth Cassel, president of EveryMundo, which helps airlines drive their direct channel growth, notes: “If there is an intention of growing market share you need to really be best in class; and the thing is, online travel agents [OTAs] and meta-search engines, the global ones, do provide far smoother experiences and far less obtrusive ancillary revenue sales.”
Cassel says: “They also have far more confidence in their ability to up-sell and cross-sell and drive ancillary sales post-purchase, because they have those communications tools in place.” This brings us back neatly to the requirement for access to data. “It requires the ability to track this information, to manage that data and act upon it with relative ease, or even better, with some level of automation,” he says.
Amazon is as good an example as any of a successful business case, but, as Cassel points out, “translating [Amazon’s] capabilities to an airline and then even taking that a step further and translating their capabilities into an executable, realisable strategy for an airline is not trivial”.
One airline not daunted by the challenge is Ryanair. The third year of the European low-cost carrier’s “Always Getting Better” programme is all about digital acceleration and innovation. Initiatives include the ability to book travel extras such as seat upgrades, parking and transfers and use “one flick” payments in the mobile app. The airline is also improving its purchase process with fare bundles and simplified baggage options, which have been reduced from 108 to six.
Ryanair is beefing up opportunities for personalised merchandising – and thereby increasing ancillary revenue – by encouraging customers to build profiles within their “My Ryanair” accounts. Robin Kiely, head of communications at Ryanair, says: “Over 17 million Ryanair customers have already joined My Ryanair, with growth expected to 25 million by the end of 2017. Membership across Europe has doubled over the past 12 months.”
This digital evolution has seen the low-cost carrier partner with other travel providers to offer car hire, accommodation and most recently, in December 2016, a package holiday service, Ryanair Holidays. “Following the launch of Ryanair Car Hire and Ryanair Rooms, even more customers are coming to Ryanair for services and products other than flights, and this is another significant step on our journey to becoming the Amazon of air travel,” Kiely says.
“The biggest challenge is changing customers’ ingrained behaviour of going straight to hotel or car-hire websites without even thinking about Ryanair,” he adds. “Our technology is getting better every day and we’ve got better products and promotions than ever before, so we are making excellent progress.”
That progress is revealed in the first-half report issued in January, in which Ryanair increased its medium-term guidance for ancillary sales from 20% to 30% of revenues over the next four years to March 2020, “as a direct result of this increased customer demand for travel-related services”.
Ryanair’s ongoing transformation is a good pointer to the mindset required by any airline seeking to move ancillary retailing into the revenue mainstream. “Potentially the airlines that have the most opportunity in the future are the ones that shift their thinking, and actions, towards themselves being in the travel business, not just in the air transportation business,” says Duncan Jackson, president of Flightpath 3D. “The ones that recognise that they are truly in the travel business and focus on the passenger’s end-to-end journey, I think those airlines have the greatest upside in this kind of new connected world.”
That connected world, where consumers are inseparable from their mobile devices, already provides opportunities for the travel-company-minded airline to extend its selling window and reinforce its brand. Robert Booth, head of product marketing for airline merchandising solutions at Amadeus, highlights the partnership between Qantas and insurer Nib, which resulted in Qantas Assure, a combination of health and travel insurance offers that rewards customers with Qantas loyalty points, plus a wellness mobile app that also rewards users with loyalty points.
Emerging technologies have brought us to the impending reality of digital engagement with customers throughout their flight, providing information and services about their destination and onward journey. Consumers are also becoming much more comfortable leaving some decisions to the last minute. “I think the mindset of the passenger for certain services is going to be very casual and transactional,” says Flightpath 3D’s Jackson. “I think people are becoming way more casual about car hire now with the rise of on-demand cars like Uber... I see a lot of younger millennials expecting to [find] last-minute hotel deals and last-minute accommodation.”
His company is working with more than 20 airlines to provide “geotainment” information services – and ancillary revenue opportunities – via a 3D moving map portal within the airline in-flight entertainment system. The portal, which can work in both online and offline environments, allows passengers to explore attractions near their destination and plan the next stages of their journey.
“If we provide location-based content and data we can solve core passenger challenges like, ‘I know when we land, but when will I get to my hotel? What’s the fastest or cheapest way to get to my office? What should we see in the city if we have time? Where should we eat tonight?’” says Jackson.
To build a robust ancillary business, any offers and customer engagement must be facilitated wherever and whenever suits the passenger, including allowing them to seamlessly transition their interactions with you across any device or channel. “Travellers are looking for transparency, consistency and choice, so it’s important for airlines to portray a consistent offer to their travellers across all channels,” says Amadeus’s Booth. “We’re seeing an increase in the use of omni-channel marketing.”
Amadeus’s Anytime Merchandising solution was launched with its first customer, Avianca, last year. It provides the South American mainline carrier with advanced segmentation capabilities for many types of ancillary services, plus the ability to facilitate more relevant offers to passengers throughout the trip cycle. Avianca’s executive vice-president and chief revenue officer, Estuardo Ortiz, notes that merchandising is a huge part of the equation when it comes to delivering a quality experience to travellers. “We need to take our digital capabilities to new levels, across all channels and in all markets, and in so doing engage with our customers during every stage of their journey based on context, relevance and their unique profile.”
An omni-channel approach will also generate greater opportunities to create value, says Ornagh Hoban, chief marketing officer at digital commerce platform Datalex. “The airline retail model tends towards a commercial limitation based on channel of acquisition. As the airline develops [a] unified offer, order and service management [process], we foresee that the commercial proposition will pivot to focus on ‘customer’ value creation rather than ‘channel’ segmentation,” she says.
For Hoban, a unified retail platform capability, common across all channels, will open up a digital marketplace to airlines, and she forecasts that predictive technologies will enable true dynamic pricing and revenue optimisation for all products and services.
“Cloud and data technologies will move the airline from managing online and offline data systems separately and switch to single-view data management across channels, gaining sales, inventory and customer visibility for better retail strategies,” she says.
This approach to ancillary revenue will demand a much closer alignment between business departments in the airline, which could pose a problem. Booth says: “One challenge we’ve noticed is that teams in marketing, IT and operations are sometimes siloed, and this prevents airlines from defining a strategy that cuts across the business, and this can impact the way airlines take advantage of the technology we offer.”
The winners in the new ancillary services reality will be those airlines that create brand confidence by inspiring a belief in their business integrity. On this basis of trust, customers will be happy to spend with them. A key element in designing ancillary processes will be to take account of forthcoming legislation, such as the proposed Europe Union Data Protection draft, which makes very specific requirements on how customer data can be collected and stored. Furthermore, once real-time in-flight connectivity is commonplace, airlines will have to provide compelling reasons for their passengers to shop with them rather than going to the e-commerce giants.
Any smart airline retail strategy needs to take account of the lifetime value of the customer, and ancillaries are no different. For EveryMundo’s Cassel, the start to a successful ancillary strategy is customer acquisition. “No amount of coming up with that new additional thing you can sell beyond seats and bags and lounge access and boarding early et cetera will replace the value of direct customer acquisition, which ultimately means customer lifetime value,” he says.
If the goal of airlines is to drive ancillaries, there is a need to focus on “having a deeper relationship with every passenger and not simply renting passengers from OTAs”, says Cassel. While some airlines may focus primarily on their most valuable customers, the issue is not clear-cut. “There’s a lot of channels out there and a lot of tools that people use to make their purchase and do their research. If you are not actively competing for that relationship, then you are facilitating a commoditised world... It becomes entirely about price,” he says.
It is also likely that as ancillary strategies evolve, airlines will mature their thinking about customer lifetime value. “Understanding the customer’s lifetime value and other customer metrics enables airlines to make tactical offers at the right time to secure long-term revenue growth and sustainability,” says Datalex’s Hoban. “We believe airlines will transform their approach from a focus on a channel value/cost to segment based on consumer type. The airline will be able to develop new metrics such as acquisition cost, retention cost, expected margin and lifetime value based on customer type.”
With the its new Bombardier CSeries aircraft now in service, Air Baltic is physically embodying a slick tech-company experience and incorporating the aircraft into its ancillary revenue drive by promoting and up-selling flights as well as the wider middle seats.
Innovating a travel approach to ancillary sales is familiar territory for the European LCC, which has been offering a selection of services for the journey – even flowers to give as a gift – for some time. More recently, says vice-president of corporation communications Janis Vanags, Air Baltic has added a practical edge to the mix, as it was one of the first to introduce an enhanced, responsive website. “You no longer need an app from us to book a flight, you just need a mobile phone,” Vanags says. It is also engaging across all channels, including social media, where it has introduced chat-bot technology to have conversations (supervised by team members) with customers, leading to additional sales.
After being one of the first airlines to offer added services, Air Baltic has streamlined its shopping experience. “It’s true we were throwing a lot of products at customers 10 or so years ago,” Vanags says. “We have made checkout much simpler these days. Out approach is to limit the number of steps you have to take to buy that travel service and offer a quick checkout.”
Later, segmentation and customer data is used for post-sale to make targeted offers to customers. “This is the beauty of digitalisation. There is no need to force checking-in a bag at the point of purchase,” Vanags says.
Rather like a tech start-up, Air Baltic is also not afraid to take an experimental approach to products and services. Vanags says: “Another thing we are doing now is playing with dynamic pricing for ancillary products. Instead of charging a flat fee for your check-in bag, we have a bit of dynamic element – we say the flight you booked is short, an early bag will cost you less than for a long flight.”
He adds: “Air Baltic’s continued effort to simplify customer experience has boosted ancillary sales in 2016 up by 20% year-on-year for selected products, such as advance seat reservation, thus helping to beat its own ambitious ancillary revenue plans.”
Vanags reports that smarter digital services have strengthened Air Baltic’s internet booking engine and improved its revenue share compared with other distribution channels against a backdrop of growing operations and a 10% increase in passengers numbers compared with a year earlier.
FlightGlobal is organising the Technology and Innovation in Airline Distribution conference, which takes place in Bangkok on 17-18 May 2017, and where airlines will be sharing insight on how they have adapted to digital distribution. Get involved in the conversation, join us here.