2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 1

Transcription

1 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 1

2 Table of Contents Forward by Philippe Chérèque, EVP Commercial Amadeus... 6 Welcome Aboard the Third Ancillary Revenue Guide... 8 Selections from a Global a la Carte Menu Long Live the Revolution Something New or Just Another Fee Managing Ancillary Revenue Annual Pre-Paid Plans and Passenger Loyalty Frequent Flier Programs Finally Participate Food is the Next Frontier Test, Change, and Measure The Revolution Continues Discovering New Worlds of Onboard Merchandising The Corps of Discovery Old World Catering Traditions The State of Catering Today Exploring Bold New Worlds Building the Restaurant Check Boosting Revenue by Breaking Routines Selling by Making it Easy to Buy Menus, M&Ms, and Offering More Chart Your Own Course Worldwide Financial Statistics from Leading Airlines Airlines Posting Ancillary Revenue Results Europe and Russia The Americas Asia and the South Pacific Middle East and Africa Currency Exchange Rates Used for the Worldwide Statistics Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 2

3 AirAsia X Stretches a la Carte to Fit the Globe Low Cost Long-Haul Becomes a Success London to Kuala Lumpur and Beyond AirAsia X is an a la Carte Hybrid Going Upscale in a Big Way AirAsia X Defines Long-Haul a la Carte More a la Carte All Over the World How Ryanair is Trying to Change the World The Psychology of Michael O Leary Love the Fare, Hate the Airline The Ryanair Way of Passenger Behavior Sell, Sell, Sell Lowest Price Wins Stories from the Field Peter Gerstle easyjet Azran Osman-Rani AirAsia X Damien Paries Corsairfly Michel Teychené Air France/KLM Pia Viljaniemi Finnair The Amadeus Guide to Ancillary Revenue by IdeaWorks Published by the IdeaWorks Company Shorewood, Wisconsin, USA IdeaWorksCompany.com October Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 3

4 About Jay Sorensen, Writer of the Report Jay Sorensen with sons Anton and Aleksei in Mount Rainier National Park in Washington. Jay Sorensen s research and reports have made him a leading authority on frequent flier program development and the ancillary revenue movement. For 2010 he is a keynote speaker at Mega Event 2010 (FFP/ARAC) the annual worldwide conference for ancillary revenue and frequent flier programs. This event, developed by Airline Information, has been a resounding success for many years. More than 300 executives representing 75 airlines from all over the world are expected to attend the October 2010 event in Montreal. In addition, he will also speak on the topic of Moving to Merchandise Methods in the Cabin at the global Amadeus airline conference Horizons which will be held in San Francisco October The 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks is the third edition of this guide. Mr. Sorensen is a veteran management professional with 26 years experience in product, partnership, and marketing development. As president of the IdeaWorks consulting firm, he has enhanced the generation of airline revenue, started loyalty programs and co-branded credit cards, developed products in the service sector, and helped start airlines and other travel companies. His career includes 13 years at Midwest Airlines where he was responsible for marketing, sales, customer service, product development, operations, planning, financial analysis and budgeting. His favorite activities are hiking, exploring and camping in US national parks with his family. About Eric Lucas, Editor of the Report Eric Lucas is an international travel and business writer and editor whose work appears in the Los Angeles Times, Michelin travel guides, MSN/Bing Travel, Alaska Airlines Magazine, Westways Magazine and numerous other publications. Founding editor of Midwest Airlines Magazine, he is the author of five books, including the 2009 Michelin British Columbia Green Guide. Eric has followed and written about the travel industry for more than 20 years. He lives in Seattle s Ballard neighborhood, where he grows and sells organic garlic; visit him online at Eric, at his favorite summer retreat, Steens Mountain, Oregon Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 4

5 Disclosure to Readers of this Guide: IdeaWorks makes every effort to ensure the quality of the information in this guide. Before relying on the information, you should obtain any appropriate professional advice relevant to your particular circumstances. IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for, the accuracy, currency or completeness of the information. Terms of Use for this Guide: You may not disseminate any portion of the guide, to parties other than the client company, without the prior consent of IdeaWorks. This includes distribution through electronic means, including mail lists or electronic bulletin boards. Except as expressly permitted in this Terms of Use, the guide may not be reproduced, transmitted, or distributed without permission. IdeaWorks provides the guide and services as is and without any warranty, or condition, express, implied or statutory. IdeaWorks specifically disclaims any implied warranty of title, merchantability, fitness for a particular purpose, and non-infringement. In no event shall IdeaWorks be liable for lost profits or any special, incidental, or consequential damages arising out of or in connection with the guide (however arising, including negligence). Distribution of this guide is protected by the Economic Espionage Act of 1996 of the United States and the data protection laws of Europe. Boost your revenue IQ with seminars at your headquarters Illuminate and innovate with an on-site learning experience that we call BlueSkyU. Enjoy the convenience and savings of private seminars held at your headquarters with an agenda chosen by you. Create your own agenda from a library of presentations provided by global airline consultant and analyst Jay Sorensen. Featured topics: Ancillary Revenue - A la Carte Pricing - Loyalty Marketing - Industry Trends & Research. It s a convenient, cost-effective, and customized method to educate airline managers on crucial marketing issues. You may choose a 1, 2 or 3 day format and can also include time for one-on-one dialogue. The presentation style is designed to encourage debate and discussion in a confidential environment. You can fill the room with general staff or limit attendance to senior leaders. Contact Jay at IdeaWorksCompany.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 5

6 Forward by Philippe Chérèque, EVP Commercial Amadeus 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 6

7 About Amadeus Amadeus is the chosen technology partner for providers, sellers, and buyers of travel. The company provides distribution, IT and point-of-sale solutions to help its customers adapt, grow and succeed in the fast changing travel industry. Customer groups include travel providers (airlines, hotels, car rental companies, railway companies, ferry lines, cruise lines, insurance companies and tour operators), travel sellers (travel agencies) and travel buyers (corporations and travellers). Solutions are grouped in four solution categories Distribution & Content, Sales & e-commerce, Business Management and Services & Consulting. Amadeus has central sites in Madrid (corporate headquarters & marketing), Nice (development) and Erding (Operations data processing centre) and regional offices in Miami, Buenos Aires and Bangkok. At market level, Amadeus maintains customer operations through 71 local Amadeus Commercial Organizations covering 219 markets. The company is majority owned by WAM Acquisition, whose shareholders are BC Partners, Cinven, Air France, Iberia and Lufthansa. Amadeus employs more 8,900 employees worldwide, representing 123 nationalities. More information about Amadeus is available at: Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 7

8 Welcome Aboard the Third Ancillary Revenue Guide An introduction by Jay Sorensen Something big has happened to the airline industry. Ancillary revenue has become the billion-euro benefit that is too big to ignore. Network airlines worldwide are embracing a la carte fees. And by every measure, the ancillary revenue movement is gaining strength. Reporters no longer inquire whether the fad will last, but want to know which new fee will be levied next. Politicians aren t that interested in stopping the advance of fees, but desperately want to learn how to tax it more effectively. Ancillary revenue at top producing airlines has moved from measurement in millions to billions. Consumers have not marched to airline headquarters to commit revenge on CEOs. Planet Earth has not spun out of control as carriers add fees for virtually every component of the air travel process. Ancillary revenue is becoming a normal and accepted method of doing business. But if this has yet to occur at your airline, rest assured, it will. It s been several years - - imagine that - - since this guide has defined ancillary revenue. It s amazing how durable the original premise remains. The following is an updated attempt to describe what now generates estimated revenue of 18.4 billion worldwide: Revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience. IdeaWorks further defines ancillary revenue using these categories: 1) a la carte features, 2) commission-based products, 3) frequent flier activities, and 4) advertising sold by the airline. To add a bit more clarity to this declaration, IdeaWorks offers these definitions: A la Carte Features: These represent the items on the ancillary revenue menu and consist of the amenities consumers can add to their air travel experience. The list continues to grow and the following are typical activities: 1) onboard sales of food and beverages, 2) checking of baggage and excess baggage, 3) assigned seats or better seats such as exit rows, 4) call center support for reservations, 5) fees charged for purchases made with credit cards, 6) priority check-in and screening, 7) early boarding benefits, 8) onboard entertainment systems, and 9) wireless internet access. Commission-Based Products: Ancillary revenue activities also include the commissions earned by airlines on the sale of hotel accommodations, car rentals and travel insurance. The commission-based category primarily involves the airline s website, but it can include the sale of duty-free and consumer products onboard aircraft Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 8

9 Frequent Flier Programs: The frequent flier category largely consists of the sale of miles or points to program partners such as hotel chains and car rental companies, co-branded credit cards, online malls, retailers, and communication services. Sales of miles or points made directly to program members also qualify. Advertising Sold by the Airline. This is a new category for 2010 and includes any advertising initiative linked to passenger travel. The following are typical activities: 1) revenue generated from the in-flight magazine, 2) advertising messages sold in or on aircraft, loading bridges, gate areas, and airport lounges, and 3) fee-based placement of consumer products and samples. The list is not intended to be exhaustive or complete; that would violate the spirit of creativity. However, caution is advised when considering revenue sources not linked to the passenger travel experience. This includes air cargo, mail revenue, ground handling, and in-flight kitchen operations. Some carriers consider these ancillary revenue, but they are best defined by the category of other revenue. But what matters most is not how ancillary revenue is defined, but how it s obtained. The third edition of this guide offers a wide array of commentary, practical advice, and analysis of ancillary revenue and a la carte activity from all over the world: Selections from a Global a la Carte Menu describes the importance of innovation and how to go beyond merely adding new fees. Pricing is becoming more sophisticated with the addition of pre-paid plans and the application of revenue management. Look for food to be the next frontier - - All Nippon Airways, KLM, and United are all testing pre-order plans. Discovering New Worlds of Onboard Merchandising reveals retail secrets across a wide range of retail specialists from grocery stores to baseball teams. Interviews conducted by IdeaWorks bring knowledge from other service sectors to the art of onboard retailing. Worldwide Financial Statistics from Leading Airlines is a favorite section of many readers. It provides at-a-glance ancillary revenue disclosures from 47 carriers all over the globe. AirAsia X Stretches a la Carte to Fit the Globe takes an intriguing look at how a la carte pricing has been successfully paired with long-haul flying. Look for the ancillary revenue statistics disclosed by the airline exclusively to IdeaWorks. How Ryanair is Trying to Change the World is a fun review of the irascible Michael O Leary and his ancillary revenue profit machine called Ryanair. The task here is huge, as IdeaWorks explores the paradox of Ryanair. How can a company that executes so well be so reviled? And how can a company so reviled be so financially successful? 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 9

10 The final section of Stories from the Field presents interviews from fellow practitioners of the art of ancillary revenue. Whatever your type of carrier - - be it an ancillary revenue champ such as Ryanair, a major network airline such as Qantas, a low cost carrier such as Air Arabia, or a traditional airline such as LAN, there is plenty of tasty content for you in this guide. Some carriers might become better practitioners of ancillary revenue techniques and upgrade to champ status. Being more like Ryanair is not the objective promoted by this guide. Instead, airlines are encouraged to find the revenue balance that works best for customers, investors, and employees. My ancillary revenue mantra calls for new initiatives to follow the lead established by a carrier s brand identity. I encourage you to begin your voyage of discovery by establishing the identity of your carrier s brand. It s difficult and painful work. Sadly, in a world that seeks instant gratification, the building block of defining the brand is often skipped. I have found the following to represent excellent words of advice for any company: Know your brand. Trust your employees. Love your customers. Enjoy reading your copy of the Amadeus Guide to Ancillary Revenue by IdeaWorks. And please don t hesitate to provide feedback on its content and what you would like to see in the 2011 edition. I wish you every ancillary revenue success! October 2010 Shorewood, Wisconsin, USA 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 10

11 Selections from a Global a la Carte Menu Long Live the Revolution Our baby is growing up. The ancillary revenue movement is gradually losing its revolutionary verve by becoming an accepted and necessary activity. Ancillary revenue was recently considered an aberration associated with low cost carriers; it is now a point of pride among senior executives at major airlines all over the world. Evidence of the increased maturing of the process can be found everywhere. Ancillary revenue and a la carte pricing is now referenced in financial reports, investor presentations, and earnings calls. John Tague, United s president, offered his opinion on the importance of ancillary revenue during a recent presentation to investment analysts:... I think that this is the model of the future. I think there is tremendous upside going forward. And I think there are a lot of optional value added opportunities for our customers as well. - UAL Corporation second quarter 2010 Earnings Call. He projected United s checked baggage revenue would zoom to $1 billion from the current level of $400 million per year. That s a big number from a big airline. United s results mirror the numbers posted by major, medium, and small airlines all over the globe. The Worldwide Review of Ancillary Revenue (appearing later in this guide) provides a list of ancillary revenue activity disclosed by 47 airlines for Financial filings made by these airlines reveal ancillary revenue of 11 billion ($13.5 billion) which is a 43 percent increase from However, these disclosures only represent a portion of worldwide activity. IdeaWorks applied trends from the survey to estimate global ancillary revenue for all airlines. This generated a far larger result of 18.4 billion ($22.6 billion) which is approximately 4.8 percent of the airline industry s worldwide operating revenue of 386 billion ($473.6 billion) for Airline Category Worldwide Estimate of Ancillary Revenue As % of Carrier Revenue Total Operating Revenue Euro (US$) Ancillary Revenue Euro (US$) Ancillary Revenue Champs 19.4% 15.8 billion ($19.4 billion) 3.1 billion ($3.8 million) Major US Airlines 7.2% 75.5 billion ($92.6 billion) 5.4 billion ($6.7 billion) Low Cost Carriers 5.4% 53.9 billion ($66.2 billion) 2.9 billion ($3.6 billion) Traditional Airlines 2.9% billion ($295.4 billion) 7 billion ($8.5 billion) Totals 386 billion ($473.6 billion) 18.4 billion ($22.6 billion) Sources: Airline revenue from various sources to include the 2010 World Airline Report, Air Transport World (July 2010) Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 11

12 The Worldwide Review of Ancillary Revenue provides a detailed look at the results posted by many types of airlines. The statistics reveal natural groupings based upon each carrier s ability to generate ancillary revenue. The percent of revenue results associated with four defined groups were applied to a worldwide list consisting of 150 airlines. The following describes the four carrier types identified by IdeaWorks: Ancillary Revenue Champs. These carriers generate the highest activity as a percent of operating revenue basis. The average within this group was 19.4 percent. Examples include Allegiant, Flybe, Spirit, Ryanair, and Tiger Airways. Major US Airlines. US-based majors generate strong ancillary revenue through a combination of frequent flier activity and baggage fees. The average within this group was 7.2 percent. Examples include American, Delta, and United. Low Cost Carriers. LCCs throughout the world typically rely upon a mix of a la carte fees to generate good levels of ancillary revenue. The average within this group was 5.4 percent. Examples include AirArabia, Air Berlin, Spicejet, Spring Airlines, Virgin America, and Westjet. Traditional Airlines. This category represents the largest number of carriers. Ancillary revenue activity may consist of fees associated with excess or heavy bags and limited partner activity for a frequent flier program. The average within this group was 2.9 percent. Examples include AeroMexico, Asiana, British Airways, Egyptair, Scandinavian, and Silkair. Operating revenue is from the annual report published in the July 2010 issue of Air Transport World. Additional sources were used, such as disclosures made at airline alliance websites, to complete the list of 150 airlines. Adjustments were made to prevent duplicate reporting from regional affiliates associated with major airlines (such as Skywest and Delta). Pure air cargo carriers, such as FedEx and UPS Airlines, were removed from the list. The list includes 98 percent of the $483 billion IATA estimate of worldwide commercial airline revenue for The 2010 numbers will certainly increase. Each group will likely achieve a higher percentage as a la carte pricing methods are perfected and become more pervasive. For example, coordination among alliance partners has compelled Europe-based airlines to adopt baggage charges on transatlantic routes. Traditional airlines are boldly experimenting with new a la carte initiatives. All Nippon Airways, KLM, and United are testing the sale of upgraded meals to economy class passengers on long-haul routes. In addition, carriers may move up a category - - some low cost carriers might become better practitioners of the ancillary revenue art and upgrade to champ status. A surprising number of LCCs throughout the world continue to provide complimentary beverages or have yet to assess fees for checked baggage. 1 Fact Sheet: Industry Statistics reviewed August 2010 at IATA.org Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 12

13 Our baby is indeed growing up. CEOs and CFOs all over the world are pushing for new revenue opportunities. Ancillary revenue has become an accepted line item on airline income statements in Europe, Asia, the Middle East and the Americas. A la carte fees are fundamentally changing the airline business in a manner similar to the revolution caused by online booking in the travel industry. The vast majority of hotel rooms, car rentals, and airplane seats are sold online - - bypassing the traditional source of travel agents. Travel agencies, not unlike global airlines, are scurrying to find new sources of revenue in an increasingly online world. Successful companies embrace change and move with the market. But some will choose to remain in the past or act too slowly. These companies believe their markets are isolated from change. The numbers provide ample warning against this choice. Ancillary revenue has become the billion-euro benefit that is too big to ignore. Something New or Just Another Fee An article in the January 2010 issue of a leading US consumer magazine listed the top gripes among American consumers. 2 Number one on the list was hidden fees. Far down the list were other annoyances that don t seem petty: noisy neighbors, long checkout lines, and bad airline service. It s an honor of dubious distinction; a la carte is now on top. It s generally accepted that airline executives have fallen in love with fees. But consumers are embittered by the unfair combination of rising air fares and fees for things-that-once-were-free. Even the eager readers of this report are upset when hit with a service fee charged by a bank, credit card, or car rental company. But change need not seem cruel and unfair if we simply put our thinking caps on and innovate instead of aggravate. Truly new products and services are rare. The words new and improved are among the most abused by marketers and advertisers. You might find inspiration from a recent business jet innovation that has created something entirely new under the sun. BAE Systems could ve followed the competitive pack by adding chrome, wood inlays, and marble counters to its AVRO Business Jet. But the Design Q interiors firm had a very different idea when it transformed the jet into a Now this is something new! The Air Deck viewing platform is designed to bring a yacht-like experience to private jet travel. Image: Design Q lifestyle-enhancing experience. When the jet is on the ground, a large side door powers open to reveal a concealed platform that extends out from the aircraft. The Air Deck provides an elevated outdoor viewing platform combined with a luxurious indoor space with a state-of-the-art entertainment system and vast open plan galley. Design Q essentially combined the characteristics of a business jet and lakeside cottage to create a flying version of a Winnebago motor home. 2 Top Gripes: What Bugs America Most article in the January 2010 issue of Consumer Reports Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 13

14 The result created something delightfully new and newsworthy. The concept placed the jet in a new category of luxury and adventure. The newness of the concept defies comparison with anything else in the market. It reduces the importance of price by introducing new features. There is a lesson here for airlines - - innovation creates distance from competitors and casts existing products and services in an entirely new light. Did your airline follow the pack by placing fees on the product feature once known as the free baggage allowance? If you worked at Southwest or Alaska Airlines the answer would be a resounding no. Southwest chose an unusual path as a low fare carrier with its bags fly free policy. Lucky for them, the status quo has become an exceptional benefit. Alaska Airlines choose the a la carte method but added a twist by enhancing a service instead of merely adding a new fee. Alaska Airlines sought a method to implement bag fees that provided good value to customers while remaining consistent with the company s brand values. The revenue potential associated with baggage fees had become too large to ignore. Internal debate on the subject was intense and the carrier did not eagerly embrace the baggage fees initiated by other major airlines. The fee for a first bag became effective July This was months after most competitors introduced first bag fees in late But rather than follow the pack, the airline stayed true to its reputation for providing a higher level of customer care. The airline announced a $15 ( 12) fee for first bags on 23 April 2009 and disclosed details of its Baggage Service Guarantee. Customers would receive 2,500 Alaska Mileage Plan miles or $25 ( 20) off a future flight when luggage does not arrive at bag claim within 25 minutes after a flight chocks in at the gate. Alaska followed industry precedent by waiving the fee for elite tier members of its frequent flier program. The earlier second bag fee would remain $25 ( 20) but the fee for a third bag dropped 50 percent. Amazingly, the carrier subsequently announced it would shave five minutes off its guaranteed delivery time as of June Customers would now receive their bags within 20 minutes of arrival. The reward dropped slightly to 2,000 miles or $20 ( 16) off a future flight. Furthermore, first, second, and third bag fees would now be $20 across the board. It s unusual for an airline to guarantee a delivery time for checked bags; it s a miracle when the same airline promises to deliver bags even faster than before. 3 Alaska Airlines, Horizon Air announce new service charge for first checked bag with guarantee press release dated 23 April 2009 at AlaskaAir.com. 4 Alaska Airlines And Horizon Air Speed Up Baggage Service Guarantee press release dated 16 June 2010 at AlaskaAir.com Alaska boldly promotes the guarantee at its website, in online newsletters, and at the airport. This advertisement appears on jetways at its Seattle hub. Other ads can be found in the baggage claim area. Image: Courtesy Alaska Airlines 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 14

15 The guarantee is simple to administer; awareness created by the advertising campaign ensures customers actively monitor baggage delivery. The 20-mintue clock begins when aircraft arrive at the gate, not when touchdown occurs. It s the passenger s responsibility to know if the 20-minute standard has been met. If the bags are late, the passenger requests a certificate from the baggage service office at larger airports or from the ticket counter at smaller locations. Agents give a uniquely numbered certificate (front and back shown below) which provides fulfillment instructions. Customers go online to request the $20 ( 16) future flight credit or 2,000 frequent flier miles. Alaska s management says frequent flier miles are favored far more than the cash discount. Sample inquiries made at Alaska station locations reveal procedures that favor customer service over strict policy. Certificates are given out upon request with no bureaucracy to restrict distribution. Some stations adhere to an internal baggage standard of 15 minutes just to add an extra layer of protection. The guarantee keeps staff aware of how well their station is meeting the 20-minute standard - - no one wants to reorder boxes of new certificates from headquarters Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 15

16 Managing Ancillary Revenue It was only a matter of time before senior airline managers thought to pair the practice of revenue management with the art of ancillary revenue. Voila! Revenue management has met a la carte pricing and the ancillary revenue process is becoming more sophisticated. Revenue managers instinctively understand the relationship between price complexity and revenue gain. Revenue management allows airlines to capture more revenue from individual passengers by matching willingness to pay with distinct price points. The following table describes how fees evolve to offer the right price, to the right consumer, at the right time. How a la Carte Fees Evolve Flat Fee Pricing. A la carte services are best introduced to consumers through simple pricing plans that gradually become more sophisticated. Consumer promotion can stress benefits without sacrificing message space to describe the price. Singapore Airlines charges a flat $50 ( 41) for preferred seats with more legroom in economy class - - regardless of flight distance or consumer demand. Price Testing. As an airline gains experience in the market, it should consider price drops or increases. The objective is to seek the best profit result by building volume through a price decrease or to test upper limits. Delta Air Lines initially charged $25 ( 20) in May 2008 for the second checked bag (the first bag was free). Three months later the fee was increased to $50, and was later dropped to $25 before the end of the year. The later drop occurred when the carrier started charging for the first bag. The airline was using market results to determine the best revenue mix. Variable Pricing. Longer flights can command higher fees for comfort-related services or due to higher expenses. Allegiant Airlines charges higher seat assignment fees on longer flights. Booking a 1-hour flight yielded an $11.99 ( 10) fee each way, while the fee for a 4- hour flight was $14.99 ( 12) each way. Airlines are charging higher bag fees for longer flights; consumers understand the cost is driven by fuel expense. Pre-Pay Discounts. Airlines should encourage passengers to pre-pay whenever possible. This places extra cash in the pocket of the airline and removes the hassle of collecting funds at the airport. easyjet provides a generous 50 percent discount to encourage pre-payment of baggage fees. By comparison, Delta is far less generous and only grants an 8 percent discount for online payment of first bag fees for US travel. Annual Pre-Paid Plans. This is the ultimate loyalty program because the customer pays in advance for a year of benefits. United Airlines has mastered this art with annual options available for its roomier Economy Plus zone, baggage fees, and fast track screening. Demand-Based Pricing. This is the air fare approach to a la carte pricing. Fees start at a published price but vary according demand by day and flight. Continental was the first to implement demand-based pricing in March 2010 when it implemented its Extra Legroom at Check-In service Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 16

17 Europe represents the birthplace of a la carte pricing for the airline industry. Europe s low cost carriers continue to lead other regions in terms of innovation. Major carriers in the US bluntly adopted ancillary revenue when they rapidly introduced significant first and second bag fees within a one-year period. Innovation has yielded surprising results in the world s largest aviation market. United has quickly moved through the evolutionary process and has implemented flat fee pricing, price testing, variable pricing, pre-pay discounts, and annual pre-paid plans. This legacy airline has boldly tossed its legacy of being an industry follower. Its list of branded Travel Options now numbers twelve and relies on almost every type of pricing methodology. Continental leapt ahead in pricing sophistication with its Extra Legroom at Check-In service announced 3 March The service itself and manner of implementation are not innovative. Airlines have been charging fees for exit row seating for many years. But Continental lifted the art of a la carte pricing to new heights through the carefully chosen words of its press release, Pricing for the premium seats will vary depending on a number of factors, including the length of the flight and market. Noticeably missing was any reference to a base price for this service. The mysterious craft of revenue management determines these prices. The service promises a minimum of seven extra inches legroom which is typically accomplished by assigning exit row seats. Continental includes bulkhead seats in the mix which may or may not offer the additional space. Chat board postings disclose a passenger s attempt to get a refund after paying $39 ( 32) at the airport for an extra legroom seat. 6 Much to the dismay of the passenger, it was a bulkhead seat that purportedly offered no extra legroom. Another passenger described paying $69 ( 56) for a seat located in a more spacious exit row location, but settled for the less costly $39 bulkhead location (and was happy with the outcome). The postings speak to the importance of complete disclosure of product details. Seat map for a Continental 767. Dark blue seats are available for purchase at time of check-in, or may be requested at anytime by elite members having gold or platinum status. The blue shaded seating zone is available to all elite travelers, to include silver. Revenue management systems rely on the continuous pricing feedback provided by thousands of transactions and actively adjust prices based upon demand. Extra legroom seats on Monday morning flights to business destinations probably fetch a healthy premium, while midweek flights are priced lower because there are more empty middle seats. While price flexibility is good for the carrier s income statement, it does add to the complexity of the sale. 5 Continental Airlines to Sell Seat Assignments Offering Extra Legroom at Check In press release dated 3 March 2010 at Continental.com. 6 Continental Extra Legroom Seat Ripoff dated 9 August 2010 at FlyerTalk.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 17

18 Variable pricing, pre-pay discounts, and demand-based pricing depart from the predictability of flat fee pricing. Low cost carriers, which often don t sell travel through global distributions systems, are only limited by their creativity and the constraints of in-house booking systems. It s not so easy for carriers selling through travel agencies. These airlines must consider how vendors process pricing information. Online travel agents, such as Expedia.com, rely upon static page displays to disclose a la carte fees for checked baggage and other a la carte features. Timeliness is also a problem. As of August 2010 Expedia s online fee chart was not updated to reflect Continental s extra legroom feature (the feature became effective March 2010). Customers must rely on a click here link to the appropriate information page at Continental s website - - which of course may cause Expedia to lose the booking. Continental s approach might be considered an elegant solution in this regard. It places the a la carte feature after the booking process. This probably offers more advantages than disadvantages for the carrier. Frequent flier program members with elite status are kept happier because everyday consumers don t have early access to the best seat assignments. Continental s extra legroom product allows assignment 24 hours before departure. Sale of the service is limited to Continental s in-house system; agency distribution doesn t become an issue. Keeping the transaction within the system allows the revenue management process to maintain complete control. That factor alone may erase the revenue penalty of not including the feature in the booking process. But that s a big assumption, as flight-related features always sell best when placed in the booking path - - not after a booking is made. Distribution systems are racing to become compliant with the ancillary revenue objectives of client airlines. Efforts made by the Airline Tariff Publishing Company (ATPCO) to promote standardized fee filing are a crucial component to promote widespread access to price information. But don t expect widespread acceptance throughout the global airline industry. Low cost carriers, such as Ryanair, embrace anarchy and happily implement pricing schemes that frustrate competitors. Other LCCs, such as AirAsia, have added global distribution systems as integral parts of the selling mix. They will likely harmonize a la carte products to promote distribution through travel agencies. Global airlines are concerned about creating harmony within the ranks of alliances. This will be a critical issue that will soon influence the revenue success of codeshare operations and joint ventures. Annual Pre-Paid Plans and Passenger Loyalty Demand-based pricing applies the art of revenue management to a la carte activity. Annual pre-paid plans could be compared to frequent flier programs with one major caveat... this form of a la carte pricing is far more powerful than any loyalty program. Think of pre-paid customers as shareholders in the airline. These consumers have purchased a one-year subscription that only provides benefits when more travel is purchased on the airline. Frequent flier programs reward travelers for past loyalty whereas annual pre-paid plans require customers to pay up front for the privilege of buying more in the future. United leads the airline industry in the number of pre-paid plans offered and no carrier has a better promotional effort. The carrier introduced these new services under the Travel Options by United brand during Since then United has created an array of a la carte services designed to enhance customer convenience, comfort, and peace of mind. 7 United Airlines press release dated 29 October Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 18

19 The carrier does not hesitate to fly the a la carte banner at its website and in other advertising venues. Website advertising, such as the example to the right, happily presents a menu of options for consumers to consider while booking. Many are offered in the booking path and even more are now sold on an annual subscription basis. This airline has fully embraced a la carte pricing and now enjoys revenue in the millions. Travel Options by United keeps expanding its travel offer; the carrier is currently testing the concept of pre-booked meals on select SFO-JFK and SFO-FRA flights. Travel insurance companies have recognized the merits of annual policies for many years. easyjet promotes policies for individual trips and 365-day terms, with the latter starting at 35 ( 41). 8 But United has introduced something far more powerful. Not only does the carrier receive its money up front, it also enjoys the annuity stream provided by repeat travel. These plans quickly jumpstart revenue progress. For example, Air Berlin s Service Card provides perks such as seat assignments and increased baggage allowance for an annual fee of 59 ($73). The Service Card contributed 3.8 million ($4.67 million) for 2009 from an estimated base of more than 64,000 cardholders. 9 And every cardholder realizes a lower prorated cost with every additional flight purchased... amazing isn t it? United s Pre-Pay Plans Pre-Pay Plans Annual Price Features Comparable a la Carte Fee Economy Plus Annual Economy Plus with Red Carpet Club Economy Plus with Premier Fast Track Premier Baggage $425 ( 346) $699 ( 570) $799 ( 651) $249 ( 203) Choose Economy Plus seating with an additional 5 inches of legroom on any United route worldwide for one year (companion included). Economy Plus benefit and one-year access to United s 40 Red Carpet Club locations. Economy Plus benefit and registration for Fast Track for Premier status. After flying just 15,000 miles or 15 segments, enjoy priority check-in and boarding, upgrades and other elite perks. Waiver of first and second bag fees for one year on all United routes (up to 8 companions). Starts at $9 ( 7) $35 ( 29) for Club entry Not applicable 1 st bag $25 ( 20) 2 nd bag $35 ( 29) Note: Companions must be booked in same reservation record. Source: Review of United.com website August easyjet.com website reviewed August Air Berlin Annual Report for Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 19

20 Speedy Boarding as an a la carte item starts at 6 each way. United is not alone among airlines to promote annual pre-paid plans. easyjet recently introduced easyjet Plus! as a service aimed at frequent travelers, especially those on business trips. easyjet Plus! provides a speedier path to the airplane with access to priority checkin counters and early boarding. Customers receive a personalized membership card, which is presented at the airport to receive benefits. Perhaps it s an attempt by the carrier to mimic the elite status benefits provided by competitors with frequent flier programs. The carrier might even provide free cards to win the business of select corporate accounts. Annual benefits for the primary member cost 109 ( 129), and a second card ordered at the same time is 89 ( 105), or 49 ( 58) for a child. The program was announced March 2008 with an introductory rate of 75 ( 88) 10 easyjet s early boarding service does have a potential flaw for ramp-level boarding occurring via motor coach. Boarding an aircraft through a jetway is very straightforward; easyjet Plus! passengers are the first called through the gate. However, ramp-level boarding is more problematic. easyjet Plus! cardholders board the bus last so they are the first to exit at the aircraft. The bus driver must remember to open motor coach doors at the aircraft in the proper sequence to ensure this occurs. Unhappy customers are inclined to not renew memberships, which causes the airline to lose the annual fee and quite possibly all future fare revenue. Annual pre-paid plans can create incredibly loyal customers... but they can also turn customers away when benefits are not reliably delivered. Frequent Flier Programs Finally Participate Frequent flier programs are a universal source of ancillary revenue for the world s airlines. For many network carriers, such as American, Delta, and Qantas, it s the largest ancillary revenue component. That s why it s surprising frequent flier programs are rarely called upon to support a la carte strategies. Bonus miles and points could encourage all types of a la carte spending on checked baggage, priority check-in, early boarding, food and beverages, and insurance. Lufthansa provides a rare example with its offer of one mile per euro spent onboard for duty free shopping. Some airlines are just learning the magic of using frequent flier programs to encourage members to buy miles and book hotel accommodations and car rentals online. Airlines rake in huge revenue from the sale of miles and points to program partners. For example, Qantas disclosed program revenue of AU$1.13 billion ( 783 million) in its 2009 Annual Report. But airlines are also selling miles and points directly to consumers. Alaska Airlines disclosed annual revenue in excess of $12 million ( 10 million) from its Buy Miles which sells miles directly to members. 11 IdeaWorks believes the annual figure is closer to $15 million ( 12 million). Using Alaska s price of $ ( ) per mile, this equals more than 545 million miles sold to program members. 10 easyjet launches easyjet Plus press release dated 12 March 2008 at easyjet.com. 11 Tempted by Bonus Miles? Do the Math article dated 19 August 2010 in the Wall Street Journal Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 20

21 There are a variety of methods to promote the sale of miles. Mileage multiplication is an easy method for consumers to understand. This allows program members to buy bonus miles linked to a particular travel itinerary. Some programs allow members to double and triple mileage accrual for a fee. Much to the delight of program managers, it generates amazing results for airlines. Miles are sold at a premium price of 2 to 4 cents per mile. United Airlines Presents its Award Accelerator United is a very savvy marketer of this feature. The carrier promotes and sells its Award Accelerator at a number of touch points to include online, through call centers, and during check-in at the website, airport kiosks, and mobile phones. Mileage multiplier programs universally generate outstanding revenue results for airlines. While the direct sale of miles to consumers provides great ancillary revenue, it doesn t boost overall a la carte efforts. But airlines are slowly engaging frequent flier programs in the ancillary revenue business. The allure of bonus miles and points is now used to encourage consumers to book hotel accommodations and car rentals at airline websites. Recent offers have been made by American, British Airways and Vueling. Booking a hotel or car rental at AA.com earns 500 bonus miles for a limited time. Vueling is a bit more direct in its desire to generate hotel and car rental revenue. One point is offered for every 25 spent on a hotel booking. BA demonstrated creativity by seeking revenue from reward travelers. US-based members are advised by when sufficient miles are accrued for reward travel... and that as a British Airways Visa Signature cardholder, you will earn 2.5 BA Miles for every $1 spent on ba.com. That s strong encouragement for consumers to shop at the carrier s online store for all those travel necessities such as pre-paid baggage, hotel accommodations, car rentals, trip insurance... and perhaps someday a pre-ordered meal. Food is the Next Frontier Checked baggage will remain a hot topic in the near term. It s proven to be a big generator of cash for airlines. Existing procedures for the collection of baggage fees made it a relatively easy policy to implement. Look for eventual implementation by almost all airlines. Meal service will likely follow the trend as another popular a la carte activity for airlines. An emphasis will be placed upon pre-order meals as a method to solve many of the problems associated with the operation of onboard cafes. Offers for premium meals, or upgraded dining experiences, are a painless way to introduce customers to the concept of pre-ordering meals on longer flights Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 21

22 Carriers are contemplating the eventual demise of complimentary meal service in economy cabins. Experimenting with pre-order meals provides the opportunity to fine tune the process and test price points before implementing changes on a grander scale. Not surprisingly, low cost carriers have led this initiative. AirAsia, Air Asia X, Air Arabia, airbaltic, Air Berlin, Jetstar, and NIKI allow passengers to order a meal when booking a flight. With the exception of Air Berlin and NIKI, these airlines don t provide complimentary meal service. Air Berlin and NIKI include a snack or basic meal as a free amenity and allow travelers to upgrade to a higher quality meal service associated with a local gourmet restaurant. This trend was validated among network carriers during KLM recently introduced a pilot project to test high quality a la carte catering in economy class on long-haul flights from Amsterdam to ten destinations. 12 Passengers traveling to Bangkok/Taipei, Dubai, Calgary, Cape Town, Lima, Manila, Sao Paulo and Singapore/Denpasar may order a meal online 30 to 24 hours before departure. Each meal costs 10 ($12) and is served in lieu of the complimentary economy class meal. The program has been extended beyond the termination date which was initially announced as August United, as the newly crowned world s largest airline, also began testing pre-order meals during summer United s customers may order food on PS flights on San Francisco - JFK and LAX - JFK routes or choose branded dine upgraded meal items on flights from San Francisco to Frankfurt and London. KLM Presents Examples of its a la Carte Menu of Upgraded Meals Japanese Delight sushi and chicken Bella Italia antipasti & pasta carbonara Consumers booked on the transcontinental service may retrieve an itinerary at United.com and order a meal under the Reserve your meal now tab. The request must be made a minimum of three days before departure. Pre-order menu selections on the PS transcontinental routes are limited to brunch-style meal choices that include an entree, fruit salad, cheese plate, and bread. Prices for the meals, which are based on a business class menu, are $19 ( 15) each. Payment is made onboard the aircraft and only with a credit card and not online. 12 KLM launches à la carte catering pilot press release dated 25 May 2010 at KLM.com. Indonesian rijsttafel satay & beef stew 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 22

23 United s recently introduced Choice Menu also provides more fresh food items for passengers to purchase onboard the flight. However, using pre-order ensures a desired item will be available for the passenger. Complimentary food service is not offered on domestic routes in economy class. San Francisco - Frankfurt passengers can impress fellow passengers by choosing an entrée a minimum of 3 days before departure. But more noteworthy is the placement of pre-order meals into the booking path at United.com for the San Francisco Frankfurt and London routes. Passengers booking these flights are greeted with an order box inserted into the booking process. It might be somewhat common for an LCC - - but it s a very unusual offer for a global airline to present to its customers. After selecting one of the designated flights (not the Lufthansa codeshare flight) the website displays an invitation for the consumer to Reserve your meal now. Clicking the link reveals a menu of three premium meal choices. Consumers might be surprised by the offer and believe United has removed complimentary meal service from this flight. They haven t... not just yet. But the carrier has certainly embarked on an amazing experiment by testing the pre-order concept on international longhaul flights. The meals include salad, fresh fruit, dessert, and a selection of cheese for $19 ( 15). The order is noted on the flight manifest and payment is made onboard by credit card. Hopefully this is a restriction required due to technology, as it s always better to complete the sale online. This saves consumers the trouble of paying onboard which represents a hassle for corporate travelers. Similar to the transcontinental test, consumers may also retrieve an itinerary at United.com and book a meal under the Reserve your meal now tab. What might United do after the test has been completed? IdeaWorks speculates the airline could add the pre-order dine feature to more and more flights. On flights without catering, the feature will boost sales activity by ensuring The tray on the left is free, the premium meal on the right is $19. Which would you prefer? consistency for travelers. Undoubtedly, United is willing to board higher quality meals when the risk of disposal due to poor sales has been removed from the process. On flights with catering, the feature provides a double benefit. United saves money by reducing its complimentary meal count and realizes revenue from pre-order sales Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 23

24 All Nippon Airways (ANA) is unique because it now offers long-haul economy passengers the option to pre-order a business class meal. The carrier introduced ANA My Choice on 30 October 2009 as a service to sell wine from the business class menu to passengers in economy class. 13 The service was expanded 01 June 2010 when the carrier made business class meals and individual entrees available to economy travelers. These revenue-producing initiatives were linked to the carrier s Emergency Income Recovery Plan which was conceived to help ANA recover from harsh economic conditions in Japan. The following is a list of the upgrade options available to ANA s long-haul economy passengers: ANA s Upgraded a la Carte Dining Options Tokyo - Europe and Tokyo - USA Routes Meal Type Description Ordering Fee Business Class 2 Full Meals Business Class Hot Snacks Light Meal - Hawaii Only One meal served after take-off and a second meal served later during the flight. Same meal served to business class passengers on china and linen. Passenger may select one business class drink, such as wine or champagne, with meal. Selections include a rice ball with caramelized kelp filling and miso soup, Cantonese-style pork filled bun with a sticky pork dumpling, and dimsum chicken dumplings. Bakery products on flights from Japan. Sushi and rice ball plate on flights from Hawaii. Select during booking process or call at least 2 days before departure Onboard from flight attendant Onboard from flight attendant 8,000 ( 74) 700 ( 6) 1,000 ( 9) Source: ANA website reviewed August ANA My Choice is unconventional and consumers will likely find the premise confusing. Passengers receive a basic meal service in economy class and have the option to purchase more food and drinks. Those who desire a higher quality meal experience may order a business class meal in advance or buy an entrée during the flight. The carrier does not clarify the meal choices available through the business class meal service; only a steak entrée is listed. Information provided at the website makes several attempts - - without success - - to describe the complete onboard dining and beverage experience. It s not obvious whether the airline boards additional business snacks to sell. The airline might simply be selling the items that remain after business class passengers have been served. The result is an unusual mix of commercial objectives and complimentary services. Some food and drinks are free, while some require a fee. With a few changes the concept would be better marketed as a value-oriented service to corporate travelers stuck in economy. The premium price of 8,000 ( 74) is not supported by the details offered at the website nor the quality of the communication. There is a compelling concept here, but ANA My Choice would benefit from stronger branding, more details for consumers, and a more concise strategy. 13 ANA to Start ANA My Choice press release dated 30 October 2009 at ANA.co.jp Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 24

25 Test, Change, and Measure The pre-order products introduced and tested by KLM, United, and ANA represent the outcome of months of planning by inter-departmental teams. Each carrier says the meal test could end at any time along with other operational caveats. Introducing new products is risky business. Even small tests in today s marketplace - - made transparent by the internet - - can catch the attention of bloggers, major media, and individual consumers posting comments at FlyerTalk.com and AirlineQuality.com. But there is an easier path to ancillary revenue bliss and it s probably right under the nose of airline managers. Existing a la carte programs provide the biggest opportunity to boost ancillary revenue. These are also the easiest to change because the difficult work of launching the program has already been accomplished. The next section of the guide describes how to increase sales by adopting merchandising methods from the world of retail. Carriers can also test, change, and measure existing a la carte features to tweak more revenue from current customers. The revenue objective is to set prices that deliver the largest profit. In the language of revenue management, that might be a low price that moves lots of goods, or a high price that moves fewer goods. The corresponding retail objective is to offer products having the greatest appeal to customers. Ryanair, easyjet, and airbaltic demonstrate how profits can be maximized when revenue and retail objectives are applied to the management of buy-on-board programs. Bigger stores move more goods. By providing greater depth of selection, retailers keep customers from shopping at competitors. The best retailers also know consumers are fickle. Consumers continually change tastes and preferences. Television advertising provides ample evidence of the continuous stream of new products designed to tempt the status quo. It s not easy to stay ahead of competitors. And it s even more difficult to anticipate consumer desires. That rare moment of retailing Zen occurs when the retailer defines the trend - - ask Steve Jobs at Apple how that feels. With its high rate of product turnover, airbaltic purposely upsets its onboard store with every printing of its menu. Onboard menus reveal much about an airline. Small, non-laminated, and picture-less menus portray a half-hearted retail attempt. Large, colorful, and image-filled menus convey an aggressive retail environment - - and tasty profits. Ryanair, easyjet, and airbaltic fill their menus with color images and plenty of items. Ryanair menus from 2008 averaged 60 items (measured as individuals SKUs) with the item count increasing to more than 70 two years later. easyjet offers even more, with about 75 items listed on 2008 menus and in excess of 80 items for airbaltic is newer to the a la carte game and averaged 40 items during the same period Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 25

26 These numbers portray a sizable stock of goods that adds to operational complexity. But nutritionists would be appalled by the selection. Shelf stable products dominate because these don t require refrigeration and can be re-stocked to another flight by the commissary department. Analysis performed on the three carriers reveals six common categories such as hot and fresh foods, alcoholic drinks, and coffee/tea. Impulse snacks, such as chocolate bars and salty foods, represent the largest category for Ryanair and easyjet. Hot and fresh food items are labor intensive and offer lower margins. But these items also define the level of dining quality provided by the Airline Menu Analysis by Item Category easyjet, Ryanair, and airbaltic - recent menus Hot Food Fresh and Other Food Snacks / Chocolate From the Bar Soft Drinks, Water, Juices Coffee and Tea Menu items offered easyjet Spring 2010 Ryanair Feb/Mar 2010 airbaltic Spring 2010 carrier. Retailers might call this window dressing or placing your best products for full display to consumers. Imagine your own perception of quality when a food outlet doesn t offer hot food - - the experience becomes something akin to a vending machine. The big differences in life (and in business) are rarely defined by what you have but are defined by what you do with it. Even the largest selection will eventually become unproductive without a turnover of items. Ryanair, easyjet, and airbaltic manage their inventory by practicing a simple rule of retailing - - discontinue the slowest moving items, and find new items to place on the shelf. Analysis of menus from a 7-month period reveals how these carriers manage turnover. airbalitic churns its menu by adding many new items and ruthlessly cutting poor performers. 68 percent of items were new and 50 percent of prior items were dropped. The percentages for airbaltic are somewhat influenced by the smaller item count maintained by the airline. Carrier New and Discontinued Menu Item Trends Period Between Menu Cycles % Items Dropped % Items Added airbaltic 7 months 50% 68% easyjet 7 months 15% 26% Ryanair 7 months 2% 20% Source: IdeaWorks analysis of airline menu cards, Fall 2009 and Winter 2010 periods Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 26

27 Life for Ryanair menu planners is more predictable. Ryanair dropped very few items but the 20 percent increase swelled the size of the selection. This indicates the carrier has already filled its menu with items that sell well; but Ryanair is always on the prowl to identify even better products. Change for the sake of change is not the objective. The message conveyed by their success is the importance of actively managing what is on the shelves. If your menu remains unchanged from cycle to cycle... something is very wrong. Tired items are not being removed and better products are not being added. The average menu price for the three airlines is amazingly consistent and ranges from 2.50 to 3.50 ($ $4.30). It s probably no accident that Ryanair has gradually decreased its average menu price during the last three years: ($4.27), ($3.98), and ($3.73). The worldwide recession has triggered tighter consumer spending and Ryanair has responded. Offering lower-priced items is an effective method to encourage consumers to keep spending. As the economy improves, Ryanair will undoubtedly test consumer resiliency by adding higher-priced products, or boosting prices on existing items. The Revolution Continues Ancillary revenue growth is not stopping and 2010 revenue numbers will assuredly be much larger. This is because carriers already engaged in ancillary revenue activity will become better at the task. Airlines not yet engaged will join the revolution or continue to ignore it at great peril. For those considering a decision to jump in... take comfort. The core brand values of a carrier need not be sacrificed to accommodate ancillary revenue and a la carte pricing. With innovation and creativity any airline can convert economic and competitive necessity into revenue and opportunity. This is not a search for the holy grail of Monty Python lore, but rather a mission guided by healthy portions of persistence, planning and patience. Being more like Ryanair is not the objective. The objective is to find the revenue balance that works best for your customers, investors, and employees. It doesn t matter if your airline captures 5 or 25 percent of operating revenue from a la carte activities. What does matter is how your team works toward the goal. Successful companies (and individuals) are always on a path of discovery that looks ahead for opportunity and backward at competitors. Persistence, planning, patience, and other advice. Innovation creates distance from competitors and reduces reliance on lowest price. Move beyond flat fee pricing to price testing, variable pricing, pre-pay discounts, and annual pre-paid plans. Use bonus miles or points to encourage all types of a la carte spending on checked baggage, priority check-in, early boarding, food and beverages, and insurance. Consider the eventual demise of complimentary baggage and meals in economy class. Provide greater depth of selection to keep your customers from shopping competitors. Test, change, and measure your way to better profits Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 27

28 Discovering New Worlds of Onboard Merchandising The Corps of Discovery Finding new opportunities often requires radical change and exploring the unknown. Today s buy-onboard methods are artifacts based on past practices created when food was a free amenity. The wide world of retail, from leading retailers to American ballparks, offers merchandising lessons for the airline industry. Discovering these worlds requires airline executives to approach the challenge with open minds and the passion of explorers much as Meriwether Lewis and William Clark explored the continental United States at the start of the 19th century after Thomas Jefferson had paid Napoleon millions of dollars for an unknown land. There are vast differences between then and now for instance, no retail enterprise can afford to wait almost three years for research results. But some of Lewis and Clark s strategies show surprising application to the commercial aviation world of today, such as the necessity to consider new solutions and the importance of documenting results. Captain Lewis was first to document what he called a vulture now known as the California condor, an amazing bird with a 3 meter (10 feet) wingspan. The explorers adopted new technology, such as a collapsible boat to make land crossings more convenient. An abundant President Jefferson chose innovative methods to find new opportunities for America. supply of gifts provided incentives for cooperation from indigenous peoples. Does this remind you of loyalty marketing? And in terms of creating a record of results this expedition was amazingly inquiring. The expedition discovered and documented 122 species of animals and approximately 178 plants, and produced more than 140 maps. Lewis and Clark s Corps of Discovery was successful because of a combination of excellent leadership, dedicated teamwork, and well-engineered operations that adjusted quickly to the challenges of a wilderness. Fast forward to our century, where old traditions must yield to new methods and the frontiers are economic Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 28

29 Old World Catering Traditions A la carte pricing is nothing new. Buy-on-board likely originated with Freddie Laker s Skytrain, which operated between London and New York back in This no-frills airline broke new ground by offering rock-bottom fares and dared to charge passengers for in-flight meals. 14 The model created by Skytrain was adopted by People Express in 1981 amid a newly deregulated environment in America. People Express further defined no-frills flying by charging $3 to check bags, 50 cents for a cup of coffee, and introduced the novelty of selling tickets onboard. 15 The carrier eagerly highlighted the lack of free amenities in its advertising to include positioning two coins next to a coffee cup. These innovations merely borrowed the same delivery methods used by airlines since the 1960s. Even today, premium class meal service on the newest aircraft is still delivered by a flight attendant pushing a galley cart. The onboard product has evolved to include lie-flat beds, private suites, in-flight showers and high-tech entertainment. These innovations have largely ignored the business of selling products onboard aircraft, the Today s carriers borrow a page from the 1981 People Express playbook... You pay only for baggage you want to check, drinks you want to drink, and the snacks you want to snack. notable exception being handheld point-of-sale devices. Flight attendants may now scan a credit card at 36,000 feet, receive confirmation of the transaction, and record the item sold by flight for later data analysis. Behold the humble but reliable galley cart. The lack of progress has been stymied by adherence to tradition and product complexity. Airlines throughout the world offer every style of cabin service. Longer haul flights usually provide a bundled experience with all amenities included in the price of a ticket. Exceptions are cropping up in this market through the efforts of AirAsia X, Jetstar, and airbaltic. The list of long-haul a la carte examples keeps growing with the recent addition of Minneapolis London flights operated by Sun Country and the West Coast Hawaii operations announced by Allegiant. But a standardized passenger experience is less predictable on shorter haul flights. 14 Freddie Laker; A Vanguard Of No-Frills, Low-Fare Flying The Washington Post, 11 February and Counting: People Express by Brett Avery, New Jersey Monthly, 5 February Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 29

30 Most network airlines in Europe, Asia, South America and the Middle East still strive to provide complimentary meal and beverage service. Flights in North America offer yet another style with free non-alcoholic beverages and a limited buy-on-board menu of sandwiches, snacks, beer and wine. Meanwhile, low cost carriers all over the world lead the way with a full retail offer of beverages, alcoholic drinks, sandwiches, snacks, hot entrees, and souvenirs. But even today s low cost carriers largely rely on the catering methods of yesteryear. The State of Catering Today Pity the wayward traveler who is confused by a bundled product with poor selections or a buy-onboard experience offering a wide array of goods. Alitalia promotes a Made in Italy experience with Classica service which promises a snack or light meal on intra-europe flights. Beyond fancy words, the service is limited to a complimentary bag of chips, red or white table wine served in a flimsy plastic cup, and the usual offer of soft drinks and coffee. Italian travelers can instead opt for a low cost flight on easyjet which offers more than 80 items from its a la carte service. The Bistro onboard menu includes hot entrees such as croque monsieur and pizza margherita, and many more choices beyond the reach of passengers on Alitalia. Converting to a buy-on-board environment is no easy task. Just ask the folks at US Airways who encountered a buzz saw of consumer and employee complaints back in The carrier announced a $2 fee would apply for soft drinks, juices, bottled water, and coffee starting August The carrier s labor groups soon revolted by complaining directly to the media: We re trained to keep order on an airplane and defuse confrontation. If it takes giving a free beverage to somebody to do that, so be it. I expect there will be flight attendants who just give everything away. This is the very tip of the iceberg on what they re going to want us to sell It s going to be everything from pillows and blankets to cell phone chargers. - Mike Flores, President of the US Airways flight attendant union The airline was already selling snacks; complimentary meal service had long disappeared from most US carriers. But it was the loss of a free Coca Cola that put passengers and employees over the edge. Seven months later the airline rescinded the beverage charge. 17 Management was obviously surprised by the negative reaction and said the change was made because the issue had become too big a distraction for the airline. The skyrocketing fuel prices of 2008 also led United Airlines to consider testing the buy-on-board concept for transatlantic flights. The carrier announced in August that economy passengers flying from its Washington Dulles Hub could purchase sandwiches, salads, and snack boxes on its flights to Europe. 18 United s plans suffered the same sorry fate of beverage fees on US Airways. Within 13 very unlucky days United said it was compelled by overwhelming public feedback to drop its test plans US Airways Accelerates Business Model Transformation press release dated 12 June 2008 at USAirways.com. 17 Beginning March 1st Customers Will Be Offered Free Soda, Juices, Tea, Water, and Coffee press release dated 23 February 2009 at USAirways.com. 18 United Tests Food Choices in Business and Economy United Airlines press release dated 22 August United Backs Off Plan to Cut Free Meals From Transatlantic Flights Wall Street Journal article dated 2 September Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 30

31 Fortunately, US-based airlines would find refuge from oil prices in a completely different a la carte category. The world s airline industry watched in amazement as American, Continental, Delta, United, and US Airways gorged on the revenue generated from the rapid introduction of first and second bag fees. During this period of newfound fee infatuation, low cost carriers were working to enhance onboard merchandising. More products were offered to travelers... freshness and quality were improved... payment and sales automation became prevalent... and a greater emphasis was placed upon promotional activity. Even with this progress, the majority of the airline industry still uses old methods, such as onboard magazines, to deliver menus; and the traditional galley cart to deliver food. Insanity has often been defined as doing the same thing over and over and expecting different results. This philosophy can be applied to the current state of affairs for in-flight catering. The need for more revenue will lead the best carriers to go beyond old methods. The old world is represented by using unadorned galley carts to deliver food, the sale of shelf-stable snacks, the use of boring packaging, and a failure to analyze sales. The best carriers will adopt new methods... and fly beyond the known world to leave the competition behind. Exploring Bold New Worlds IdeaWorks has scouted this journey by interviewing a wide range of retail specialists from grocery stores to baseball teams. This strategy borrows knowledge from other service sectors to enhance the science of onboard retailing. Restaurants build the check through suggestive selling and effective menu design. Grocery stores increase revenue through careful positioning of impulse items. Professional sports teams utilize the power of group dynamics to encourage individual fans to spend more. IdeaWorks conducted research on the following companies, and incorporated the advice of experts, to create new concepts designed to boost ancillary revenue from onboard sales: TGI Friday s is a global restaurant company privately held by Carlson, which also owns Radisson and Carlson Wagonlit Travel. The company is known for effective sales methods that maximize dinner guest revenue. Trader Joe s is an innovative grocer that features unusual, hard-to-find, and great-tasting foods. It operates 326+ stores throughout the United States. Major League Baseball is an American sports icon. Through savvy merchandising, fans respond to the tradition of buying peanuts, popcorn, drinks and souvenirs from their seats or at vendor booths. Amtrak is the national passenger railroad in the United States. Railways have an onboard sales tradition, which Amtrak has enhanced to include at-seat sales on short-haul routes. In addition to the above resources, IdeaWorks conducted interviews with experts on consumer product design and retail operations. This work provides a new perspective on the practice of selling beverages, food, and other merchandise in the cabin environment Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 31

32 Pundits have marveled for years on the tremendous sales opportunity when consumers are held captive for hours on commercial aircraft. More and more airlines, to include some of the world s largest, are beginning to realize the power of onboard merchandising. It s time to consider successful practices from other industries as we build a more powerful retailing machine for the air travel experience. Building the Restaurant Check TGI Friday s offers great food, innovative drinks and a unique experience filled with flair and a Thank God It s Friday s attitude. 20 The company has developed proven processes to encourage its guests to enjoy themselves and spend more. One of its early guest engagement methods required employees to wear trinkets called flair on their uniforms. The 1999 movie Office Space poked fun at this tactic. Jennifer Anniston, who plays a waitress at a chain restaurant modeled on the TGI Friday s format, eventually gets fired for not having Jennifer Aniston in her role as a restaurant the required quantity of flair on her uniform. While rigid work waitress is scolded by management for failing to wear the required 15 pieces of flair. processes can be overdone and may invite criticism, the chain s 900 locations in 60 countries worldwide indicate this is a company not to be taken lightly. The company s slogan Guest requests are never denied highlights the importance of customer satisfaction. Most diners are probably unaware of the scripted process that begins when they enter the front door of a local TGI Friday s restaurant. The process ensures continuing contact between guests and wait staff... and this boosts spending, or building the check as it s called in the restaurant business. Wait Staff Process at TGI Friday s Introduce yourself to the guest and establish a relationship. Describe the drink special of the day and request a drink order. Mention a specific appetizer and request an appetizer order. After returning with drinks, request the food order. Repeat the order to guests for accuracy. Refill drinks once for free refill items. For cash refills, ask guests if they want a second drink. Inquire about dessert midway through dinner refer to a specific item. Solicit coffee or another drink order with dessert. Three strategies are used by TGI Friday s wait staff to seamlessly blend customer service with revenue enhancement: 1) maintain guest contact during regular intervals of the meal, 2) refer to specific items to engage guests, and 3) proactively request food and drink orders. Yes, sometimes success is as easy as asking for the sale. 20 TGI Friday s website reviewed May Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 32

33 TGI Friday s uses many other tactics to silently boost guest satisfaction, spending, and loyalty. Appealing to children is an important revenue component. Children don t (usually) direct spending, but they do influence parental behavior. The chain believes children have more influence than adults during the process of selecting a restaurant. Sometimes kids arrive unhappy because they prefer another destination such as McDonalds. It s the job of the host at the front door to help improve attitude. That s why family restaurants provide crayons and other small items such as toys. Satisfied children encourage parents to return to TGI Friday s. Ivan Pavlov, the physiologist, would be pleased by guest responses to the mere picture of food in a menu. The printed menu is a restaurant s primary communication tool. Food and beverages are what compel guests to return. It s the task of the wait staff to coordinate these ingredients to create an enjoyable dining experience. TGI Friday s introduces new items approximately every three months. This schedule provides sufficient time to measure results from newly introduced items. It also ensures menu selection does not become stale for frequent guests. Restaurants are advised of changes about three weeks before a new cycle. This provides adequate time to train kitchen staff on new entrees and to order supplies. Managers eagerly check new menus to determine which items are pictured. Sales for an item might jump 300 percent simply because an image is included in the menu. The best method of promotion involves menu cards placed on tables to highlight a food theme or special appetizers, entrees, and drinks. Coupons, to include the venerable TGI Friday s free appetizer offer, generate considerable traffic. Locations know to stock up on supplies because orders for highlighted items will be higher when the menu is introduced. TGI Friday s carefully monitors the performance of all menu items. Items that sell poorly are eliminated. Wait staff offer suggested alternatives to shift consumers from discontinued items. Managers also know the importance of introducing wait staff to new entrees. All items are available for staff tasting about a week before a new menu rotation. Contests are used to motivate wait staff to promote new items or encourage customers to spend more. For example, a free dinner entrée might be offered to the wait staff member with the largest per person average check on a particular shift. Lessons for Airlines TGI Friday s Create structured service flows to ensure regular interaction between flight attendants and passengers for beverages, entrees, and dessert courses. Train flight attendants to actively solicit orders: May I take your drink order? Use images of food in menus to attract passenger interest and order activity. Familiarize flight attendants with new menus through crew base sampling and promotions. Consider specials and item combinations to create added value and disrupt purchase routines Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 33

34 Admittedly, TGI Friday s has several advantages over an airline. Restaurant environments are designed to create a spirit of fun and frivolity through music, visual elements, and flavors. Aircraft interiors are brutally sterile in appearance and are incapable of whetting the appetite of travelers. Future aircraft design must consider a more entertainment-oriented approach to encourage guests to enjoy themselves and spend more. Which setting would you enjoy more? If you picked the one on the left - - you are spending far too much time in the office and need a little Friday s. Photos: (left) Matt Coleman, Flickr.com (right) Allan Crain, Flickr.com Service staff is another area that begs innovation. The title of flight attendant is by definition passive - - they attend the flight and its passengers. Wait staff in a restaurant wait upon dinner guests, which describes a stronger service orientation. It s somewhat unfair to criticize flight attendants at legacy airlines as they were hired to ensure safety and dispense free amenities - - not to act as sales people. Ryanair, easyjet, AirAsia, and Spirit Airlines have natural advantages in this regard; these carriers have hired flight attendants on the basis of safety and sales ability. Low cost carriers don t have the baggage associated with the era of free amenities. Low cost carriers also enjoy another advantage; flight attendants are motivated by commissions paid for onboard sales. This is another practice airlines should adopt when moving to an a la carte design - - cabin crew commissions on the items sold onboard. The prevailing rate is 10 to 15 percent of cabin sales. The topic of tipping invariably pops up but the airline industry has worked to prevent this practice. The dual roles of safety and service represent a major distinction from the restaurant business. But tipping will undoubtedly creep into the culture as it already exists in other travel sectors such as railways, hotels, cruises, and restaurants. Boosting Revenue by Breaking Routines Trader Joe s is a most unusual grocery store that thrives by going against prevailing wisdom... except for the desire to build exceptional growth on a base of exceptional customer service. Privately held Trader Joe s has 326+ stores in the U.S. and likely generated sales of $7.2 billion during 2009, which represents a 190 percent increase from the 2004 estimate of $2.5 billion. 21 Shoppers won t find many national brands. Instead, the company relies on private label products. The typical supermarket carries 30,000 products with 16 percent private labels, while Trader Joe s has around 2,000 items and about 80 percent are private labels. "2 Buck Chuck" is the name endearingly applied to Charles Shaw wine priced at $1.99 per bottle... a wine that appeals to the sometimes frugal Jay Sorensen. Photo: Michael Lowry, Flickr.com 21 In Manhattan, A Billionaire Supermarket Showdown article dated January 09 January 2009 at Forbes.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 34

35 Trader Joe s uses its private label approach to deliver outstanding value in its unconventional and interesting products. The company offers a shopping adventure through quirky features and a friendly staff. For example, management long ago banned the use of blustery public address systems and a ship s bell calls extra staff. 22 One bell requests another check-out line to be opened. Two bells signal a call for assistance from a crew member. Three bells represent a request for manager assistance. Customers seem to love everything about the company but complain parking This Facebook page is lots are too full. Shoppers are rabidly loyal and have created multiple fan not operated by the websites. How many airlines can claim that degree of loyalty? All staff members company and boasts wear Hawaiian-style shirts and seafaring titles are used for workers; the store nearly 180,000 friends. manager is the captain and assistant managers are called first mates. Each store is said to have its own in-house artist - - many with art degrees - - to create the chalkboard signs that give each location a distinct personality. 23 And the top quirky element? Most Trader Joe s have a plastic lobster somewhere in the store. No reason is given for the appearance of these homarus americanus but the tradition has stuck. The casual appearance may give the impression Trader Joe s lacks formal processes. But high quality service and growth on a national scale don t occur through luck. Company management attributes its financial success to product turnover. Trader Joe s is always trying new products and purging ones that don t sell well. This keeps the chain s array of products fresh and popular. It seems disruption of consumer routines leads to better sales. End caps, the special displays at the end of an aisle, are crucial for boosting sales activity. These displays are changed on a regular basis to quickly close out discontinued and seasonal items. One private grocer (not Trader Joe s) rearranges his store on a regular basis. While customers hate it, a major reorganization can boost weekly sales by 20 percent. This grocer doesn t use aisle labels for the same reason - - it forces customers to search more and naturally leads them to seeing new items. If a customer knows where everything is, they are less likely to bump into something new. Checkout Time at Trader Joe s Keep the product pipelines flowing by discontinuing slow sellers and introducing new products. Private label brands, such as Charles Shaw wine, deliver great value for consumers and reinforce the store s high quality low price image. The quirky island theme creates a distinctive and memorable brand and a fun environment for shoppers and employees. Product demonstrations and free samples generate higher sales. 22 General FAQs at the TraderJoes.com website reviewed May Things You Didn't Know About... Trader Joe's article dated 13 November 2008 in the Washington Post Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 35

36 True to retailing legend, impulse items are stocked near the checkouts, bearing in mind that too many choices or flavors will depress sales. Juice boxes didn t sell well at the checkout in Trader Joe s. Shoppers skipped the purchase when they didn t spy their favorite flavor in the limited space allowed near the checkout. Customers are generally impatient during the checkout process. While waiting, they like to read labels. They stop, look, read, and toss the item on the checkout belt. Even potted plants will sell well there. Vibrant colored packaging works best. If you have kids, you know what happens and so does the grocer. The kids beg for something and the parent buys it to quiet them. Candy is always offered in the check-out lanes. Small items are also offered because these are likely to fall through the cart if picked up elsewhere. Theft of small items is less likely at the check-out lane. Product demonstrations generally yield big results if correctly done. Trader Joe s customers always head for the island-style hut in the back of the store for the day s free sample item. One grocer reported sales of the item sampled may increase 400 percent. Suppliers routinely pay fees for product demonstrations and provide the sample goods free of charge. The additional labor cost is easily paid by the sales increase. Items paired with the featured item will always sell better. Large displays sell better than small displays. Why? Who knows. Maybe the consumer believes the savings are better because the items are delivered to the store in larger quantity, or that it s fresher. New packaging also disrupts the complacency of consumers, and it is used to prompt emotions regarding the product. What feeling should the consumer have when first seeing the package? Trader Joe s used a clear plastic cover to provide a full product view of its ready-to-heat lasagna. The product sold poorly, so the package was changed to display an image of the fully prepared product - - sales quadrupled. Effective packaging moves more goods. According to a consumer product specialist, airlines need to convey tasty, premium, and different to pique passenger curiosity to try a product. Is your airline doing packaging research? And are you doing it on the ground or up in the air? This box may meet the carrier s branding standards, but it would sit forever on the shelf of a grocery store. Is it possible to be unhappy while wearing a Hawaiian shirt? Trader Joe s calls the store s entrance area the decompression zone. Aisles are widest here to provide visual space for customers to slow down, relax, and look up and around. It's also where the store places items that require the most thought fruits and vegetables. Also stocked here are Trader Joe s signature items to suggest a higher level of quality throughout the store. This zone prepares the customer for the sales-enhancing experience sought by the company. Trader Joe s demonstrates the power unleashed when complacency is banished. Walking into a Trader Joe s is compared to going on vacation. Hawaiian shirts, bells clanging, cheerful employees, and artfully created signs create a retail environment as fresh as a tropical breeze. Yet hiding below this zaniness is a retail process and prowess more solid than most major grocers. Trader Joe s offers a retail island that has proven more effective at getting the treasure from a consumer s wallet than any pirate with a sword Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 36

37 Lessons for Airlines Trader Joe s Discontinue slower selling items to test the potential of new products. Disrupt the predictability of your menus for repeat travelers. Onboard retail trends support national brands, but consider creating your very own brands. If you do go with big brands consider adopting the retail practice of negotiating incentives from producers for product sampling. Packaging should show the product in its best light; avoid sterile corporate branding and opt for displaying food that s tasty, premium, and different. Passengers on vacation spend more - - the holiday should begin on the flight, not after. Selling by Making it Easy to Buy Baseball in America faces serious competition from many entertainment alternatives. With games lasting as long as three hours, fan convenience is an important consideration for Major League Baseball. But time spent in the ballpark also represents a great opportunity to sell stuff. With professional games having been around for more than 150 years, the industry has had plenty of time to perfect its retailing game. Retail activity in a ballpark provides a blend of fan convenience and aggressive selling. Fans are finding more all-inclusive zones at ball parks nationwide which feature all-you-can-eat buffets, beer, and better seating. Or, fans can opt for the traditional a la carte approach with a regular game ticket and food, beverage, and souvenirs available from vendors working the seating areas. In all areas of the ballpark, management knows it must maximize customer spending to keep up with the payroll expense of its onfield talent. Ah, the timeless allure of cotton candy. The best vendors know it's important to be visible with product. The St. Louis Cardinals franchise of Major League Baseball has Photo: Sally Lindsay, Flickr.com become a leader in the trend of adding all-inclusive zones. The Cardinals offer nine of these zones at Busch Stadium. Some, such as Bank of America Club, offer the double benefit of revenue from the naming right sold to a corporate partner. The BoA Club offers the following amenities starting at a price of $102 ( 83) per ticket: 2 ½ hour all-you-can-eat buffet that includes hot dogs, two additional entrees, salad, pasta station, baked beans, cookies and brownies (begins one hour prior to game time). Budweiser, Bud Select, Bud Light (begins one-and-a-half hours prior to scheduled game time and is available through the middle of the 8th inning). Coca-Cola products & O'Doul's low-alcohol beer (available throughout the game). Closed-circuit televisions and private toilets Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 37

38 Every kid s dream - - baseball and unlimited hot dogs. Photo: St. Louis Cardinals website The team positions the all-inclusive zones as money-saving and convenient. It s a popular choice for corporate entertaining and makes a nice gift for customers. The buffet is self-serve but beer is poured by ballpark staff. It s the offer of free tap beer that provides the biggest appeal for many fans. This is also a sensitive issue for the team and extra management attention is given to the all-inclusive zones. Senior bartenders are posted in these areas and fan behavior has not caused problems. Special wrist bands are required to control admission. BoA Club tickets start at $102 per game; regular seats in an adjacent area without amenities start at $39 ( 32) per game. The Cardinals are pleased with the financial results from all-inclusive pricing with healthy demand from fans. All-inclusive pricing allows the fan to pre-pay the cost of food and entertainment. These are premium tickets which are somewhat beyond the budgets of family-oriented consumers. Healthy margins do allow discounting to occur, but management is concerned about the perception of high ticket prices. But a growing number of fans do wish to pay a premium for more convenience; to avoid lines for counter service, and to enjoy more selection than is offered by at-seat vendors. How Vendors Hit a Home Run Be conspicuously visible to your customers, display your products, and be loud. Clearly communicate the price, don t make it a mystery. Take your time at the bottom of a section to create more interest throughout the section. Consumers love sale prices and discounting always works. Most fans at the ball park still choose the savings of regular seats and buy refreshments from at-seat vendors or counter service areas. A beer, hot dog, or souvenir vendor working a seating area is the ultimate embodiment of merchandising. The vendor earns a commission on what is sold. The vendor instantly learns what methods work best and which products are the most popular. In the stands, the key to success is being seen with your wares. The best vendors use a process that is nearly as old as baseball itself. They walk down the rows of a seating section holding the product high for all to see and loudly promote the product. More fan attention leads to better sales. This provides potential buyers time to consider what they want and to prepare to buy something. During the game, it s impossible to compete with the noise, so a visual display of the price is crucial. Whether it s a carpet bazaar in Morocco or a ballpark in Milwaukee, making eye contact with the customer is important. More time spent selling items at the bottom of the section - - in full view of the entire section - - always generates better sales on the way up. Vendors have a theory why this occurs. It gives the customer more time to consider the purchase and anticipate. Don t forget, it also provides more opportunities for kids to nag their parents. A flurry of sales activity suggests customers should act quickly while items are available. Consumers generally move in a herd and aspire to be like others. But the key factor remains being seen Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 38

39 Souvenir vendors also work booths inside the ballpark. One long time vendor remarked, Price appropriately, everything will eventually sell. The ugliest T-shirt will always sell for 50% off. The herd mentality works here too. A big crowd in front of the stand simply attracts more shoppers. Many stop because they are curious to learn what they might be missing. Consumers will buy what's put in front of them in the booth. That's the first place they look, and the location where the best selling items are stocked. Of course they look up and down, left and right, but what's in front of them is the sweet spot. Good merchandising begins with the buyers. If they buy the wrong items at the beginning of the year, it will detract from the entire selling season. Vendors on commission simply stash these items under the counter until the season ends. They won t place an item for sale when it simply displaces something that will sell better. Vendors are financially motivated to suggest additional and higherpriced items. But the crush of people that occurs during breaks in the game requires vendors to focus on speedy transactions. Those paying by credit card spend more. They respond especially well to a vendor s closing prompt, Would you like anything else? Lessons for Airlines American Baseball This lucky fan scored a baseball bobblehead souvenir at the ballpark. Photo: Daniel Means, Flickr.com Provide options for different consumers; some prefer all inclusive and some a la carte. All-inclusive service could become a premium-priced option for coach travelers. Consumers pay a premium for more convenience, and corporate clients like the amenities. Always start service at the front of the cabin to create anticipation. Enhance the visibility of signs for product pricing. Use sales to move products that don t sell well. Close each interaction with the request, Would you like anything else? Menus, M&Ms, and Offering More The well-known lyric to Glen Miller s 1941 tune Chattanooga Choo Choo implies an exceptional meal experience awaits travelers on American trains: Dinner in the diner, nothing could be finer, than to have your ham an' eggs in Carolina. Today s rail passengers only encounter dining cars on longer distance trains. Amtrak, the country s remaining passenger railroad, learned the painful economics of restaurant car service many years ago. Amtrak operates long distance trains in spectacular and remote places in America, which often makes catering an operational and economic challenge Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 39

40 The company created a variety of solutions to provide cost-effective food service on shorter routes and on high-speed trains serving business travelers. At-seat trolley service has proven to be an attractive solution. The best practitioner of the art pushes a cart on Amtrak s short haul train between Chicago and Milwaukee. Martin Schall is one of the highest revenue producing onboard attendants in Amtrak s nationwide network. After years of perfecting his craft, he has developed an effective merchandising system for the 86-mile route. He has about 90 minutes to sell food, beverages, and souvenirs to hundreds of passengers. Marty always places his M&M sign on the cart before rolling it down the aisle, It's the most important thing, passengers see the sign and instantly know what I'm selling. I can say M&Ms all day, but it's not as effective as that sign. Again, it's all about visibility. Onboard attendant Martin Schall is serious about revenue but relies on humor to boost sales. He holds up a handful of snack items for each passenger to pick from. This brings the store to the passenger s lap. It's an approach that allows the passenger to consider buying more than one item. When someone orders an item, he always asks, Would you like anything else? Each seat back is stocked with a simple laminated menu card. I didn't have menus for three years and now that I have them, it makes their mouth water before I get there. Marty often responds to customer requests by saying, Excellent choice. It's a simple phrase, but one that customers really appreciate; they like being told they've done well. Marty once relied on the PA system to promote his wares, but has since altered this strategy and now considers it obnoxious. This has been replaced by the conductor making a short announcement at the beginning of the trip. You can't sell by being an annoyance. Passengers want face to face contact, as they already have too many interactions involving machines talking to them. But the passengers receive much more than a friendly service attendant. Marty offers a complete repertoire that involves a paper railway hat, hand puppets, magic tricks, and a reservoir of jokes worthy of a bad lounge act... passengers love it and willingly open their wallets in appreciation. Lessons for Airlines Amtrak s Hiawatha Route Personality and humor engage passengers and open wallets. The key is being visible with your products and pricing. Reinforce the selection made by a passenger - - Excellent choice. You can t sell by being annoying. Close each interaction with the request, Would you like anything else? Little touches, such as cocktail condiments, impress the customer Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 40

41 Simple touches of thoughtfulness abound on Marty s train. Every can of soda includes a free wrapped drinking straw offered with a bit of contrived flourish. He believes passengers like the better sanitation of drinking through a straw. It's a simple thing, but they appreciate the extra care. When he makes a Bloody Mary, it always includes ground pepper and Tabasco sauce he has ingeniously procured from the commissary department. It s not an official condiment on this train, but it s something he knows passengers will remember. Marty takes pride in his work and considers his high sales activity a personal achievement - - and that s an accurate self assessment. Chart Your Own Course Lewis and Clark were assigned the task of finding an all-water route from St. Louis to the Pacific Ocean. 24 In this single regard, the Corps of Discovery failed its original charter. But in countless other ways, the nearly 2½ year journey delivered unprecedented results. The expedition charted the unmapped lands of western America and thoroughly recorded observations of its soil, plants, animals, minerals, climate, and native people. Excellent leadership, new approaches, profound teamwork, and well-engineered operations were the ingredients for success in 1803 and these attributes resonate in the business world of today. Everyone desires a direct path and a successful outcome. In this spirit, the following lessons are the ones most likely to take airlines to new retailing worlds where the competition is left behind. The 10 Steps to Onboard Revenue Success 1. Create structured service flows. 2. The key is being visible with your products and pricing. 3. May I take your drink order? 4. Use images of food in menus. 5. Discontinue marginal items to test the potential of new products. 6. Disrupt the predictability of your menus. 7. Packaging should show the product in its best light. 8. Provide all-inclusive and a la carte options. 9. Little touches, such as cocktail condiments, impress the customer. 10. Would you like anything else? The lessons provided by merchandising leaders such as TGI Fridays, Trader Joe s, professional baseball, and Amtrak, are made more valuable by the common sense approach taken by these companies. The Lessons for Airlines offered in the tables throughout this merchandising tale are written to reinforce a sensible approach to doing business: Know your brand. Trust your employees. Love your customers. 24 Return of Lewis and Clark at the Monticello.org (the home of President Jefferson) website reviewed May Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 41

42 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 42

43 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 43

44 Worldwide Financial Statistics from Leading Airlines IdeaWorks analyzed financial statements from 97 airlines to develop a picture of ancillary revenue activity by carriers worldwide. Of the 97 airlines, 47 reported revenue breakdowns identifying ancillary activities. The carriers that comprise the 97 arlines provide detailed financial statements and typically offer shares to the public. IdeaWorks used a number of resources, such as airline stock indexes, to identify these publicly-held airlines. Some of the carriers included do not offer shares to the public, but make financial statements available at airline websites. IdeaWorks Analyzed Financial Statements from 97 Airlines Worldwide Asia and the South Pacific 28% The Americas 23% Middle East and Africa 12% Europe and Russia 37% The results reveal ancillary revenue activity in excess of billion ($13.49 billion), which is more than 42 percent of the 7.68 billion ($10.25 billion) result reported in the 2009 guide. Financial results that qualify as ancillary revenue activities used the definitions provided in this report. Caution is advised for making airline-to-airline comparisons as the definition of ancillary revenue varies greatly. The US Department of Transportation (USDOT) collects data on excess baggage charges and other fees associated with domestic travel for US carriers for domestic travel. Baggage fees reported by the USDOT were included in the airline statistics because IdeaWorks believes this data to be mostly accurate. However, other ancillary revenue activity reported by the USDOT has been found to be inaccurate. In particular, statistics related to the sale of frequent flyer award miles to airline business partners under the Miscellaneous Operating Revenue category rarely match the millions of dollars disclosed by carriers in financial statements Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 44

45 Some airlines are vague in their descriptions and merely provide an ancillary revenue line on the income statement without further details. Some of the carriers don t specifically list ancillary revenue, but describe qualifying activities such as revenue from the sale of frequent flier miles to partners or revenue from duty-free sales. Other airlines provide robust details and seem very proud of their ancillary revenue accomplishments. Airlines sometimes choose to provide additional information in the presentations made to investment analysts. The explanatory material provided for each reporting airline is an edited version of information found in sources such as financial statements, annual reports, analyst research, and investor relations presentations. The Total Revenue and Passenger numbers for each airline are intended to reflect the activities associated with the generation of ancillary revenue. Financial figures have been converted to Euros with the exception of information provided in the Notes from Financial Reports box for each listed. The exchange rates used are listed at the end of this section. Results provided by AirAsia X were disclosed to IdeaWorks after the 15 July 2010 press release of 2009 activity for the Worldwide Review of Ancillary Revenue. Accordingly, the 2009 total increased from billion ($13.47 billion) to the billion ($13.49 billion) published in this guide Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 45

46 Airlines Posting Ancillary Revenue Results For most recent full-year period, listed in alphabetical order. Carriers Ancillary As % of Total Euros per US$ per Revenue in Euros Revenue Passenger Passenger Region Aer Lingus 173,900, % $20.57 Europe and Russia Air Arabia 7,394, % 1.80 $2.22 Middle East and Africa Air Berlin 123,100, % 4.41 $5.42 Europe and Russia Air Canada 534,143, % $21.19 The Americas AirAsia 102,546, % 4.52 $5.56 Asia and the South Pacific AirAsia X 17,650, % $21.00 Asia and the South Pacific AirTran 209,455, % 8.73 $10.74 The Americas Alaska Airlines 368,869, % $20.25 The Americas Allegiant 132,613, % $30.61 The Americas American 1,507,750, % $17.75 The Americas Austrian 9,800, % 0.99 $1.22 Europe and Russia British Airways 81,351, % 2.56 $3.14 Europe and Russia Comair S. Africa 873, % 0.24 $0.30 Middle East and Africa Continental 254,117, % 4.05 $4.98 The Americas Delta 1,117,120, % 6.94 $8.53 The Americas easyjet 608,796, % $16.57 Europe and Russia Emirates 218,448, % 7.96 $9.79 Middle East and Africa Finnair 1,700, % 0.23 $0.28 Europe and Russia Flybe 89,250, % $15.04 Europe and Russia Frontier 44,955, % 4.65 $5.72 The Americas GOL 113,209, % 3.98 $4.90 The Americas Hawaiian 50,774, % 6.09 $7.49 The Americas Iberia 18,700, % 0.89 $1.10 Europe and Russia Jet Airways 6,772, % 0.61 $0.75 Asia and the South Pacific Jet2.com 69,788, % $27.69 Europe and Russia JetBlue 287,695, % $15.76 The Americas LAN Airlines 33,155, % 2.15 $2.65 The Americas Lufthansa 116,000, % 2.09 $2.57 Europe and Russia Norwegian 99,370, % 9.24 $11.37 Europe and Russia Pegasus 19,926, % 4.12 $5.07 Europe and Russia PIA Pakistan Int. 10,859, % 1.96 $2.41 Asia and the South Pacific Qantas 782,903, % $25.05 Asia and the South Pacific Royal Jordanian 6,880, % 2.61 $3.20 Middle East and Africa Ryanair 663,600, % 9.98 $12.27 Europe and Russia Scandinavian 47,528, % 1.91 $2.35 Europe and Russia Singapore 17,690, % 0.97 $1.19 Asia and the South Pacific South African 31,458, % 4.56 $5.61 Middle East and Africa Southwest 247,678, % 2.87 $3.53 The Americas Spirit 136,105, % $27.50 The Americas Sun Country 9,535, % 7.65 $10.05 The Americas TAM Airlines 308,000, % $12.46 The Americas Tiger Airways 54,578, % $13.78 Asia and the South Pacific United 1,527,310, % $23.07 The Americas US Airways 540,589, % 6.93 $8.52 The Americas Virgin America 21,190, % 5.65 $6.96 The Americas Vueling 74,314, % 9.06 $11.14 Europe and Russia WestJet 70,884, % 5.05 $6.21 The Americas Data source: Research conducted during May 2010 by IdeaWorks of the financial statements filed by 47 airlines worldwide. The airlines in the graph disclosed qualifying ancillary revenue activity in financial statements for the most recent full year period. Please refer to individual carrier listings for details Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 46

47 Ancillary Revenue as a % of Total Revenue Allegiant Spirit Ryanair easyjet Tiger Airways Jet2.com Aer Lingus Alaska Airlines Flybe AirAsia Vueling United AirTran Norwegian JetBlue AirAsia X American Qantas TAM Airlines Air Canada US Airways Pegasus Sun Country Hawaiian Frontier Delta Virgin America GOL WestJet Air Berlin Southwest Continental Emirates Air Arabia PIA Pakistan Int. South African LAN Airlines Scandinavian Royal Jordanian Lufthansa British Airways Austrian Iberia Jet Airways Comair S. Africa Singapore Finnair 23.9% 22.2% 19.4% 19.4% 18.1% 14.4% 13.3% 13.2% 13.1% 12.4% 11.5% 11.0% 10.8% 10.7% 9.9% 9.3% 7.8% 7.7% 7.1% 6.3% 6.0% 5.8% 5.3% 5.0% 4.9% 4.7% 4.2% 4.0% 3.8% 2.9% 2.5% 2.3% 1.7% 1.1% 1.1% 1.1% 1.0% 1.0% 1.0% 0.9% 0.5% 0.4% 0.3% 0.3% 0.2% 0.1% 29.2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 47

48 Ancillary Revenue in Euros per Passenger Allegiant Jet2.com Spirit Qantas United Air Canada AirAsia X Aer Lingus Alaska Airlines American easyjet JetBlue Flybe TAM Airlines Tiger Airways Ryanair Norwegian Vueling AirTran Emirates Sun Country Delta US Airways Hawaiian Virgin America WestJet Frontier South African AirAsia Air Berlin Pegasus Continental GOL Southwest Royal Jordanian British Airways LAN Airlines Lufthansa PIA Pakistan Int. Scandinavian Air Arabia Austrian Singapore Iberia Jet Airways Comair South Africa Finnair Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 48

49 Ancillary Revenue in US$ per Passenger Allegiant Jet2.com Spirit Qantas United Air Canada AirAsia X Aer Lingus Alaska Airlines American easyjet JetBlue Flybe Tiger Airways TAM Airlines Ryanair Norwegian Vueling AirTran Emirates Sun Country Delta US Airways Hawaiian Virgin America WestJet Frontier South African AirAsia Air Berlin Pegasus Continental GOL Southwest Royal Jordanian British Airways LAN Airlines Lufthansa PIA Pakistan Int. Scandinavian Air Arabia Austrian Singapore Iberia Jet Airways Comair South Africa Finnair $30.61 $27.69 $27.50 $25.05 $23.07 $21.19 $21.00 $20.57 $20.25 $17.75 $16.57 $15.76 $15.04 $13.78 $12.46 $12.27 $11.37 $11.14 $10.74 $9.79 $9.41 $8.53 $8.52 $7.49 $6.96 $6.21 $5.72 $5.61 $5.56 $5.42 $5.07 $4.98 $4.90 $3.53 $3.20 $3.14 $2.65 $2.57 $2.41 $2.35 $2.22 $1.22 $1.19 $1.10 $0.75 $0.30 $0.28 $0.00 $10.00 $20.00 $30.00 $ Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 49

50 Source and Type Europe and Russia Aer Lingus Multiple ancillary revenue activities Ancillary Revenue 173,900,000 As a % of Revenue 14.4 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 1,205,700,000 Passengers 10,400,000 Information Source 2009 Full Year Results Presentation Dated 30 March 2010 and Investor and Analyst Day (London) 26 January 2010 Ancillary Revenue Definitions and Other Notes from Financial Reports 2009 ancillary revenue increased by 16.2% in 2009 to 173.9m. The carrier disclosed it experienced strong year-on-year increases from: - Online booking fees - Car hire commission - Baggage fees - Card fees - Seat selection revenues Aer Lingus includes benefit driven paid options, such as preorder food, as an element in its competitive positioning against low cost carriers: - Operate at central airports with multi-channel distribution such as global distribution systems. - Lounge access as a frequent flier program perk. - FlexiFares - Good seat comfort, recline and onboard amenities. - Pre-order food/all-day breakfast and good crew engagement. - Occasional use of jetways. - Limited transfer connectivity. - FFP and a limited partner network. Air Berlin Source and Type Multiple ancillary revenue activities Ancillary Revenue 123,100,000 As a % of Revenue 3.8 % Euros per Passenger 4.41 Reporting Period Calendar year Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 50

51 Total Revenue 3,240,344,000 Passengers 27,911,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Air Berlin Annual Report for 2009 and Analysts & Investors Conference (Berlin) 25 March 2010 Air Berlin experienced a decline of onboard revenue due to reduced long-haul flight operations. The carrier disclosed the following revenue from additional products and services associated with flying: - In-flight sales: 33,100,000 - Excess luggage: 18,800,000 - Air Berlin benefits card: 3,800,000 - Seat reservations: 7,900,000 - Promotional: 13,200,000 - Other: 46,300,000 Promotional and other includes revenue from commissions and co-branded credit cards. The Air Berlin Service Card provides perks such as seat assignments and increased baggage allowances upon payment of an annual fee. IdeaWorks divided the 3.8 million revenue generated by this program by the 59 annual fee to derive an estimate of 64,400 cardholders. Source and Type Austrian Checked baggage fees Ancillary Revenue 9,800,000 As a % of Revenue 0.5 % Euros per Passenger 0.99 Reporting Period Calendar year 2009 Total Revenue 1,963,400,000 Passengers 9,900,000 Information Source Austrian Airlines Group Quarterly Report, January September 2009 and Business results of the Austrian Airlines Group 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports Austrian Airlines recently became a wholly owned subsidiary of Lufthansa. The company provided detailed financials through 3 rd Quarter 2009 (the last day of shares trading was 3 February 2010). In that report, the company disclosed excess baggage revenue of 7.3 million and total revenue of 1,424.2 million. IdeaWorks calculated excess baggage fees represented 0.5% (0.005) of total revenue for the January September 2009 period Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 51

52 The company provided a summary of results for 2009 on 11 March 2010 which disclosed total operating revenue of billion. The 0.5% excess baggage revenue statistic was applied to the 2009 revenue result to generate an estimate of 9.8 million excess baggage revenue for The carrier also listed 2009 traffic at 9.9 million passengers. Source and Type British Airways Multiple ancillary revenue activities Ancillary Revenue 81,351,000 As a % of Revenue 0.9 % Euros per Passenger 2.56 Reporting Period Fiscal year ended 31 March 2010 Total Revenue 9,424,926,000 Passengers 31,817,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Preliminary Full Year Results 2009/10 and Preliminary Full Year Results 2009/10 Conference Call Transcript All figures below are in Great Britain pounds (GBP). British Airways disclosed ancillary revenue results of 69 million in its 2009/10 full year results presentation: 1) excess baggage approximately 11 million, 2) seat assignment fees - 10 million, 3) sale of FFP miles to partners approximately 38 million, and 4) online vacation packages - 10 million. IdeaWorks believes this is the first specific disclosure of specific results by British Airways. Ancillary revenue activity was referenced in the 2008/2009 report as one of Five Key Goals: Meet our customers needs and improve margins through new revenue streams by building profitable ancillary services that offer customers great value and re-enforce our brand. Our aim is to grow our mileage business and boost revenues from third-party engineering, in-flight sales and a new online retail website. On ba.com we have now launched a range of great value hotel and car hire options packaged with our flights. The following comments made by Keith Williams (CFO of British Airways) during 21 May 2010 earnings presentation for fiscal year 2009/10 include frequent reference to the company s ancillary revenue initiatives: And what I wanted to show you is what is happening with ancillary revenues. If you recall, we initiated a project, which we called Sprint, internally which was all about 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 52

53 bringing in more ancillary revenues, and what I thought I'd give you was an update on where we are on some of those ancillary revenue streams... And we have made significant progress since we introduced Sprint at the end of last summer. As you know, we changed the baggage charges, and that has brought in some revenue there. The first bag is still free for everybody. We do have excess baggage rules and that is bringing in more revenue. We introduced pay for seating, where people can go on the web and book a particular seat if they want to, and that is extremely popular. It is very, very popular and has raised more than GBP10 million of revenue since its introduction. Mileage; we've done a lot of work on mileage sales and you can see the result there... We introduced something called dynamic packaging, where you can go on the web and you can bring together your own package of flights, car hire, hotels, and that has brought in additional revenue there since its introduction early last year. And that will bring in more revenue again during the coming year. So, some significant progress on ancillary revenues. It's an early start, but there is significant progress to be made in each of those areas, and that will continue in the coming year. British Airways Executive Club has approximately 6 million members per a graph displayed in the Investor Day presentation dated 21 May Source and Type Ancillary Revenue As a % of Revenue Euros per Passenger Cimber Sterling Multiple ancillary revenue activities None specifically detailed see reference below Reporting Period Fiscal Year ended April 30, 2009 Total Revenue 174,366,654 Passengers 1,843,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports n/a n/a Q3 Interim Report for Investor Meeting Presentation Announcement no. 25/2010 dated 9 February 2010 Cimber Sterling Group A/S - Annual report 2008/09 All figures are in Denmark kroner (DKK). Cimber Sterling does not report ancillary revenue in its financial filings. However, IdeaWorks discovered the carrier does describe various ancillary revenue initiatives planned for The Odin Project is a promotional initiative to create an a la 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 53

54 carte pricing structure for the Denmark-based carrier. The new pricing concept will implement fees for baggage, seating, and catering. The initiative is expected to generate 40 million Danish kroner per year. The company is introducing a new price policy on in-flight catering and luggage which is expected to have a positive effect on operating profit (EBIT) of DKK million for the Financial Year 2010/11. The new policy will have marginal effect for the 2009/10 fiscal year. The new pricing policy will require travelers to pay for in-flight catering on international flights. Meals on domestic flights will be eliminated. The fee for checked baggage will be DKK 50 per piece. Management believes the new price philosophy reflects the belief customers should only pay for the services they desire. Source and Type easyjet Multiple ancillary revenue activities Ancillary Revenue 608,796,693 As a % of Revenue 19.4 % Euros per Passenger Reporting Period Fiscal year ended 30 September 2009 Total Revenue 3,144,393,000 Passengers Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports 45,200,000 (please see Note A below) easyjet Annual Report and Accounts 2009 and 2009 Full year results analyst presentation All figures below are in Great Britain pounds (GBP). Ancillary revenue increased by 40.6% to million in 2009, driven mainly by increases in the checked bag charge. Bag charge revenue delivered million in 2009, an increase of 94.0 million or 65.2% compared to the previous year. As expected, this has been accompanied by a small yield dilution, but with approximately 70% of passengers having checked baggage, the net result is positive. Speedy Boarding continues to deliver a strong performance. Management sees a number of opportunities to drive continued growth in ancillary revenues by introducing initiatives that add value to customer service. In-flight services continue to deliver improving revenue. The year saw wastage of fresh food halved and the introduction of new localized food and drink choices which better match the expectations of 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 54

55 customers on different routes. For 2010, the emphasis will be on fresh food, including a key country-specific bistro offering. easyjet has also expanded the number of partners it works with to provide these ancillary revenue generating services: car rental, hotel rooms, coach and rail travel, and insurance. Agreements with new partners such as Mondial Assistance and Laterooms.com, together with renewed focus on long-term partnerships with companies including Europcar and Gatwick Express, will generate revenue through easyjet.com. Management believes consumers have accepted fees for the first piece of checked baggage. During the year the carrier increased first bag charges to 9. Caution is warranted, as competitive pressures may limit the ability to increase revenue from this activity in the future. During 2010 in-flight revenue will benefit from the introduction of electronic point of sale equipment onboard and food offerings tailored by market and designed to appeal to a broader range of consumers. Improvements in website presentation should also result in improved conversion rates for car hire and hotels. The carrier s main ancillary partners are Gate Gourmet (inflight food and merchandise), Europcar (car rental), Hotelopia and Laterooms (hotel accommodations) and Mondial (travel insurance). Checked baggage revenue was 4.51 per seat. Change in ancillary revenue per seat versus 2008: - Baggage / sporting goods +53.3% - Speedy boarding and other discretionary charges +43.0% - Card / change fees +31.0% - Partner revenues +15.4% - In-flight net revenue -5.9% easyjet believes additional opportunities exist with these activities for ancillary revenue growth: - More travelers buying Speedy Boarding. - Higher in-flight spending per passenger. - Improvements to easyjet.com to drive partner revenue conversion. Hot food spending per passenger was approximately 0.13 and fresh food spending per passenger was approximately 0.13 during August Ancillary revenue is generally recognized when the flight to which it relates departs. Certain types of ancillary revenue are recognized at the time the benefit of the service provided passes to the customer. Ancillary revenue in the form of fixed annual fees is recognized evenly throughout the year Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 55

56 Note A: Represents the number of earned seats flown. Earned seats include paid for seats whether or not the passenger turns up because easyjet is a no-refund airline, and once a flight has departed a no-show customer is generally not entitled to change flights or seek a refund. Earned seats also include seats provided for promotional purposes and to staff for business travel. Source and Type Finnair Partner activities associated with the frequent flier program Ancillary Revenue 1,700,000 As a % of Revenue 0.1 % Euros per Passenger 0.23 Reporting Period Calendar year 2009 Total Revenue 1,837,700,000 Passengers 7,433,000 Information Source Annual Review 2009 and Financial Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports Finnair did not report revenue from a la carte activities. However, the carrier did report operating income of 1.7 million from its frequent flier program. The majority of this is likely provided by the carrier's Finnair Plus co-branded credit cards. The Finnair Plus frequent-flier program has around 1 million members in Finland and half a million members abroad. Source and Type Flybe Multiple ancillary revenue activities Ancillary Revenue 89,250,300 As a % of Revenue 13.2 % Euros per Passenger Reporting Period Fiscal year ended 31 March 2009 Total Revenue 674,857,242 Passengers 7,300,000 Information Source Annual report and consolidated financial statements dated 31 March Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 56

57 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Great Britain pounds (GBP). Flybe does not distribute interim financial reports at its website; the most recent report available was for the period ended 31 March Ancillary revenue for the year ended 31 March 2009 increased by 30% to per passenger. IdeaWorks calculated the annual result to be 75,700,000 based upon reported passenger traffic of 7.3 million passengers. Flybe considers ancillary revenue to consist of: 1) checked baggage, 2) advance seat assignment, 3) commissions earned on the sale of items, 4) reservation change fees, and 5) credit card fees. These are recognized as revenue on the date the right to receive consideration occurs. In respect of credit card fees, this occurs when each flight is booked and paid. For the remaining ancillary revenue, this occurs on the date of transportation, as this is when the service is generally provided. Commissions received from the issue of Flybe branded credit cards by a third party provider are allocated between the sales value of free flights and revenue. Revenue associated with free flights is recognized when the related flights are taken and remaining revenue is recognized upon receipt of payment, provided that it is not refundable and there are no further obligations for the company. Source and Type Iberia Partner activities associated with the frequent flier program Ancillary Revenue 18,700,000 As a % of Revenue 0.4 % Euros per Passenger 0.89 Reporting Period Calendar year 2009 Total Revenue 4,409,000,000 Passengers 20,900,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Summary of Fiscal 2009 and Presentation of Fourth Quarter Results Iberia does not report ancillary revenue in its financial filings. However, the carrier disclosed it owns 43.5% of Iberia Cards (Sociedad Conjunta para la Emisión y gestión de Medios de Pago EFC, S.A.). The company's shareholders are: Iberia Airlines, Grupo Banco Popular, BBVA, and Caja Madrid. According to the Iberia Cards website, Iberia Cards offers a complete range of products that meets the needs of all 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 57

58 segments of customers: families, small and medium enterprises, large corporations and public and private institutions. With over 8,000 branches spread across the Spanish geography, Iberia Cards has the largest sales network in the country. Thanks to this broad coverage, Iberia Cards is adding more customers and increasing its brand presence nationally. Iberia Cards generated revenue of 43 million during 2009; 43.5% (representing Iberia's ownership share) would be 18.7 million. Iberia may have realized a larger amount from the sale of points to Iberia Cards. As of late 2009, Iberia Plus had 4. 2 million members, which represents a 10.5% increase from Source and Type Jet2.com Multiple ancillary revenue activities Ancillary Revenue 69,788,547 As a % of Revenue 18.1 % Euros per Passenger Reporting Period 12-month period ended 30 September 2009 (fiscal year ends 31 March - two reports were used for the statistics) Total Revenue 384,589,800 Passengers 3,100,000 Information Source Dart Group Plc. Interim Report Period Ending 30 September 2008 Dart Group Plc. Interim Report Period Ending 30 September 2009 Dart Group Plc. Reports and Accounts 2009 (31 March 2009) Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Great Britain pounds (GBP). Jet2.com is a UK-based airline owned by the Dart Group Plc. Ancillary revenues are continually being developed with gross revenue per passenger at for the period ended 30 September 2009 and for the prior period. IdeaWorks calculated the period ended 30 September 2009 generated 45,540,000 and the prior period provided 13,653,000 (12- month period analyzed = 59,193,000). This increase is principally driven by sales made possible by the carrier s proprietary reservation system. Pre-ordered meals and advance seat assignment have been particularly successful on some longer routes. Further enhancements continue to be introduced by commercial and IT teams, including on-going development of travel agency interfaces which allow easy access to Jet2.com s seat inventory for travel agents and tour operators Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 58

59 Revenue statistics used to create the 2009 total: 1) 6 months ended 30 September 2008 was million, 2) 6 months ended 30 September 2009 was million, and 3) 12 months ended 31 March 2009 was million. Airline revenue for 12-month period analyzed: million. Passenger statistics used to create the 2009 traffic total: 1) 6 months ended 30 September 2008 was 2.3 million, 2) 6 months ended 30 September 2009 was 2.2 million, and 3) 12 months ended 31 March 2009 was 3.2 million. Airline passengers for the 12-month period analyzed: 3.1 million. The airline sometimes defines ancillary revenue as retail revenue in its financial reports. Jet2.com switched to its own in-house-developed reservation system in February The introduction of this reservation system allows the carrier to tailor the online offer more quickly and effectively to meet customer needs, and improve the online shopping experience. Retail revenues, in particular online seat assignment and extra leg room, have increased significantly as a result of the introduction of this system. Retail revenue from cabin service sales, excess baggage charges and extra legroom charges are recognized once the relevant flight has taken place. Separately identified incremental credit card charges and booking fees are recognized at the date of booking and booking change fees are recognized when the change is made, in line with the costs which such charges are designed to cover. Commission earned from car rental and hotel bookings is recognized on departure and from travel insurance on booking, reflecting the time when commission can no longer be recovered on cancellation. Source and Type Lufthansa Commission-based travel services Ancillary Revenue 116,000,000 As a % of Revenue 1.0 % Euros per Passenger 2.09 Reporting Period Calendar year 2009 Total Revenue 12,199,000,000 Passengers 55,544,000 (Lufthansa and Regional Partners) Information Source Lufthansa Financial Statements 2009 and Lufthansa Annual Report 2009 Ancillary Revenue Lufthansa reports other revenue which includes 98 million 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 59

60 Definitions and Other Notes from Financial Reports from ground services and in-flight sales and 116 million commission revenue from travel services. Ground services are not considered ancillary revenue and the 98 million was not included in this report. However, commissions from the sale of travel services do qualify and have been included. Results include Lufthansa and regional partners. Results exclude SWISS, British Midland (from July 2009), Austrian Airlines (from September 2009), and Germanwings. Source and Type Norwegian Multiple ancillary revenue activities Ancillary Revenue 99,370,530 As a % of Revenue 10.8 % Euros per Passenger 9.24 Reporting Period Calendar year 2009 Total Revenue 920,957,814 Passengers 10,754,104 Information Source Norwegian Air Shuttle Fourth Quarter Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Norway kroner (NOK). Results for Norwegian Air Shuttle ASA (the Group) consist of Norwegian Air Shuttle ASA and its subsidiaries. Ancillary revenue for 2009 was 788,655,000 NOK. Per passenger revenue was higher on longer flights. Norwegian considers ancillary revenue to include luggage fees, seat selection fees, commissions from sale of hotel bookings and insurance sold to customers while booking the flight. The company also operates Call Norwegian AS (established January 2008) to offer products such as cell-phone coverage and internet access that produce additional ancillary revenue for the airline. Pegasus Source and Type Multiple ancillary revenue activities Ancillary Revenue 19,926,000 As a % of Revenue 6.0 % Euros per Passenger 4.12 Reporting Period Calendar year Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 60

61 Total Revenue 331,383,000 Passengers 4,832,559 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Direct disclosure by the airline to IdeaWorks Pegasus disclosed the details of its ancillary revenue activity for 2009 direct to IdeaWorks. Ancillary revenue consists of the following activities: excess baggage, seat selection, onboard café, call center fee, online booking fee, duty free commission, airport parking revenue, car rental commission, advertising revenue, travel insurance commission, and sale of frequent flier points. Source and Type Ryanair Multiple ancillary revenue activities Ancillary Revenue 663,600,000 As a % of Revenue 22.2 % Euros per Passenger 9.98 Reporting Period 12 months ended 31 March 2010 Total Revenue 2,988,100,000 Passengers 66,503,999 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Full Year Results 2010 for Ryanair Holdings Plc, and Ryanair Investor Day (London) 2 October 2009 Presentation The carrier defines ancillary revenue to consist of onboard sales, non-flight scheduled revenues, and other ancillary products. These revenues are maximized by significant web traffic at Ryanair.com, better conversion rates, and new products. The company notes the growth rate is slowing over time. The company added a new hotel partner during 2009 (Booking.com). AXA insurance is paying on a per passenger basis and assumes all conversion risk. The company disclosed it improved the range of products offered onboard aircraft for sale. Ryanair has implemented variable pricing and is placing items on special sale. Checked baggage activity has been reduced by the new simplified airport procedure resulting in a 20% ramp staffing reduction. The checked baggage ratio has dropped from 1 bag per passenger to 0.3 bags per passenger Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 61

62 Source and Type SAS Scandinavian Onboard sales Ancillary Revenue 47,528,000 As a % of Revenue 1.0 % Euros per Passenger 1.91 Reporting Period Calendar year 2009 Total Revenue 4,671,472,000 Passengers 24,900,000 Information Source SAS Group Annual Report & Sustainability Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Sweden kroner (SEK). SAS disclosed operating revenue from in-flight sales was 457,000,000 SEK. The carrier includes the following among its commercial offerings: ticket add-ons, in-flight sales, and upgrades. SAS statistics include Scandinavian Airlines, Widerøe, and Blue1 Airlines. Source and Type Vueling Multiple ancillary revenue activities Ancillary Revenue 74,314,000 As a % of Revenue 12.4 % Euros per Passenger 9.06 Reporting Period Calendar year 2009 Total Revenue 601,600,000 Passengers 8,202,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Vueling Airlines 2009 Fourth-Quarter, Full-Year Financial Results Ancillary revenues per passenger have dropped due to increased sales through off-line channels (which do not sell as many ancillaries) and EU legislation changes for the sale of travel insurance online (opt-out is no longer permitted). The carrier disclosed it generated ancillary revenue of 0.73 euro cents ( ) per available seat kilometer (ASK) during The carrier operated 10,180,000,000 ASKs during Total ancillary revenue for 2009 was 74,314, Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 62

63 Non-Reporting Carriers for Europe and Russia The following airlines did not reveal ancillary revenue activity for the most recent full year period: Air Europa (Globalia), Air Greenland, Air Malta, Aegean Airlines, Aeroflot, Air France KLM (includes Transavia), Alitalia, Atlantic Airways, BMI British Midland, Croatia Airlines, Cyprus Airways, Eurofly, Germanwings, Icelandair, Lufthansa, TUI Travel Group (Airline brands: Arkefly, Corsairfly, First Choice Airways, Jet4You, Thomson Airways, TUIfly, and TUIfly Nordic), SAS Scandinavian, Spanair, SWISS (Lufthansa Group), TAP Portugal, and Thomas Cook Group (includes Condor) Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 63

64 Source and Type The Americas Air Canada Multiple ancillary revenue activities Ancillary Revenue 534,143,000 As a % of Revenue 7.1 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 7,528,247,000 Passengers 31,000,000 Information Source Air Canada Annual Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports Other revenue was CAD$882 million for This includes revenues from the sale of the ground portion of vacation packages, ground handling services and other airline services. This category also includes revenue related to the lease or sublease of aircraft to third parties. Lease or sublease revenues are recognized on a straight line basis over the term of the lease or sublease. Rental revenue from operating leases and subleases amounted to CAD$126 million in In 2005 the carrier disclosed its ground handling unit contributed revenue of CAD$65 million (this activity was not disclosed for 2009). These amounts (CAD$191 million) were deducted from the CAD$882 million amount disclosed as other revenue. Vacation package revenue is recognized as services are provided over the period of the vacation. Other airline related service revenues are recognized as the products are sold to passengers or the services are provided. Air Canada is an Aeroplan partner providing certain of Air Canada s customers with Aeroplan Miles, which can be redeemed by customers for air travel or other rewards acquired by Aeroplan. Under the agreement, Aeroplan purchases passenger tickets from Air Canada to meet its obligation for the redemption of Aeroplan Miles for air travel. The proceeds from the sale of passenger tickets to Aeroplan are included in advance ticket sales. Revenue related to these passenger tickets is recorded in passenger revenues when transportation is provided. IdeaWorks does not include this activity as ancillary revenue because the loyalty program is no longer owned by the airline. Air Canada s annual report discloses it carried nearly 31 million passengers for Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 64

65 Source and Type AirTran Multiple ancillary revenue activities Ancillary Revenue 209,455,000 As a % of Revenue 11.0 % Euros per Passenger 8.73 Reporting Period Calendar year 2009 Total Revenue 1,908,275,230 Passengers 23,997,810 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports 2009 Annual Report and 2010 Annual Shareholder Meeting Presentation AirTran disclosed ancillary revenue represented 11% of total revenue for 2009 (which was $2,341,442,000). IdeaWorks calculated this to equal $257,000,000. The carrier began unbundling pricing and services in Today, non-fare ancillary revenue is an important source of revenue from operations. Traditional sources of ancillary revenues include fees charged for the carriage of pets; liquor sales; excess baggage charges; special services fees, such as fees related to the transportation of unaccompanied minors; and revenue from the sale of frequent travel credits. In 2007, AirTran introduced optional fees for advance seat assignments and a fee for call center services. Additional fees were introduced in 2008: 1) fees for priority seat selection, 2) extension of mileage expiry or transfer of A+ Miles Rewards, 3) purchase of A+ Miles Rewards, and 4) first and second pieces of checked baggage. The carrier evaluates potential new services which may be of interest to customers, especially services for which customers are prepared to pay a fee and from which the carrier may derive additional ancillary revenue. As a result of the unbundling of pricing and services and, to a lesser extent the introduction of new fee-generating services, the carrier s ancillary revenue has grown since Significant growth occurred in 2008 with the introduction of checked bag fees. AirTran will continue to evaluate how and when to offer unbundled services as well as consider new services in These calculations generated a larger revenue result than AirTran reported to the US Department of Transportation. IdeaWorks chose to use the larger amount for this report Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 65

66 Source and Type Alaska Airlines Multiple ancillary revenue activities Ancillary Revenue 368,869,000 As a % of Revenue 13.3 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 2,770,837,000 Passengers 22,400,000 (Combined total of Alaska Airlines mainline and Horizon Air) Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports 2009 Annual Report and Bureau of Transportation Statistics, Form 41; Schedule P-12 Passenger revenue also includes certain ancillary or nonticket revenue such as reservations fees, ticket change fees, and baggage service charges. These fees are recognized as revenue when the related services are provided. The carrier separately disclosed domestic baggage fee revenue of $58.7 million to the US Department of Transportation. Total revenue reported for Mileage Plan was $333.6 million for 2009 (which includes an other-net component of $151.5 million). Total Other-net revenue for 2009 for the Group was $211.8 million. This includes $60.3 million ($211.8 million less $151.5 million associated with Mileage Plan) largely generated by ancillary revenue activity such as onboard food and beverage sales, commissions from car and hotel vendors, travel insurance commissions. These items are recognized as revenue when the services are provided. The grand total for 2009 ancillary revenue is $452.6 million: 1) $58.7 million from baggage fees, 2) $333.6 million from Mileage Plan, and 3) $60.3 million from other-net revenue. Alaska disclosed its key initiative for 2009 (and 2010) is to increase revenue. The carrier is taking a three-pronged approach that focuses on increasing non-ticket (or ancillary) revenues, improving product merchandising, and engaging frontline employees in the marketing process. The airline is redesigning the alaskaair.com web site to more prominently feature hotel, car rental and vacation offerings, and provide customers with convenient, one-stop shopping. In addition, Alaska plans to equip its 737 fleet with Wi-Fi by the end of In order to maximize revenue to help offset decreased traffic, Alaska and other carriers continued down the path of adding 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 66

67 or increasing ancillary fees for checked baggage, buy-on-board items, ticket fees, etc. These fees helped to recover some of the lost revenue from the decline in traffic, but certainly not all of it. The carrier warned in its annual report future increases in the price of jet fuel will harm its financial condition and results of operations, unless it is able to increase fares or add additional ancillary fees to attempt to recover increasing fuel costs. An increase in Mileage Plan redemption revenue and higher ancillary fee revenue contributed significantly to an increase in yields for These calculations generated a larger ancillary revenue result than Alaska reported to the US Department of Transportation. IdeaWorks chose to use the larger amount for this report. Source and Type Allegiant Multiple ancillary revenue activities Ancillary Revenue 132,613,540 As a % of Revenue 29.2 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 454,721,100 Passengers 5,328,436 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Allegiant Travel Company, Form 10-K for the period ending 31 December 2008 and Management Presentation - March 2009 Allegiant generates ancillary revenue from air-related charges and third party products. Total reported ancillary revenue for 2009 was $162,716,000. The amount consists of revenue from two categories, air-related charges and third party products. Air-related charges: $143,001,000. These are generated through charges for use of our website to purchase tickets, checked bags, advance seat assignments, priority boarding and other services provided in conjunction with scheduled air service. Third party products revenue was $19,715,000. This is ancillary revenue from the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets and fees received from other merchants selling products through the website. Gross sales from third parties were $73,188,000 during Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 67

68 Deducting the cost of goods sold of $50,014,000 and transaction costs of $3,459,000 (credit card fees and travel agency commissions) generates ancillary revenue of $19,715,000 (mark-up above costs). Ancillary revenue represents a significant percentage of total operating revenue. Ancillary revenues have grown from $65.0 million in 2007, to $114.6 million in 2008, and $162.7 million in Allegiant's average base fare fell during 2009 as the carrier reduced fares to stimulate air travel demand, yet ancillary revenue per passenger grew 12.4% on a per passenger basis. The carrier believes per-passenger ancillary revenue and the ability to maintain high load factors during the difficult revenue environment were key contributors to the positive financial results for Allegiant lists the following strategies in its annual report to develop ancillary revenue in three key areas: Unbundling the traditional airline product. We believe most leisure travelers are concerned primarily with purchasing air travel for the least expensive price. As such, we have created new sources of revenue by charging fees for services many U.S. airlines historically bundled in their product offering. We believe by offering a simple base product at an attractive low fare we can drive demand and generate incremental revenue as customers pay additional amounts for conveniences they value. For example, we do not offer complimentary advance seat assignments; however, any customer can purchase advance seat assignments for a small incremental cost. We also sell snacks and beverages on board the aircraft so our customers can pay for only the items they value. We aim to continue to increase ancillary revenue by further unbundling our air travel product. Expand and add partnerships with premier leisure companies. We currently work with many premier leisure companies in our leisure destinations that provide ancillary products and services we sell to our customers. For example, we have contracts with Harrah's Entertainment and MGM MIRAGE, among others, that allow us to provide hotel rooms sold in packages to our customers. During 2009, we generated revenue from the sale of more than 500,000 hotel rooms. By expanding our existing relationships and seeking additional partnerships with premier leisure companies, we believe we can increase the number of products and services offered to our customers and generate more ancillary revenue. In 2010, we began an initiative to emphasize and focus on revenue growth from third party products. We believe our efforts to enhance software capabilities and provide additional offerings, 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 68

69 along with our loyal customer base, could result in meaningful long-term revenue growth. Leverage direct relationships with our customers. Since approximately 86% (during 2006 through 2009) of our scheduled service revenue is purchased directly through our website, we are able to establish direct relationships with our customers by capturing their addresses for our database. This information provides us multiple opportunities to market products and services, including at the time they purchase their travel, between the time they purchase and initiate their travel, and after they have completed their travel. In addition, we market products and services to our customers during the flight. We believe the breadth of options we can offer them allows us to provide a "one-stop" shopping solution to enhance their travel experience. Source and Type American Multiple ancillary revenue activities Ancillary Revenue 1,507,750,000 As a % of Revenue 9.3 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 16,232,355,000 Passengers 104,467,549 (Combined total of American mainline and American Eagle) Information Source Form 10-K Annual Report of AMR Corp. for 2009, JPMorgan Aviation, Transportation & Defense Conference Presentation (March 9, 2010) Ancillary Revenue Definitions and Other Notes from Financial Reports American implemented numerous efforts to find additional revenue sources and increase existing ones which contributed $2.3 billion in Examples of other revenue sources over this period include confirmed flight changes, purchased upgrades, Buy-on-Board food services, baggage service charges, and numerous other initiatives. IdeaWorks does not include flight change fees as ancillary revenue. American reported revenue of $450 million from this activity for The amount was deducted from the $2.3 billion disclosure to generate adjusted ancillary revenue of $1.85 billion. In 2009, the company obtained approximately $1 billion of cash from the advance sale of AAdvantage Miles to Citibank (of which $110 million is recorded as deferred revenue and included in cash flow from operations). Revenue earned from 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 69

70 selling AAdvantage miles to other companies is recognized in two components. The first component represents the revenue for air transportation sold and is valued at fair value. This revenue is deferred along with revenue related to expected breakage of sold miles and recognized over the period the mileage is expected to be used, which is currently estimated to be 28 months. The second revenue component, based on the residual method and representing the marketing services sold, is recognized as related services are provided. The company further defined other revenue to include the sale of FFP miles to partners during its first quarter 2010 earnings call. These calculations generated a larger revenue result than American reported to the US Department of Transportation. IdeaWorks chose to use the larger amount for this report. Source and Type Continental Multiple ancillary revenue activities Ancillary Revenue 254,117,000 As a % of Revenue 2.5 % Euros per Passenger 4.05 Reporting Period Calendar year 2009 Total Revenue 10,257,590,000 Passengers 62,809,000 Information Source Continental Airlines Form 10-K for the period ended December 31, 2009, Barclays Capital High Yield Bond & Syndicated Loan Conference Presentation dated March 26, 2010, and Bureau of Transportation Statistics, Form 41; Schedule P-12 Ancillary Revenue Definitions and Other Notes from Financial Reports The carrier did not disclose ancillary revenue in financial reports for 2009 with the exception of baggage fees. Continental disclosed miscellaneous operating revenue of $57.3 million to the US Department of Transportation. This activity may include the sale of frequent flier miles, seat assignments and onboard sales of food, drink, pillows, blankets, and entertainment. The carrier also disclosed baggage fee revenue of $254.5 million to the US Department of Transportation. Miscellaneous operating and baggage fee revenue was combined to calculate ancillary revenue of $311.8 million for Systemwide baggage fee revenue was listed in financial filings as 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 70

71 approximately $270 million for 2009 (this amount approximately equals the $254.5 million reported to the US Department of Transportation). For the future, Continental advises in its 2009 Annual Report, We intend to offer additional goods and services relating to air travel that will permit customers to select product attributes that they wish to consume, and pay for, and not select other product attributes that they do not wish to consume or pay for. A portion of the goods and services will come from unbundling our current product, while another portion will come from goods and services that we do not currently offer. The revenue we derive from these goods and services, which is generally referred to as ancillary revenue, typically has higher margins than that of our core product and is an important element of our strategy to return to profitability and sustain that profitability. The carrier offers specific examples of Growing ancillary revenue streams in an investor presentation: 1) day-ofdeparture upgrades, 2) preferred coach seating, 3) premium wines and liquors, and 4) and a program called PetSafe. Source and Type Delta Multiple ancillary revenue activities Ancillary Revenue 1,117,120,500 As a % of Revenue 4.9 % Euros per Passenger 6.94 Reporting Period Calendar year 2009 Total Revenue 22,871,345,000 Passengers 161,048,649 Information Source Form 10-K for the year ended 31 December 2009, Delta Air Lines Reports December Traffic, 07 January 2010, and Bureau of Transportation Statistics, Form 41; Schedule P-12 Ancillary Revenue Definitions and Other Notes from Financial Reports Delta's financial reports do not disclose specific ancillary revenue activity. The carrier does report results for its ancillary businesses which it defines as aircraft maintenance and staffing services provided to third parties, dedicated freighter operations and vacation wholesale operations (MLT). This activity does not meet the definition of ancillary revenue for this report and the results were not included in the data. American Express disclosed in its Form 10-K Filing for the period ended December 31, 2009 the purchase of frequent flier 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 71

72 miles from Delta for $889 million ($900 million for 2008). This effectively represents revenue for Delta. The carrier disclosed it has more than 74 million SkyMiles members. The carrier separately disclosed domestic baggage fee revenue of $481.7 million to the US Department of Transportation. These calculations generated a larger revenue result than Delta reported to the US Department of Transportation. IdeaWorks chose to use the larger amount for this report. Source and Type Frontier Airlines Checked baggage fees Ancillary Revenue 44,955,400 As a % of Revenue 5.0 % Euros per Passenger 4.65 Reporting Period Calendar year 2009 Total Revenue 907,418,555 Passengers 9,675,257 Information Source Republic Airways Holdings Form 10-K for 2009, Republic Airways Holdings Inc. Q Earnings Call, Bureau of Transportation Statistics, Form 41; Schedule P-12 Ancillary Revenue Definitions and Other Notes from Financial Reports Republic Airways acquired Frontier Airlines on October 1, Results for the first three quarters of 2009 are not available. Republic results included Frontier effective on the purchase date. The carrier disclosed baggage fee revenue of $55.2 million to the US Department of Transportation. In its 3 rd quarter Republic Airways disclosed in its earnings call it is evaluating steps to increase ancillary revenue production through a la carte products and branded fares it offers through Frontier Airlines and Midwest Airlines. The two airlines are seeking more opportunities to sell even more ancillary revenue services during Frontier is expanding seat pitch on Airbus aircraft to offer a new seating zone called Stretch by the end of January Republic Airways reported ancillary revenue on a consolidated basis was approximately $11 per passenger during the fourth quarter Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 72

73 Source and Type GOL Partner activities associated with the frequent flier program Ancillary Revenue 113,209,600 As a % of Revenue 4.2 % Euros per Passenger 3.98 Reporting Period Calendar year 2009 Total Revenue 2,699,371,136 Passengers 28,410,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports US Securities and Exchange Commission (SEC) Form 20-4 for the 12-month period ended 31 December 2009 and GOL Institutional Presentation dated March 2010 All figures below are in Brazil reais (BRL). GOL operates the SMILES frequent flier program. Multiple banks participate as partners in SMILES. Credit card holders may transfer points earned with these cards to miles in the SMILES program. During 2009 the airline realized BRL million from the upfront sale of miles to Banco Bradesco and Banco do Brasil. SMILES has approximately 6.6 million members. The company also describes its desire to expand ancillary revenue through the following activities: - New partnerships - New e-commerce platform - Buy-on-board - VoeFácil (proprietary consumer credit benefit) - Wireless onboard entertainment The carrier launched buy-on-board during 2009 as a test on 42 daily flights. The program will be expanded to cover more than 400 daily flights, which represents in excess of 50% of GOL s daily flight operations. Financial results from the activity were not disclosed. GOL is also evaluating other opportunities such as the sale of travel insurance. Hawaiian Airlines Source and Type Multiple ancillary revenue activities Ancillary Revenue 50,774,500 As a % of Revenue 5.3 % Euros per Passenger Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 73

74 Reporting Period Calendar year 2009 Total Revenue 964,394,390 Passengers 8,340,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Form 10-K for Hawaiian Holdings for the period ended December 31, 2009 and and Bureau of Transportation Statistics, Form 41; Schedule P-12 Hawaiian reached an agreement in June 2009 with its cobranded credit card partner to extend the co-branded card agreement. Under the amendment, the card-issuing bank purchases frequent flier miles for mileage credits earned by HawaiianMiles members for making purchases using a Hawaiian Airlines credit card. The Amendment provides for an increase in the rate per frequent flier mile sold to the card-issuing bank effective January 1, 2009 as well as an advance payment of $24.1 million received in June The carrier disclosed baggage fee revenue of $38.2 million to the US Department of Transportation. Total ancillary revenue calculated by IdeaWorks for 2009 was $62.3 million. Source and Type JetBlue Multiple ancillary revenue activities Ancillary Revenue 287,695,000 As a % of Revenue 10.7 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 2,678,090,000 Passengers 22,450,000 Information Source Form 10-K for the period ended 31 December 2009 and JetBlue Airways Corp. Q Earnings Call Transcript Ancillary Revenue Definitions and Other Notes from Financial Reports JetBlue continues to pursue ancillary revenue growth. During January 2010 the company implemented a new integrated customer service system, which includes a reservations system, revenue management system, revenue accounting system, and customer loyalty management system. This new platform offers many benefits, including an enhanced ability to sell a la carte products. Ancillary revenue has helped JetBlue offset some of the financial weakness associated with The airline disclosed 2009 ancillary revenue grew $60 million or 17% compared to 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 74

75 2008 (IdeaWorks calculates 2009 ancillary revenue was $353 million). The increase was driven primarily by a full year of the carrier's Even More Leg Room (EML) offer. The customer response to EML continues to surpass the carrier's expectations; in 2009 it generated more than $70 million of revenue. The carrier does not define which activities are included under the ancillary revenue category. Other revenue, which appears to include ancillary revenue activities, consists of revenue generated through checked baggage, reservation changes, a portion of TrueBlue frequent flier point sales, airport concessions, mail and cargo, and LiveTV onboard entertainment (to include the sale of entertainment systems by the LiveTV subsidiary to other airlines). Other revenue increased 8%, or $26 million, for The increase was primarily due to higher excess baggage revenue with $18 million resulting from the introduction of the second checked bag fee in June 2008 and increased rates for these and other ancillary services during Points in the carrier's TrueBlue frequent flier program are sold to participating companies, including credit card and car rental companies. The revenue from this activity is split between deferred revenue and other revenue. Deferred revenue for points not redeemed is recognized as revenue when the underlying points expire. Deferred revenue was $54 million at December 31, Historically, point expiration has been minimal; however, with program changes made to TrueBlue during 2009 the airline recorded $5 million in revenue for point expirations. JetBlue's co-branded credit card agreement, under which it sells TrueBlue points to American Express, provides for a minimum point sales guarantee. Through December 31, 2009, the airline received $21 million in connection with this guarantee, which is subject to refund in the event that point sales exceed future minimums. During 2009, JetBlue recognized approximately $5 million (as an amount likely to not be redeemed) leaving $16 million deferred for future reward redemption. In December 2009, JetBlue extended the American Express co-brand arrangement through These calculations generated a larger revenue result than JetBlue reported to the US Department of Transportation. IdeaWorks chose to use the larger amount for this report. The $353 million ancillary revenue figure was used for JetBlue s ranking Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 75

76 Source and Type LAN Airlines Duty free and tour package sales Ancillary Revenue 33,155,015 As a % of Revenue 1.1 % Euros per Passenger 2.15 Reporting Period Calendar year 2009 Total Revenue 2,979,232,500 Passengers 15,404,300 Information Source Annual Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures are in US dollars. The carrier does not report ancillary revenue but does describe Other Revenues which include aircraft leases, courier and logistic services, storage and customs brokering, duty-free sales, and tours. Of these, duty-free and tour package sales qualify as ancillary revenue (totals $40,481,000) - Duty-free sales for 2009: $9,593,000 - Tour package sales for 2009: $31,088,000 Source and Type Southwest Multiple ancillary revenue activities Ancillary Revenue 247,678,500 As a % of Revenue 2.9 % Euros per Passenger 2.87 Reporting Period Calendar year 2009 Total Revenue 8,435,250,000 Passengers 83,310,229 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports 2009 Annual Report, Southwest Airlines Q Earnings Call, and Bureau of Transportation Statistics, Form 41; Schedule P-12 Southwest introduced fees for non-routine ancillary activities during June The carrier began allowing customers to bring small cats and dogs into the aircraft cabin for a $75 oneway fare. The company also implemented a $25 each way service charge for customers traveling as unaccompanied minors and increased its already existing service charge to check a third or overweight bag by $25. During September 2009 Southwest introduced EarlyBird 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 76

77 Check-in which allows customers to receive an automatically assigned boarding position before general check-in begins by adding $10 to the price of a one-way fare. Customers who purchase EarlyBird Check-in are able to board ahead of all passengers except Business Select passengers and those with A-List elite status. Priority boarding privileges are already included in the purchase of a Business Select fare and are a benefit of being an A-List frequent flier. Southwest disclosed other revenue was $340 million for The majority of the increase was due to revenues from recent initiatives, such as recently implemented fees for unaccompanied minors and for pets, revenue from the EarlyBird initiative, and an increase in the fee charged for customers checking a third bag. This category also includes revenue from the sale of Rapid Rewards frequent flier credits to program partners and charter aircraft operations. The carrier separately reported charter revenue of $36.1 million to the US Department of Transportation. This activity was deducted from the $340 million to yield ancillary revenue of $303.9 million for Summary of key ancillary revenue results (not all activity): - Early Bird revenue for the fourth quarter: $13 million - Business Select revenue for 2009: $72 million - New pet fare, unaccompanied minor charges and excess heavy bag fee revenue for 2009: $20 million. Southwest management disclosed during its fourth quarter earning call, The big opportunity out in front of us is with our Rapid Rewards program. We are looking for a very significant revenue contribution there. The company plans to introduce in-flight wireless internet access as a future revenue initiative. Source and Type Spirit Airlines Multiple ancillary revenue activities Ancillary Revenue 136,105,000 As a % of Revenue 23.9 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 569,685,000 Passengers 6,088,588 Information Source USDOT, Bureau of Transportation Statistics, and Bureau of Transportation Statistics, Form 41; Schedule P Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 77

78 Ancillary Revenue Definitions and Other Notes from Financial Reports Spirit is privately held but is required to report revenue and traffic data to the US Department of Transportation. Ben Baldanza, President and CEO of Spirit Airlines, spoke at the June 2010 Low Cost Airlines World Americas conference in Coral Gables, Florida. His slide presentation listed ancillary revenue of $27.53 per passenger for the 3 rd quarter of IdeaWorks multiplied this amount by four to compute an annual estimate of $167 million. These calculations generated a larger revenue result than Spirit reported to the US Department of Transportation. IdeaWorks chose to use the larger amount for this report. Spirit disclosed miscellaneous operating revenue of $75.7 million to the US Department of Transportation. This activity may include the sale of frequent flier miles, seat assignments and onboard sales of food, drink, pillows, blankets, and entertainment. The carrier also reported baggage fee revenue of $46.8 million to the USDOT. Miscellaneous operating and baggage fee revenue was combined to calculate ancillary revenue of $122.5 million for Source and Type Sun Country Multiple ancillary revenue activities Ancillary Revenue 9,535,500 As a % of Revenue 5.8 % Euros per Passenger 7.65 Reporting Period Calendar year 2009 Total Revenue 164,796,260 Passengers 1,246,562 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports USDOT, Bureau of Transportation Statistics, and Bureau of Transportation Statistics, Form 41; Schedule P-12 Sun Country is privately held but is required to report revenue and traffic data to the US Department of Transportation. Sun Country disclosed miscellaneous operating revenue of $90,000 to the US Department of Transportation. This activity may include the sale of frequent flier miles, seat assignments and onboard sales of food, drink, pillows, blankets, and entertainment. The carrier also disclosed baggage fee revenue of $11.6 million to the USDOT. Miscellaneous operating and baggage fee revenue was combined to calculate ancillary revenue of $11.7 million for Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 78

79 Source and Type TAM Airlines Partner activities associated with the frequent flier program Ancillary Revenue 308,000,000 As a % of Revenue 7.7 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 4,608,888,704 Passengers 30,400,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Financial Statements at December 31, 2009 and 2008 & Report of Independent Auditors and Fourth Quarter 2009 Results Presentation All figures below are in Brazil reais (BRL). TAM's disclosed revenue received from its frequent flier program: BRL 656,266,000 (TAM Loyalty Program). The carrier made the TAM Loyalty Program an independent company in October 2009 called Multiplus. The company was spun off in February 2010 through an initial public offer (IPO). Revenue is produced by the TAM Loyalty Program from the points sold to credit card, hotel, car rental, and other partners. Beginning on January 1, 2010, TAM transferred the management of the TAM Loyalty Program to Multiplus. Multiplus had 6.6 million members during Source and Type United Multiple ancillary revenue activities Ancillary Revenue 1,527,310,000 As a % of Revenue 11.5 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 13,332,585,000 Passengers 84,421,000 Information Source Form 10-K for 2009, United Airlines Q Earnings Call, and JP Morgan Aviation and Transportation Conference March 9, 2010 Ancillary Revenue Definitions and Other Notes from Financial Reports United Airlines is a leader among network airlines for creating new revenue streams. United was the first among the world's network airlines to introduce a second bag fee. The carrier's 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 79

80 ancillary revenue product line includes the following: - First & Second Bag Fees - Buy on Board Food - Economy Plus Upsell - Premier Line Access - Red Carpet Club Day Passes - Premier For A Day Combined, these initiatives will generate approximately $1.1 billion in Mainline and regional affiliate ancillary revenue increased by $140 million for 2009 compared to These revenues include baggage fees and unbundled services. For the full year of 2009, ancillary revenues totaled approximately $1.1 billion. United generates revenue through its Mileage Plus frequent flier program. Mileage Plus contributed approximately $774 million to passenger and other revenue in IdeaWorks combined United s disclosed ancillary revenue of $1.1 billion with Mileage Plus revenue of $774 million to generate total ancillary revenue of $1,874,000,000 for In January 2010 the carrier matched competitor bag fee hikes for domestic first and second bag fees. United expects this to add about $80 million in revenue to its 2010 results. These calculations generated a larger revenue result than United reported to the US Department of Transportation. IdeaWorks chose to use the larger amount for this report. Source and Type US Airways Multiple ancillary revenue activities Ancillary Revenue 540,589,500 As a % of Revenue 6.3 % Euros per Passenger 6.93 Reporting Period Calendar year 2009 Total Revenue 8,646,335,000 Passengers 78,000,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports US Airways Group, Inc. Form 10-K for the period ended December 31, 2009, and Airways Group, Inc. Q Earnings Call US Airways disclosed 2009 ancillary revenues of $424 million (described as first and second checked bag service fees, processing fees for Dividend Miles frequent traveler program, Choice Seats program, and call center/airport ticketing fees) Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 80

81 The carrier believes it receives a bigger boost from ancillary revenue than its competitors. Its route network focuses on domestic flights where a la carte fees are more prevalent. However, the statistics filed with the US Department of Transportation listed a higher result. The carrier listed baggage revenue of $432.3 million and miscellaneous operating revenue of $231million to the US Department of Transportation. The latter may include the sale of frequent flier miles, seat assignments and onboard sales of food, drink, pillows, blankets, and entertainment. This larger revenue figure was used for this report. Management previewed 2010 activities during the fourth quarter earnings call,... the next big area for ancillary revenue is allowing customers at any point in the booking process to pay some fee to sit in a better seat. The first row of coach on the aisle is a better seat than the middle seat next to the lavatory in the back of the airplane and today we charge exactly the same price for those. To allow customers to differentiate between those two seats is something we are eventually going to do. It is remarkably very challenging technologically to get that done but we are working on that. US Airways generates roughly $10 million a year from onboard advertising, but that includes napkins, cups and some buyonboard products (source: AirTran to sell advertising on seatback tray tables 17 November 2009 article in USA Today). The carrier disclosed in its Form 10-K it carried 51 million passengers on mainline services and 27 million on US Airways Express carriers (total of 78 million). Source and Type Virgin America Multiple ancillary revenue activities Ancillary Revenue 21,190,000 As a % of Revenue 4.7 % Euros per Passenger 5.65 Reporting Period Calendar year 2009 Total Revenue 446,620,000 Passengers 3,747,220 Information Source Ancillary Revenue Definitions and Other Notes USDOT, Bureau of Transportation Statistics, and Bureau of Transportation Statistics, Form 41; Schedule P-12 Virgin America is privately held but is required to report revenue and traffic data to the US Department of 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 81

82 from Financial Reports Transportation. Virgin America disclosed miscellaneous operating revenue of $6.6 million to the US Department of Transportation. This activity may include the sale of frequent flier miles, seat assignments and onboard sales of food, drink, pillows, blankets, and entertainment. The carrier also disclosed baggage fee revenue of $19.4 million to the US Department of Transportation. Miscellaneous operating and baggage fee revenue was combined to calculate ancillary revenue of $26 million for IdeaWorks believes the miscellaneous operating revenue does not include all qualifying activities as the carrier aggressively promotes its onboard café and co-branded credit card program. Source and Type WestJet Multiple ancillary revenue activities Ancillary Revenue 70,884,100 As a % of Revenue 4.0 % Euros per Passenger 5.05 Reporting Period Calendar year 2009 Total Revenue 1,763,305,760 Passengers 14,038,827 (described in the annual report as Segment Guests ) Information Source Annual Report Financial Report for 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Canadian dollars (CAD). Ancillary revenues are recognized as the services and products are provided to the guests. Included in ancillary revenues are fees associated with guest itinerary changes or cancellations, excess baggage fees, buy-on-board sales and pre-reserved seating fees. Ancillary revenues, which include service fees, onboard sales and partner and program revenue, provide WestJet an opportunity to maximize profits through the sale of highermargin goods and services, while also enhancing the overall guest experience. For 2009, ancillary revenues were C$91.7 million, representing a decrease of 4.2 per cent from The decline was attributable mainly to lower revenue due to the termination of the tri-branded BMO Mosaik AIR MILES MasterCard credit card partnership on July 31, 2008 and a decrease in certain fee revenues. Subsequent to the 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 82

83 changeover to the SabreSonic reservation system in October, certain fees, such as change and cancellation, were temporarily waived in order to accommodate our guests during the adjustment to the new system. On October 17, 2009, WestJet and Sabre Airline Solutions (Sabre) implemented the SabreSonic reservation system. Management believes this system will enhance ancillary revenue opportunities. Non-Reporting Carriers for the Americas The following airlines did not reveal ancillary revenue activity for the most recent full year period: Copa Airlines, and go!mokulele (Mesa Air Group) 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 83

84 Asia and the South Pacific Source and Type AirAsia Multiple ancillary revenue activities Ancillary Revenue 102,546,496 As a % of Revenue 13.1 % Euros per Passenger 4.52 Reporting Period Calendar year 2009 Total Revenue 785,176,938 Passengers 22,700,000 Information Source AirAsia Berhad Fourth Quarter Report dated 31 December 2009, and Fourth Quarter 2009 Results dated 25 February 2010 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Malaysian ringgit (RM). The Group recorded revenue of RM3,179 million for the full year ended 31 December 2009, 11% higher than the revenue of RM2.852 billion for the full year ended 31 December The positive growth in revenue was attributed to higher contribution from ancillary income and other operating income. Ancillary revenue is listed as a line item on financial statements: RM415,168,000. Ancillary revenue has outpaced the passenger growth rate and provides stable profits as activity show little seasonal variation. The company believes additional growth potential exists at limited additional cost. Strong ancillary revenue growth has also offset the loss of revenue from lower fare levels. Group results include investment made in Thai AirAsia and Indonesia AirAsia. AirAsia X Source and Type Multiple ancillary revenue activities Ancillary Revenue 17,650,000 As a % of Revenue 9.9 % Euros per Passenger Reporting Period Calendar year 2009 Total Revenue 177,938,800 Passengers 1,034, Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 84

85 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Disclosed by AirAsia X management directly to IdeaWorks. All figures are in Malaysian ringgit (RM). Pick A Seat feature: RM 14,944,000 Comfort Kit sales: RM 2,511,000 Checked and Excess Baggage: RM 37,801,000 Meals (pre-order and purchased onboard): RM 16,200,000 Source and Type Jet Airways Checked baggage fees Ancillary Revenue 6,772,480 As a % of Revenue 0.3 % Euros per Passenger 0.61 Reporting Period Fiscal year ended March 31, 2009 Total Revenue 2,301,710,400 Passengers 11,080,035 Information Source Annual Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in India rupees (INR). Excess baggage revenues were 318,600,000 rupees (consolidated results) for fiscal The increase was largely from the growth of international operations. Source and Type PIA Pakistan Int. Multiple ancillary revenue activities Ancillary Revenue 10,859,000 As a % of Revenue 1.1 % Euros per Passenger 1.96 Reporting Period Calendar year 2009 Total Revenue 945,640,000 Passengers 5,535,000 Information Source Annual Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Pakistan rupees (PKR). PIA reported excess baggage revenue of 1,080,000,000 rupees for The carrier operates the Awards +Plus frequent flier program which generated revenue of 5,900,000 rupees from the sale of 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 85

86 credits to program partners in Total ancillary revenue disclosed was 1,085,900,000 rupees for Source and Type Qantas Partner activities associated with the frequent flier program Ancillary Revenue 782,903,000 As a % of Revenue 7.8 % Euros per Passenger Reporting Period Fiscal year ended 30 June 2009 Total Revenue 10,055,432,000 Passengers 38,438,000 Information Source Annual Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports The results listed are for the Qantas Group which includes Qantas and its low cost carrier Jetstar (which participates in the Qantas Frequent Flyer program). Qantas plans to maximize ancillary revenue and cost recovery opportunities during the 2009/2010 fiscal year. The company will develop Qantas.com as an integrated premium travel site with a presence in 30 countries and support for seven languages. Ancillary revenue activity will be better integrated into the website to maximize the potential of the 8 million monthly visits. 2008/2009 fiscal year Qantas Frequent Flyer revenue was AUD 1,133,000,000 with a profit before tax of AUD 310,000,000. The program has 6 million members. Qantas Frequent Flyer introduced its restaurants program in April 2009, commencing with more than 150 partner restaurants, bars and cafes that allow members to earn points when they dine. The Woolworths Group became a Qantas Frequent Flyer program partner in June The alliance has united two of Australia s most recognized brands and delivers greater reward opportunities for consumers through their everyday shopping. Members will be able to earn points at Woolworths and Safeway supermarkets, Woolworths and Safeway Liquor, Big W, Dick Smith, Tandy, BWS and Woolworths Caltex fuel outlets once the program is fully rolled out Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 86

87 Source and Type Singapore Airlines Excess baggage fees Ancillary Revenue 17,690,000 As a % of Revenue 0.23 % Euros per Passenger 0.97 Reporting Period Fiscal year ended March 31, 2009 Total Revenue 7,568,710,000 Passengers 18,293,000 Information Source Singapore Airlines Group Annual Report 2008/2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in Singapore dollars (SGD). Excess baggage revenues were SGD 30.5 million for the fiscal year ended March 31, Results are for Singapore Group which includes these five primary operating companies: Singapore Airlines, SilkAir, Singapore Airport Terminal Services Group, SIA Engineering Group, and Singapore Airlines Cargo. Source and Type Tiger Airways Multiple ancillary revenue activities Ancillary Revenue 54,578,000 As a % of Revenue 19.4 % Euros per Passenger Reporting Period Fiscal year ended 31 March 2010 Total Revenue 281,996,000 Passengers 4,872,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Caged Beast or Jungle Predator article in the April 2010 issue of Air Transport World (page 42) and Tiger Airways Holdings Limited FY09/10 Results Presentation All figures below are in Singapore dollars (SGD). Ancillary revenue for the group (Tiger Airways Singapore and Tiger Airways Australia) was listed as a line item in the income statement: SGD 94,100,000. In a recent Air Transport World article, the airline described ancillary revenue growth as a major goal. Ancillary revenue is generated through baggage service and seat selection fees, and in-flight sales of beverages, food, and merchandise. Some revenue is realized from the commissions paid on the sale of 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 87

88 car rental services and travel insurance through the carrier's website. Through its website, the carrier offers passengers a range of "Tiger Add-On" products such as: - Luggage upsize: Charges are based on the weight of the luggage passengers check in, so passengers only pay for individual luggage requirements. - Seat Selector: Passengers can select preferred seats on flights by paying a fee. Pricing differs by route and the location of the seat selected. - Sports Equipment Check-in: Passengers can choose to bring golf clubs, dive bag, or any other item of oversized sports equipment. - Reservation Fees: The carrier charges a fee for almost all reservations on Tiger Airways as well as a fee for changing reservations. - Commission-Based: As part of its internet-related services, Tiger offers accommodation services, travel insurance and car rental through the website. Shareholders: Singapore Airlines Limited 34.4%, Indigo Singapore Partners L.P. 15.0%, and RyanAsia Limited 11.2% Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 88

89 Non-Reporting Carriers for Asia and the South Pacific The following airlines did not reveal ancillary revenue activity for the most recent full year period: Air Astana, Air China, Air New Zealand, Air Pacific, All Nippon Airways, Asiana, Cathay Pacific Airways, China Eastern Airlines, EVA Airways, China Southern Airlines, Hainan Airlines (only 2008 report available), Japan Airlines, Kingfisher, Korean Air, Malaysia Airlines, Philippine Airlines (only 2008 report available), Regional Express REX, SpiceJet, Thai Airways, Virgin Blue Airlines Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 89

90 Middle East and Africa Source and Type Air Arabia Multiple ancillary revenue activities Ancillary Revenue 7,394,444 As a % of Revenue 1.7 % Euros per Passenger 1.80 Reporting Period Calendar year 2009 Total Revenue 437,776,182 Passengers 4,100,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Annual Report 2009 for Air Arabia All revenue below is stated in UAE dirhams (AED). The carrier disclosed baggage revenue of AED 33,308,305 for Source and Type Comair (South Africa) Partner activities associated with the frequent flier program Ancillary Revenue 873,976 As a % of Revenue 0.3 % Euros per Passenger 0.24 Reporting Period 12-month period ending 30 June 2009 Total Revenue 326,219,674 Passengers 3,600,000 Information Source Annual Report 2009 Ancillary Revenue Definitions and Other Notes from Financial Reports All figures below are in South African rand (ZAR). Comair disclosed ad hoc revenue received from participation in an international loyalty program (British Airways Executive Club) of 8,168,000 rand. The carrier operates the British Airways franchise in South Africa. Comair also owns Kulua.com, a low cost carrier in South Africa. However, ancillary revenue results from this subsidiary was not disclosed. Passenger traffic is estimated by IdeaWorks based upon 2008 traffic reported in Air Transport World Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 90

91 Source and Type Emirates Multiple ancillary revenue activities Ancillary Revenue 218,448,000 As a % of Revenue 2.3 % Euros per Passenger 7.96 Reporting Period Fiscal year ended 31 March 2010 Total Revenue 9,647,010,000 Passengers 27,454,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports Annual Report of The Emirates Group for the period ended March 31, 2010 All figures below are in UAE dirhams (AED). Emirates did not specifically disclose ancillary revenue, but it did list many qualifying activities in its annual report: 1) Sale of consumer goods / duty free (AED 706,000,000), and 2) Revenue from excess baggage charges (AED 278,000,000). The total ancillary revenue calculated by IdeaWorks is AED 984,000,000. The Skywards frequent flier program has 5 million members. Members may accrue miles by utilizing the services of program partners; the carrier did not disclose revenue from the sale of miles in its report. Onboard staff are being issued new duty-free hand-held sales computers, while all pursers now have KIS (Knowledge-driven Information System) laptops which provide them with the who s who onboard prior to the flight. Royal Jordanian Source and Type Checked baggage fees Ancillary Revenue 6,880,212 As a % of Revenue 1.0 % Euros per Passenger 2.61 Reporting Period 12-month period ending 31 December 2009 Total Revenue 687,400,740 Passengers 2,641,0000 Information Source Quarterly and Annual Consolidated Financial Statements for 2008 Ancillary Revenue All figures below are in Jordanian dinars (JOR) Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 91

92 Definitions and Other Notes from Financial Reports Royal Jordanian disclosed excess baggage revenue in its 2009 financial statements: 5,988,000 dinars. oneworld at-a-glance statistics disclose 2,641,000 annual passengers. Source and Type South African Partner activities associated with the frequent flier program Ancillary Revenue 31,458,000 As a % of Revenue 1.1 % Euros per Passenger 4.56 Reporting Period Fiscal year ended 31 March 2009 Total Revenue 2,767,448,000 Passengers 6,900,000 Information Source Ancillary Revenue Definitions and Other Notes from Financial Reports 2009 Annual Report All figures below are in South African rand (ZAR). South African Airways generates ancillary revenue from its Voyager frequent flier program. Voyager revenue consists of annual participation fees, sale of miles to Voyager airline partners and non-airline partners such as hotels and car rental agencies. Fiscal year 2009 Voyager revenue was 294 million rand. South African Airways Group results include its low cost carrier Mango. Non-Reporting Carriers for the Middle East and Africa The following airlines did not reveal ancillary revenue activity for the most recent full year period: 1Time Airline, Air Mauritius, Egyptair, El Al, Jazeera Airways, Kenya Airways, Oman Air (only 2008 annual report available) Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 92

93 Currency Exchange Rates Used for the Worldwide Statistics Airlines disclose revenue in local currency. The reporting currency for this guide is the euro. The following exchange rates were used to convert amounts from local currencies to the euro. Australia dollar (AUD) = euro Brazil reais (BRL) = euro Canada dollar (CAD) = euro Danish kroner(dkk) = euro Great Britain pound (GBP) = euro India rupees (INR) = euro Japan yen (JPY) = euro Jordan dinar (JOR) = euro Malaysia ringgit (MYR) = euro Norway kroner (NOK) = euro Pakistan rupee (PKR) = euro Singapore dollars (SGD) = euro South Africa rand (ZAR) = euro Sweden kroner (SEK) = euro UAE dirham (AED) = euro US dollar (USD) = euro Currency exchange rates are from XE.com, the Universal Exchange Converter Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 93

94 AirAsia X Stretches a la Carte to Fit the Globe Low Cost Long-Haul Becomes a Success AirAsia X demonstrates the vibrant diversity of the world of ancillary revenue. This airline went beyond the traditional limits of the low cost model when it introduced flights between Kuala Lumpur and London Stansted. These 13-hour flights boldly applied a la carte pricing to meal and beverage service, as well as fees for checked baggage and pre-assigned seats. Many airline executives believed AirAsia X would be pilloried for the untested concept of failing to feed passengers on an ultra long-haul flight. Azran Osman-Rani, the carrier s CEO, knew it would work. AirAsia s earlier pre-order and buy-on-board experience proved customers understood the carrier s low fare promise and no-frills style of service. AirAsia X is blending its AirAsia and Virgin Group ownership pedigree with the discounted luxury of angled lie-flat beds. But Mr. Osman-Rani didn t stop there - - he has ventured into the rough and tumble world of premium cabins to woo upscale and business travelers. The 2010 fleet-wide addition of angled lie-flat beds effectively announces AirAsia X has big plans to attract a wider audience of travelers. Operating revenue for Image: AirAsia.com 2009 was MYR 720 million ( 178 million) with a profit of MYR 87 million ( 21 million). 25 More than 2 million passengers have flown the airline since its inception. The public will soon have the opportunity to buy a piece of the action. AirAsia Group announced plans on 8 June 2010 to make AirAsia X independent through an initial public offering. AirAsia X hopes for a public listing to occur during the second half of The carrier anticipates a near-term growth spurt to 11 aircraft with route expansion from Malaysia planed for India, Korea, and Japan by year-end. 26 Tony Fernandes, the founder of AirAsia, was inspired by the success of Ryanair. This inspiration, along with the success enjoyed by AirAsia, were subsequent factors in the design of AirAsia X. There is irony here as Michael O Leary, CEO of Ryanair, casts about for a future endeavor after he leaves the airline. Mr. O Leary is probably an avid reader of any news related to AirAsia X; he has considered applying the Ryanair model to the transatlantic market between Europe and North America. Other lessons might be learned too. The relationship between AirAsia and AirAsia X is defined by a brand licensing agreement which provides access to the AirAsia brand and website. Fortuitously, the good folks at AirAsia X have shared their a la carte results with IdeaWorks. As a result, readers have access to the ancillary revenue numbers associated with pre-assigned seating, checked baggage, and food service for flights operating in a 5 to 13 hour range. 25 AirAsia X to Gear Up For IPO as a Stand-Alone Airline press release dated 8 June 2010 at AirAsia.com. 26 AirAsia X to Gear Up For IPO as a Stand-Alone Airline press release dated 8 June 2010 at AirAsia.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 94

95 London to Kuala Lumpur and Beyond AirAsia X operates seven Airbus 330 aircraft on routes throughout Asia and dedicates two larger Airbus 340 aircraft to its Kuala Lumpur London Stansted service. 27 The carrier serves an Asia, South Pacific, and European network of 12 destinations from its Kuala Lumpur hub in Malaysia. All aircraft offer two-class configuration with economy class seats and angled lie-flat beds. All routes, with the exception of Chengdu, require more than five hours flying time. Some serve secondary airports, such as Hangzhou and Tianjin, while others are primary destinations, such as New Delhi and Mumbai. Tehran is undoubtedly an experiment with two roundtrip flights per week, while London Stansted reigns as a showplace destination in Europe. AirAsia X Route Network Kuala Lumpur and Flight Time Flight Frequency Direct Competitors Chengdu 4:40 5 r/t per week None Gold Coast (Brisbane) 8:15 Daily To Brisbane: Malaysia Hangzhou (Shanghai) 5:00 Daily None London Stansted 13:30 Daily To LHR: Malaysia Melbourne 7:30 12 r/t per week Emirates, Malaysia Mumbai 5:05 4 r/t per week Jet Airways, Malaysia New Delhi 5:40 Daily Jet Airways, Malaysia Perth 5:45 9 r/t per week Malaysia Seoul 6:30 Daily (starts 01 Nov 2010) Korean Air, Malaysia Taipei 5:00 7 r/t per week China Airlines, EVA, Malaysia Tehran 8:00 2 r/t per week IranAir Tianjin (Beijing) 6:10 5 r/t per week To Beijing: China Southern, Malaysia Unless noted, schedules are effective 31 October 2010 Source: Schedules reviewed at AirAsia.com September AirAsia X is no stranger to competition. Malaysia Airlines competes directly or indirectly on nine routes. Other airlines providing head-to-head competition are China Airlines, China Southern, Emirates, EVA, IranAir, Jet Airways, and Korean Airlines. All provide premium cabins, which undoubtedly prompted AirAsia X to add the same. But in other areas, the carrier has not followed. AirAsia X has not duplicated the art of connecting traffic so ably supported by network airlines. Passengers may connect at Kuala Lumpur, but are required to re-check bags and accept the risk of a missed connection (for any reason). It would not be surprising if the airline strays from the classic LCC model and implements a service to facilitate connections at the Kuala Lumpur hub. 27 AirAsia X - Details and Fleet History at Planespotters.net reviewed August Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 95

96 AirAsia X is an a la Carte Hybrid Being a purist would require all a la carte all-the-time. But AirAsia X takes a blended approach: economy is strictly a la carte and Premium is largely a bundled product with some a la carte elements. AirAsia X A la Carte Options A la Carte Feature Economy Class Premium Class Pick a Seat Standard Seats (assigned seat) Hot Seats (exit row and bulkhead) Comfort Kit Pillow & Blanket Booked Online Purchased Onboard Checked Baggage Booked Online Up to 15 kg. Up to 20 kg. Up to 25 kg. Up to 30 kg. MYR 25 ( 6) MYR 100 ( 25) MYR 25 ( 6) MYR 35 ( 9) MYR 30 ( 7) MYR 50 ( 12) MYR 80 ( 20) MYR 120 ( 30) Complimentary seat assignment. Complimentary but for onboard use only. Complimentary Up to 20 kg. Economy fees apply for more than 20 kg. Checked Baggage Booked Online London Flights Only Up to 15 kg. Up to 20 kg. Up to 25 kg. Up to 30 kg. MYR 39 ( 10) MYR 60 ( 15) MYR 100 ( 25) MYR 150 ( 37) Complimentary Up to 20 kg. Economy fees apply for more than 20 kg. Checked Baggage Paid at Airport Up to 15 kg. Up to 15 kg. London Flights Only Each kg. over 15 kg. (per bag) Standard Hot Entrée Booked Online Purchased Onboard Beverage Examples Soft Drink Red or White Wine, 175 ml. MYR 40 ( 10) MYR 50 ( 12) MYR 20 ( MYR 10 ( 3) MYR 12 ( 3) MYR 6 ( 2) MYR 18 ( 4) Same as above. Complimentary meal and mineral water. Economy fees apply. Personal Movie/TV/Music Player MYR 30 ( 7) Economy fees apply. Priority Check-In Not applicable Complimentary Express Boarding Not applicable Complimentary Priority Baggage Delivery Not applicable Complimentary Prices in Malaysia ringgit converted to euros: 1.0 MYR = euro. Source: AirAsia.com website September Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 96

97 The economy product defines basic air transportation. If a passenger desires bottled water on a 13- hour flight, it s available for MYR 3 ( 1). Seat assignments, blankets, pillows, checked baggage, food and drink, and video entertainment are all available for a fee. Passengers are generally pleased with this arrangement because they understand the AirAsia brand represents no-frills flying. But there are always consumers who don t comprehend the carrier s service proposition and expect a service comparable to network carriers such as Malaysia Airlines. However, the substantial savings delivered by AirAsia X often persuades these travelers to become repeat customers. As shown on the table below AirAsia X positions itself to provide outstanding value when compared to a network airline: Malaysia Airlines and AirAsia X Roundtrip Price Comparison Kuala Lumpur Perth (5:45 hour flight) Outbound: 01 Nov Return: 10 Nov Fare Notes AirAsia X Economy MYR 630 ( 156) Promo fare: Baggage and other services a la carte. Malaysia Economy MYR 1,737 ( 429) Lowest fare: Preassigned seats not provided. AirAsia X Premium MYR 2,463 ( 608) Premium fare: Baggage, meal, and seat assignment. Malaysia Business MYR 10,543 ( 2,604) Business Fare: All normal amenities. Prices in Malaysia ringgit converted to euros: 1.0 MYR = euro. Queries made at MalaysiaAirlines.com and AirAsia.com on 12 September 2010 Consumers seeking extreme value can book AirAsia X and receive a seat on an airplane and nothing else. Network airlines struggle to match these prices and often justify a higher price based upon brand reputation and a marginally better travel experience offering complimentary food, drink, and a modest baggage allowance. Recently, AirAsia X enhanced its cost advantage in the economy cabin through an aggressive reconfiguration. Gone is the standard 2x4x2 widebody seating which yielded 8 seats per row. The carrier s quest to always deliver the lowest fare required more seats and a 3x3x3 arrangement - - yielding a very dense nine seats per row. If the fare is low enough, they will book it - - even at 9 abreast on an A-340. Image: AirAsia.com The AirAsia X price advantage becomes amazingly distinct on the upper end of the product spectrum. In this category, which is dominated by network airlines, AirAsia X slices the fares filed by competing airlines with the finesse of a machete. In other words, low prices place its Premium cabin product in a class by itself. The price comparison displayed above demonstrates the discounting tactic used to lure business travelers from Malaysia Airlines and others Network carriers provide stiff competition. They are better linked to corporate travelers through sales representatives, travel agency distribution, and negotiated fares. Business travelers prefer difficult-to-match amenities such as airport lounges, frequent flier programs, and the recognition provided through global airline alliances. Offering low fares is a quick method to lure the most priceconscious among business travelers. The AirAsia X onboard product can t be perfectly compared to traditional business class. Its menu is limited, alcohol is not complimentary, and the entertainment system is less than robust. But AirAsia X has placed a big bet on the premium market with a major capital investment in the most crucial of amenities - - the bed Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 97

98 Going Upscale in a Big Way Hot Seats were an early product designed to satisfy customers seeking more comfort. XL Seats soon arrived and offered more space and recline than standard seats. Mr. Osman-Rani sensed a need in the market for a more luxurious product... one that would attract higher yield travelers from network airlines and provide the carrier more panache. He chose an angled lie-flat product to bridge the gap between the opulence offered by network carriers and the efficiency that comes from slightly tilting each bed to squeeze in more rows. At the same time, AirAsia X committed itself to maintaining cost leadership by adding more seats. Economy seating on the Airbus 340 (London routes) would jump from 256 seats to Premium seating would drop from 30 older-style recliners to 18 angled lieflat beds. Similar changes have been made to the carrier s Airbus 330 fleet. The move represents a big It's not all free of charge. Drinks cost extra, as does rental of a personal video unit. And don t look for an airport lounge. But the fare is delightfully low. US$10 million capital commitment to reconfigure the entire fleet and provide a product to position the carrier for better profits and a future public shares offering. This image provided by AirAsia X displays the big extra room offered by the extra-fee Hot Seats in economy. Normal seat pitch is inches. The result adds more comfort for Premium and should boost yields. And it squeezes more seats into economy to plump up cabin revenue. The distinction between these classes is dramatic but is held together by a shared a la carte DNA. The economy class product provides basic transportation and allows travelers to pick and choose from a menu of features. In a slightly scaled back manner, Premium provides a great seat along with other amenities. But don t expect prime rib carved by cabin attendants, a wicker basket of complimentary wine, and a large flat screen video unit in the arm rest. As in economy, beverages are available for purchase, the meal is simple but tasty, and the personal video unit is handheld and rented. Passengers in economy can pay the Hot Seats fee and add the extra legroom of bulkhead and exit row seating. 28 Exclusive: New AirAsia X seating for London-KL route article dated 22 February 2010 at BusinessTraveller.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 98

99 Passenger feedback posted at websites, such as AirlineQuality.com, offers a positive assessment of the carrier s Premium service. There is one significant caveat - - travelers are most satisfied with the experience when they know in advance what to expect. Passengers looking for the usual pampering and luxury of business class are disappointed. But even these travelers are amazed by the savings offered by AirAsia X. The carrier no doubt seeks the perfect balance of price, amenities, and cost. Too many amenities will capture the attention of network airlines - - which may be compelled to compete with lower fares. Too high a price will compromise the AirAsia X brand promise. Adopting the full list of amenities associated with network carriers would have dire consequences for AirAsia X. Creeping overhead costs, for services such as a separate meal program and airport lounges, would suffocate the carrier s LCC culture. Premium service is a game-changing development for the airline. But successful LCCs, as defined by Ryanair, never forget the absolute necessity to keep the lid on cost. AirAsia X demonstrated its dedication to the low cost mantra when it tested customer resilience by adding more seats to economy. AirAsia X Defines Long-Haul a la Carte Beyond a total dedication to controlling expenses, the best LCCs also know how to generate revenue from a la carte fees. AirAsia X enjoys a natural advantage with longer flight times. Comfort - - in the form of assigned seats, more legroom, and food and drinks - - becomes more important. An amazing 86 percent of travelers purchase food and drinks from the airline - - with the majority booking in advance. These travelers also take more baggage and almost all opt to save up to 50 percent by booking bags online. AirAsia X A la Carte Results A la Carte Feature Typical Spend Purchase Channel Revenue per Passenger Annual Revenue % of Operating Revenue Pick A Seat 7 ($9) 51% Booked Online 3.57 ($4.39) 3,691,000 ($4,540,000) 2.1% Comfort Kit 7 9 ($9-11) 6% Booked Online 2% Purchased Onboard 0.60 ($0.74) 620,000 ($736,000) 0.3% Baggage ($12.90) 81% Booked Online 5% Purchased at Airport 9.03 ($11.11) 9,337,000 ($11,485,000) 5.2% AirAsia Cafe 4.50 ($5.54) 51% Booked Online 35% Purchased Onboard 3.87 ($4.76) 4,002,000 ($4,922,000) 2.2% Systemwide ($21.00) 17,650,000 ($21,683,000) 9.9% Source: Based upon disclosure by AirAsia X management direct to IdeaWorks, except average spending for the Pick A Seat feature was estimated by IdeaWorks Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 99

100 AirAsia X ranks a respectable 7 th place on a per passenger basis in the Worldwide Review of Ancillary Revenue. The carrier ranks far lower for ancillary revenue measured as a percent of operating revenue. The higher fares associated with long-haul travel will always provide a disadvantage in this regard. The relatively low fees associated with many of its a la carte products suggests the airline can gain more revenue by testing higher fee levels as was described earlier in the guide. The airline shares its booking platform with AirAsia; this has advantages and disadvantages. The carrier benefits from AirAsia s effective promotion of a la carte features. Key a la carte features are placed in the booking path to encourage purchase. Consumers are encouraged to pre-pay baggage, choose an assigned seat, and buy a comfort kit and meal. The meal process is operationally simple and restricts requests to vegetarian, Malaysian, international, and kids entrees. With food an important consideration on a long-haul flight, the direct order system used by United Airlines is preferred and would result in even higher buying activity. AirAsia.com nicely accommodates the needs of its longhaul cousin, but there are definite areas in which AirAsia X would benefit from a website experience more tailored to the carrier s unique needs. More a la Carte All Over the World The financial results demonstrate - - contrary to industry pundits - - a la carte pricing can be successfully applied to long-haul travel. Network airlines all over the world are eagerly watching the example provided by AirAisa X in the Kuala Lumpur London market. The carrier has added flights to London and is publicly considering the addition of Kuala Lumpur Paris Orly service. The systemwide installation of angled lie-flat beds further validates the success this airline is enjoying. Perhaps this is why ANA, Korean, and United are experimenting with upgraded meals for economy passengers on long-haul flights. Long haul and a la carte apparently can co-exist and thrive. Success in one region of the airline world has a habit of appearing elsewhere. The definition of economy class is becoming blurred by developments at AirAsia X. Complimentary meals on long-haul flights are still considered by most airline executives to be an undeniable component of economy class service. But this premise will not last forever as more airlines consider and test alternatives. Even more novel is the spread of a la carte pricing to the business cabin. British Airways was a surprising catalyst in this regard when it implemented seat assignment fees for bargain priced business class tickets. The rallying cry for airline executives could easily be, If the world s favourite airline can do it, why can t we? AirAsia X could ve gone the usual route and provided a luxurious business cabin with all the usual amenities to compete with Emirates, Jet Airways, Korean, and Malaysia Airlines. But it didn t. Instead, it created an experience that aligns with the carrier s brand identity. Keeping a la carte in the Premium cabin nicely supports the low fare message. AirAsia X understands its identity. That s not always easy for a young company. The airline has made a low fare promise to its customers and keeps the promise through a no-frills style of service. It boosted its premium product in a way that maintains focus on the low cost culture of the company. AirAsia X knows the path of success will be determined by how well it balances its role as a hybrid airline Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 100

101 How Ryanair is Trying to Change the World The Psychology of Michael O Leary Let this section begin with admiring words about the man who defines Ryanair. Michael O Leary is an exceptional businessman, innovator, politician, and entertainer. He has also been called practically every name in the book. This dark side of the O Leary story is well documented by disgruntled passengers and the London tabloids. His business reputation has parallels to villains of the past such as William Randolph Hearst, Richard Nixon, and Bernard Madoff. But ignore for a moment this predictable rant on poor Michael. Imagine the airline landscape of Europe without him. Ryanair has introduced air travel to millions of people through Michael O'Leary posing with a symbol of ancillary revenue. Image: Ryanair.com the elixir of rock-bottom fares. And one can hardly imagine this would ve occurred without Mr. O Leary and his amazing airline. O Leary s singular wish is to be measured by the success of the airline: consistent profits, rising share price, and traffic growth. He can t understand why passengers and reporters are not delighted by Ryanair s self-promoted top ranking for on-time flights, baggage delivery, and bargain fares. There is plenty O Leary doesn t understand about us. And there is plenty we don t understand about him. But his behavior is completely sensible if one understands his rules of engagement. Shock, Awe, and Other O Leary Strategies Lowest cost wins is the most important objective. No airline ever abandoned a market because its product wasn t good enough, but airlines all over the world have dropped routes because costs weren t low enough. Be not afraid to protect your right to lower costs. If a politician taxes attack. If an airport overcharges attack. If a bureaucrat causes higher costs attack. If a competitor challenges an exclusive cost advantage attack. Consistency is a key deterrent in the battle. Low costs make low fares possible. High cost carriers that offer low cost fares are a competitive gift. They can never, ever compete long term in the same market. And nothing stimulates travel more than a low fare. Be known as the lunatic of low. People are not dumb, they know low costs = low fares. Therefore all publicity that supports a low cost or low fare message is good. Even when it appears bad - - it s still good. Paid advertising is inherently stupid because the strongest message is always delivered in a news headline. Shock and awe get everyone s attention Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 101

102 He is a one-man publicity machine who brings legitimacy to the impossible. And seems quite capable of bringing the impossible in to being. Why are in-flight pay toilets debated in the media and at airline conferences? It s because O Leary started the conversation. He is a delightful paradox, at times full of bluster and bravado, and yet consistently pushing away any perk or recognition pointed at him. Ryanair s CEO does not suffer fools. Government bureaucrats, especially transport ministers, are frequent targets for his ire. He effectively uses the government as a scapegoat when promoting the financial interests of his airline or spreading the gospel of low fares. Most airline CEOs want to hide the news of any market retrenchment such as the cancellation of routes or the closing of an aircraft base. But for Mr. O Leary these moments are used as evidence of ruinous airport fees, runaway taxation, or the unfair advantages gained by a state-backed airline. It s remarkable - - successes and stumbles are equally embraced as message opportunities. Market Cancellations Support the Low Cost Message Press Release Text Route Event Date Ryanair closes Shannon-Paris route as Shannon Airport monopoly raises fees by 33% Ryanair to close Belfast City base, as runway extension is deferred again. UK Government s 11 tourist tax devastates tourism. Ryanair will close its six Basel routes after Basel Airport refused to lower its high charges. 7 weekly flights cut at Shannon 8 September 2010 One aircraft based at Belfast is reassigned. 31 August 2010 UK flights cut 17% for winter. 29 June weekly flights cut and Basel base closed. 10 November 2009 This is classic politics, and some would argue, politics at its worst. Any party in the underdog position learns to grab headlines by attacking the party in power. Frequent attacks make the message consistent and believable. It s anyone s guess whether the 11 tax has devastated tourism in the UK or that Ryanair s schedule change is simply due to the recession. The airline has heaped blame on the new tax for declining traffic in the UK. It has done this by delivering a consistent message through executive commentary and press releases. Ryanair s position is then legitimized by tangible statistics such as flight cuts, staff layoffs, and reduced economic impact. And the public asks, Why would a company cut back if the threat was not true? Persistence and consistency are thus rewarded. Ryanair almost never makes mistakes with its message strategy. And when news is lacking, the company invents a topic for the media s ravenous 24-hour news cycle to chew on. One can imagine the carrier s senior staff sitting in a Dublin pub and dreaming up the next industry headline. Let s consider charging a quid to use the loo. The news soon becomes a headline in the Wall Street Journal. 29 How about this, we only fly with one pilot, with flight attendants as the back-up? The idea is then broadcast to a worldwide audience courtesy of CNN Will Ryanair Charge Passengers to Use Toilets, or is CEO Michael O Leary Pulling Our Chain? article dated 27 February 2009 in the Wall Street Journal. 30 Airline CEO: Nix co-pilot, save money news item dated 6 September 2010 at CNN.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 102

103 Mr. O Leary understands us better than we want to accept. He knows consumers are very uncomplicated and childlike. Infants enjoy watching bright shiny objects, and so we too are fascinated with outrageous stories of onboard pay toilets and one-pilot aircraft. What s next, pilotless jets? But there is something far more basic about human behavior. Consumers seek low prices over any other attribute. The talking heads on the news networks openly pondered the issue, Would you accept one pilot on your flight if the fare was lower? Mr. O Leary already knows the answer to this question. He has said, The European consumer would crawl naked over broken glass to get low fares. 31 It may be a sad indictment of humanity, but it s a frailty that Ryanair has built an airline upon. Love the Fare, Hate the Airline Ask travelers to name the best airline and the usual names pop up: Singapore, Cathy Pacific, Virgin Atlantic, Emirates, and Southwest. Surprisingly, selecting the world s worst is not readily obvious. Poor safety records, aged aircraft, and a general failure to dispatch aircraft are qualifying factors. The European Union has fully banned five airlines from the skies of Europe. 32 Being prevented entry into European air space should qualify an airline as among the worst. Bankruptcy might be another measure, a category which includes almost every major US airline. We could let Google decide by reviewing results from a search for worst airline. But even here, the results provide a scattering of names based upon a recent headline or complaints posted on a popular blog website. But Ryanair would not qualify under any of these conditions. The carrier has an outstanding safety record and has never had a fatality. With an average aircraft age of 2.8 years, its fleet is among the youngest in the world. 33 It s a very on-time airline with nearly 70 percent of flights less than 15 minutes late. 34 Ryanair self-reports a statistic of 78 percent but doesn t footnote the methodology. Its ratio of lost bags at 0.37 per 1,000 carried would appear to be the envy of every airline in Europe with competitors posting ratios ranging from 4.5 to Ryanair s financial performance is the stuff legends are made of. Investment analysts at Raymond James rate Ryanair a strong buy with these flattering words of support: Ryanair shares continue to be rated Strong Buy because it is by far the lowest cost and financially strongest airline in Europe with a strong earnings growth outlook. 36 This begs the question. With outstanding performance indicators, why does this airline seem so... hated? Mr. O Leary would disagree with the assessment and blame a few churls in the English and Irish media. Those on his executive team politely nod at his rationale. But the rest of us know one of the most grueling jobs on the planet is that of press officer for Ryanair. The table on the following page is a small sample of the abundance of negative feedback posted by consumers. Much of the commentary found on the topic would be unprintable in this publication due to profanity. Never again seems to be the rallying cry of consumers enraged by the self-labeled world s favourite airline. It s the paradox of Ryanair. How can a company that executes so well be so reviled? And how can a company so reviled be so financially successful? 31 Ryanair boss Michael O'Leary versus explorer Pen Hadow article dated 26 August 2008 in the London Telegraph. 32 European Commission for Mobility and Transport dated 2 September 2010 at Europa.eu. 33 EasyJet Makes False Claims About Its Fleet press release dated 24 June 2010 at Ryanair.com. 34 July 2010 European Carrier Arrival Performance Report at FlightStats.com. 35 Consumer Report for Winter 2008/9 posted by the European Airlines Association. 36 Raymond James, Company Comment on Ryanair Holdings dated 2 June Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 103

104 Never Again But Traffic Jumps Every Year Their customer care was dreadful and led to a number of incidents where the police became involved. The professionalism shown by cabin staff was equally bad. The pretakeoff safety brief was the worst I have ever witnessed. Never again. They are the most appalling, money grabbing, unprofessional airline I have had the misfortune to fly. They take advantage of their customers and will do anything to charge extra at the airport. One family had problems with boarding passes and was charged an extra 160 just to print them out again. I have to agree that they are a money-grubbing organisation and don't care about their passengers one bit! And their fares are not always any cheaper than other airlines. Never again! Money grabbing, rude, unhelpful. Unabashed heavy handed selling of products on board. In 25 years of international travel I have never had such a negative experience. Felt like cattle being herded on a train - did not get one smile or positive statement from any agent or FA the whole trip. The word customer is not in Ryanair vocabulary - avoid like the plague. Never fly Ryanair again; they treat their customers like cattle. Source: Excerpts of traveler comments regarding Ryanair at AirlineQuality.com reviewed August The latter part of the paradox is answered by the O Leary business strategies presented earlier. The company dedicates tremendous attention to costs and the need to deliver low fares. The consumer portion of the paradox is best explained by the theory of justification of effort. People tend to place greater value on an outcome that requires effort to achieve. The pain increases the value of the reward. And so it goes with flying Ryanair. To justify the choice of choosing Ryanair - - instead of a glamorous airline - - the traveler is compelled to complain about the experience. Consumers can t accept the concept of enjoying travel on an airline that completely focuses on cheapness. It s easier to join the club of naysayers who remark, It was a terrible flight, but I saved lots of money. It s the same psychology that encourages college students to endure hazing - - it makes joining the fraternity all the more enjoyable. It s irrational, but the overpowering perception of poor service is what keeps customers coming back... even after they say never again. Researchers have learned to give little credence to how consumers say they behave. They prefer to watch what consumers actually do. Ryanair s ever-increasing traffic numbers indicate a solid base of repeat customers. Yes, customers have a love hate relationship with the airline. The carrier s relationship with the media is much more mercenary Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 104

105 Michael O Leary makes headlines. And headlines create readers. And readers keep reporters employed. Nice stories about Mr. O Leary would not nearly be as interesting as the current portrayal of evil incarnate. There is a herd mentality among the media regarding the personality of celebrities. It s easy and efficient to portray Richard Branson as a brash and cheeky entrepreneur. It s even easier to keep Mr. O Leary in his current role. The casting works for him and he readily supports the personality profile through his behavior. Man likes to think of himself as a rational animal. However, it is more true that man is a rationalizing animal, that he attempts to appear reasonable to himself and others... man is a creature who spends his entire life in an attempt to convince himself that he is not absurd. - The Rational Animal by Eliot Aronson from Readings in Managerial Psychology (Leavitt, Pondy, and Boje). The Ryanair media consumer dynamic operates as a dysfunctional family that has learned to coexist. The executives at the company are not amateurs. Each component of the brand message is carefully scripted to support the lowest cost lowest fares message. The company has tapped a consumer trait to complain about poor service but to love a great price. In reality, most Ryanair travelers realize the carrier s level of service provides great value - - otherwise, they would not fly again. The media happily plays along because Mr. O Leary s antics provide an endless source of outstanding editorial material. But through this seemingly irrational process, Ryanair has brought profound change to the way people fly. The Ryanair Way of Passenger Behavior A reporter from the Financial Times dared to ask Mr. O Leary for a definition of the perfect Ryanair passenger. The CEO of Ryanair readily responded: Our ideal passenger is someone with a pulse and a credit card, who will follow the simple instructions to lower our costs to the maximum. - Lunch with the FT: Michael O Leary, Financial Times 18 December At the heart of Ryanair s philosophy is the belief consumers are not fragile beings in need of free amenities such as drinks, food, and even pillows. Instead, Ryanair believes consumers are profoundly aware of the value relationship proposed by Ryanair. The Ryanair style of customer has one objective in mind; the desire to get to their destinations, at the lowest possible cost. And Ryanair is completely ready to oblige low budget consumers. But there is a distinct Ryanair way to save money. Michael O Leary hates airports and the expense airports represent. Airports are ludicrously complicated places only because we have this utterly useless transaction of taking your bag from you upon departure, just so we can give it back to you at arrival," he says. "Get rid of all that crap. You take your own bag with you. You bring it down. You put it on." 37 He also feels the same about airplanes. But alas, these are necessary components of air transportation. 37 Ryanair s O Leary: The Duke of Discomfort dated 2 September 2010 in Business Week Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 105

106 The objective of Ryanair is to simplify the transportation process, wring out every possible needless cost, and to financially penalize consumers who won t adapt to the company s idealized style of travel: The Happy Traveler According to Ryanair Book your travel online at Ryanair.com. It s the only authorized booking site and everyone must pay a 5 administration fee for using it. If you want to reserve by telephone, you will pay a per-minute fee for assistance in English. If you speak another language the fee is often higher. When calling from Germany, the English-speaking rate is 0.62 per minute, German-speaking is 1.86 per minute (plus the 5 fee). Pay the optional Priority Boarding fee. Unless you enjoy an experience similar to the running of the bulls, you should pay the 4 fee to be part of the somewhat more civilized group that boards first and fills the overhead bins. Buy an authorized roll-on bag from us. 79 is the price for an official Ryanair roll-on bag made by Samsonite (includes delivery). Pay with a MasterCard debit card. If you are paying with a MasterCard prepaid debit card you are in luck because the administration fee is waived. Be sure to have a MasterCard or Visa, because Ryanair doesn t accept American Express. Mobility costs extra. It will only cost one euro to receive your confirmation number and flight details on your mobile. You really must check-in online. We add 5 to each segment for this. Don t make the mistake of going to the airport without printing a boarding pass. If the airport staff prints it for you, the fee is a stunning 40 for each boarding pass printed. We prefer you don t check bags. But if you feel you must, we really want you to do it online where it will cost you 15 for the first bag having a modest weight of 15 kg. (33 pounds). Waiting until you get to the airport will be a pricey mistake. Paying at the airport, or booking via telephone, costs 35. You ll pay more during the summer. July and August are busy times, so we will tack on 5 for the first bag paid. 5 kilos more for 5. We sometimes do have a heart and carry-on bags have become a hassle. This sometimes delays operations and that drives up expenses. Please don t check a second bag. It ll cost you about double the first bag rate. Use the toilet before you fly. We are seriously thinking about removing two toilets and adding more seats. You ll weigh less and we ll burn less fuel. Gee, that makes you environmentally conscious. But buy from the bar onboard. Goodness, the crew is going to pester you with goods during the flight. Food, drinks, and scratch cards. The crew is paid a commission and some are very eager to earn a few extra euro or quid. If traveling to London Stansted, you can also buy a train ticket onboard. Please don t think about complaining. You can t call or us. We only accept surface mail and facsimiles. Source: Ryanair fees reviewed August 2010 at Ryaanir.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 106

107 Traveling Ryanair at the lowest cost can be accomplished by booking online and not checking bags. Travelers report two major mistakes that result in big fees. First, they don t weigh checked bags before leaving home and pay significant per-kilo fees. Second, the boarding card is lost and must be reissued at the airport. For these travelers - - especially for families - - the thrill of a low fare is quickly replaced with the pain of 100 or more in fees. While other airlines are sometimes forgiving, this is not a trait found in Ryanair s DNA. Sell, Sell, Sell Ryanair applies the same vigor required for cutting costs to selling stuff to passengers. Its website is famous for its outrageously commercial style. Wild banner colors compete with flashing text to lure consumers into an experience akin to wandering the streets of Amsterdam s red light district. The wares displayed in these shop windows are: cheap car hire, cheap hotels, hostels, cruise holidays, cheap mobile roaming, and campsite holidays. Unlike most airline websites, most of the space on the home page is not dedicated to selling seats - - but rather things somewhat linked to seats. Practically every pixel at Ryanair.com is available for sale. The price of a big Skyscraper banner (600 x 120) on the English home page is 32,634 ($40,140) per day, or a modest 135 ($166) for a Latvian audience. 38 Running the ad on the 21 home pages serving each country in Ryanair s network will cost more than 70,000 ($86,000) for a single day of exposure. Customers also register at the website to Carry-on bliss for just 79 ($97) receive s about travel deals and discounted fares. Sending an and delivered to your door after to the 2+ million consumers registered at the website costs more than purchase online at Ryanair.com. 192,000 ($236,000) which includes 4 buttons on the website and a Skyscraper banner. Ryanair treats traffic on its website no differently than passengers on a plane. The booking process begins with a flight display that borrows retailing flair. Select flights are listed as discounted with normal fares red lined and fare sales promoted by including the percentage discount applied. Thanks to European Union regulations, all yes and no options are politely unchecked to prevent unintended purchases. In-path a la carte offers include pre-paid baggage, priority boarding, mobile phone confirmation, Hertz car hire, and a carry-on compliant bag from Samsonite. Boarding passes are carried by every traveler and feature an advertising message. The selling continues onboard. The in-flight menu carries more than 70 items (measured as individual SKUs) and includes hot and fresh foods, alcoholic drinks, and coffee/tea. Impulse snacks are a big category and feature chocolate bars and salty foods. Frequent announcements are made to promote scratch cards, fragrances, gifts, and smokeless cigarettes. 38 Airport Marketing Services rate card reviewed August Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 107

108 Ryanair is positively relentless in its effort to generate revenue from every source. A review of press releases from 2010 reveals tremendous marketing momentum. Ancillary revenue for most airlines is produced from direct sales to travelers, commissions paid by partners, advertising tied to website traffic, and the sale of miles to a bank card partner. Ryanair often applies a different model, such as negotiating payment by the partner in advance, based upon some known measurement such as passenger traffic. A 2010 History of Promotions Ryanair s Ancillary Initiatives Initiative Description Press Release Duty Free to Canary Islands SIM Cards for Mobile Phones In-flight sale of cigarettes and alcohol now offered on four routes from Dublin. Discounted roaming charges sold through relationship with Maxroam. 9 September August 2010 Hertz Car Rental Car hire offered in-path during flight booking. 9 June 2010 Frommer s Guides Samsonite Baggage Ryanair MBNA Credit Card Luxury Hotel Competition Onboard Newspaper Sales Boarding Pass Advertising Sponsored destination guide deal to reach 73 million passengers. Carry-on compliant bag offered in-path during flight booking. Co-branded credit, which provides free flight rewards, is re-launched. Enter online ( 2 per entry) for a chance to win luxury hotel stays. The Independent will be available for just 1 on all Stansted-based aircraft. Advertising to be sold by Airport Marketing Services. 27 May May May May March March 2010 Source: Ryanair press releases reviewed August 2010 at Ryanair.com. Leave no stone unturned is a likely rallying cry for the marketing group at Ryanair. On an individual basis, the promotions listed in the table are often simple projects that may yield scant revenue. But with annual passenger traffic in excess of 73 million passengers, along with website traffic that may exceed 3.5 million visitors per week, 39 the small promotions rapidly add up. But there is a certain admission associated with this heated activity. Ryanair might be reaching the end of its ancillary revenue road. Checked baggage and frequent flier programs are considered the big opportunities. The carrier faces challenges here. Ryanair hopes to someday do away with checked baggage, and Mr. O Leary has robustly condemned frequent flier programs. Plans by the airline to curtail growth and issue a special dividend support the notion Ryanair is struggling to find the next big thing. 39 Traffic statistic comparison for Ryanair.com offered at the website of its advertising agent, AirportMarketingServices.com Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 108

109 Lowest Price Wins The success of Ryanair is based upon the corporate mantra of lowest price wins. This all-important objective has served the company and its investors exceedingly well. There is no doubt consumers have embraced the slogan. Love of low costs and low fares has created a productive environment that has been amazingly durable and resilient through competitive threats, economic upheavals, and even volcanic activity. Unless a competing airline has millions in the bank, it s a simple matter of economics - - the lowest price does win. Let s end this section in the same manner it began. Michael O Leary is an exceptional businessman, innovator, politician, and entertainer. The world s media will continue to write nasty things about him and Ryanair. And Mr. O Leary will certainly continue a tradition of making shocking statements and somehow turning the impossible into reality. Where Michael will go next is anyone s guess. If not the purchase of Aer Lingus, why not another airline? Or perhaps he will compete with British Airways in the final high yield frontier of long-haul flights. But two things should be bloody obvious to the reader - - whatever he does will be entertaining and operate at the lowest cost Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 109

110 Stories from the Field Airline Executives Speak on the Value of Ancillary Revenue and a la Carte Pricing. Peter Gerstle Manager of Product Development & Innovation easyjet Azran Osman-Rani CEO AirAsia X Damien Paries Deputy Director of Capacity Management Corsairfly Michel Teychené Deputy Vice President of Marketing and Air France Customer Experience Air France/KLM Pia Viljaniemi Director of Direct Channels Finnair 2010 Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 110

111 Peter Gerstle easyjet Manager of Product Development & Innovation Easy is a term that suggests flexibility, practicality, usefulness and simplicity. All those descriptors would apply to the proposition that easyjet makes to its millions of European customers: Build your own air travel service by selecting just what you want and paying for exactly that. EasyJet strives to provide customers low-cost fares and a wide selection of extras based on their individual needs, explains Peter Gerstle, the airline s Manager of Product Development & Innovation. So all our a la carte features are very important to our business mission, as they allow our customers to build their own trip, specific to their needs. With that in mind the UK-based low-cost carrier has constructed one of the industry s most wide-ranging booking sites. With one visit customers can package into their trip everything from passage on London s Gatwick Express train to hostel beds in Egypt. Car hire, villa rental, airport parking, concerts in Salzburg all are available online with just a few mouse-clicks. Of course, the airline realizes commission revenue from each. In the context of offering our customers the best value and best-quality travel services, these are core to the easyjet proposition, Gerstle says. And, since the entire menu of offerings is presented as a pick-your-own catalogue, there has been very little negative feedback about the unbundled nature of the airline s service. We ve consistently increased passenger numbers, so customers are voting with their feet, and they re walking towards us, Gerstle reports. But easyjet can still learn from industries, such as retailing, long accustomed to selling multiple discrete items off-the-shelf to customers, Gerstle adds. In the areas of in-flight retail, stock management, line changing and brand association, airlines need to think more like retailers. Other potential areas for improvement include customer data usage to identify sales trends and ensure optimal services based on a customer s profile. In our business, each area will continuously need improvement. Standing still is never an option, especially for an airline. You need to generate uplift under those wings Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 111

112 Azran Osman-Rani AirAsia X CEO A bottle of unpasteurized milk has two components an inch or two of cream on top, and a vast reservoir of whole milk beneath. Both are excellent foodstuffs of great utility in human nutrition and cuisine, and dairy operators recognize the importance of both to their livelihoods. This picture is analogous to AirAsia X s rapidly growing long-haul business. The first successful long-haul LCC has found a la carte revenue a crucial part of its profit picture. But it never loses sight of the fact that its basic, unbundled service is the foundation of its business. The size of these a la carte revenue streams is bigger than our net profit and will continue to be a significant portion of net profit, so it s vital for our financial viability, observes Azran Osman-Rani, CEO of AirAsia X. But equally important is that a significant percentage of our long-haul customers do not opt for these features so there s value in continuing to provide them with a choice that lowers their cost of travel and lowers our cost of service. With routes from its Kuala Lumpur base to London, India, Australia and most recently Tokyo, AirAsia X uses wide-body aircraft to offer the unbundled travel service most often found on shorter routes operated with narrow-body planes such as 737s. Customers who purchase a minimum-price fare get few-frills transport to their destination. But they are exposed to ample opportunities to add services as they shop, book and fly and these revenue side-streams are vital to the airline. Rather than extravagantly expand these offers, Osman-Rani says the focus right now is on improving existing sales paths. For example, we ve always had our flight attendants taking on sales roles (with onboard food, etc.) and sales commissions have always been a material part of their compensation, he says. We hope to improve this in two ways: electronic point-of-sale devices to better manage onboard transactions and inventory; and second, improving our sales commission structures to provide even more incentive for performance. As well, we can certainly improve how we package the look and feel of our products sold onboard, and we can enhance the menu/catalogue to make it more enticing for impulse purchases. We can also learn how to better integrate supply chain management from suppliers right up to point-of-sale, Osman-Rani adds. But the bottom line for AirAsia X will remain undisturbed, he vows. Offering consumer choice is a positive attribute that is welcomed by almost all customers, especially price-conscious segments. The a la carte/unbundling model works Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 112

113 Damien Paries Corsairfly Deputy Director of Capacity Management When s the last time you bought a car that had no options added no radio, power windows, automatic transmission, coffee-cup holders or, heaven forbid, in-dash GPS monitor? The example provided by the automotive industry was key to Corsairfly s creation of its menu of a la carte services. Car-makers have shaped their market to the extent that salespeople hardly need even mention the catalogue of options available to potential buyers, points out Damien Paries, Deputy Director of Capacity Management at the Paris Orly-based airline. Very few people buy their car without any options, or even without having a look at the possibilities, says Paries. If we can succeed in having our customers ask every time about our services catalogue, we would be very happy. Of course, there are differences between air travel and carmaking, too, and Corsairfly executives keep this in mind as they expand the options available to the airline s customers. You can t sell time-saving priority check-in to too many people if you don t want to create queues at the check-in desk, Paries points out. If you charge extra for more comfortable seats, that doesn t mean you can have uncomfortable seats elsewhere in the cabin. The key element for success is to identify services that generate perceived extra value from the customer point of view. So the first priority is to build an efficient environment of a la carte features around the basic ticket and flight. So we have to come up with smart ideas from our marketing people, focus on customization for the customer, and then establish quite complex and fine-tuned automated processes to ensure that our service delivers what the customer expects. Paries believes that the need to promote and describe exactly what is available on the airline s a la carte menu also satisfies the goal of adapting to the European Union s strict regulatory environment for air travel companies. As always in the airline business, we will be selling our products with standard tools, but it can t ever be a surprise to the customer. A key need is to promote and explain the services available to Corsairfly customers in a fashion that ensures they have a very clear understanding of what they are buying. But Paries sees that as a marketing opportunity rather than a commercial hindrance. It s exciting we will be able to address more and more elements of this market segmentation such as offering our customers the chance to pay for more comfort, saving time at the airport and so on. It s a fascinating concept Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 113

114 Michel Teychené Air France/KLM Deputy Vice President of Marketing and Air France Customer Experience Analogies are a common way of increasing comprehension of new concepts. At Air France/KLM, ancillary revenue is not considered like icing on the cake, but rather more like Lego blocks with which customers construct the particular travel experience they seek. We develop actions in order to offer each individual customer a full range of choices along with easy buying and booking access to those choices, explains Michel Teychené, Deputy Vice President of Marketing and Air France Customer Experience. As a full service network airline, we determined not to unbundle our past and present offer we didn t want to request additional money for services that were previously included in airline tickets but to create additional experiences on top of existing offers. Thus we could enable passenger customization while tapping new sources of revenue. An example is Air France/KLM s extension of an existing service, unaccompanied minors escort. The airline is one of the world s leaders in this corner of air travel, which has traditionally applied to children under 14. Now AF/KLM customers can buy escort for older teenagers as well, a new revenue-generating service much appreciated, Teychené reports, by the many expatriate families within the airline s route system, which covers the globe. This arose from a process in which we realized we had some in-house competencies that could be of great value for new customer segments, he says. By keeping in mind the idea that new a la carte services need to actually add to the customer experience, the airline has so far experienced no negative feedback from its revenue expansion initiatives. The airline insists on a broad distribution policy, to include those booking through travel agencies and corporate travel departments, which makes inclusion in global distribution systems of paramount importance. A corollary example is Air France/KLM s extension of its distribution channels to partners, such as hotel and car hire, who wanted to take advantage of the airline s global reach. We discovered partners that were eager to channel their offers through our distribution grid, Teychené reports. One of the challenges here is for us to bring consistency and value to our customers while enforcing our brand image. Businesses can create more value by associating expertise and other brands in the offer we present customers as long as it makes sense, of course. Over all, our goal is to just keep listening to our customers needs while improving our bottom line. The result is definitely positive so far Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 114

115 Pia Viljaniemi Finnair Director of Direct Channels Adopting new approaches to business doesn t necessarily demand tossing the old. The best term to describe Finnair s approach to ancillary services might be that 1990s business touchstone, value-added. The traditional network carrier based in Helsinki believes that ancillary revenue is best derived from offering additional services to complement the carrier s already established product. The ancillary revenue mission for Finnair is to offer bundled fares with additional services that the customer might want to purchase on top of the standard services, explains Pia Viljaniemi, Finnair Director of Direct Channels. That s the airline s approach from the customer side of the equation. From the revenue side, then, Finnair relies on partner transactions for aid to its bottom line. Customers can book car rentals, rooms at 90,000 hotels worldwide, vacation activities and shop for everything from Macintosh computers to high-style Finnish rubber boots on the airline s website. From the customer service point of view, we want to offer additional services that can be easily purchased by our customers, such as additional baggage and insurance, Viljaniemi explains. But from the revenue point of view, the most important is the partner revenue from our frequent flier program. Viljaniemi expects all areas of ancillary revenue to continue their growth over the next five years, and add-on services such as gourmet meals have been well received, she reports. That s the value-added principle first articulated in the 1990s by business theorists customers will pay more for what they perceive as extra value, and whoever creates it and markets it can enjoy the added revenue from it. Furthermore, it makes more sense to all concerned if it truly is added value. For example, onboard snack sales work best if flight attendants believe they are worthwhile and worth selling, commission or no. But, Viljaniemi adds, new fees that Finnair customers perceive as involuntarily imposed on them have not been well received, such as extra charges for credit card transactions. We don t see unbundling as a good thing if it is taken too far, she argues. The best approach is to offer products that give added value to the passenger Amadeus Guide to Ancillary Revenue by IdeaWorks, Page 115