Ancillary Revenues Dr Frankie O Connell Istanbul Technical University Air Transportation Management, MSc. Program Airline Business Models and Strategic Management Module #5 10th December 2016
Ancillary Revenues Dr Frankie O Connell Turkish Airlines Executive MSc December 2016
Outline Thin margins of the industry Types of ancillaries Analysis of Ryanair s ancillaries Air Canada s segmentation Case study on Hawaiian Airlines Dynamic packaging
$ Billions World Airline revenues and expenses 1991-2015 $800 $600 $400 $200 $0 Operating Revenues Operating Expenses Source: ICAO and IATA
Cost versus Revenue per passenger in 2015 Net Profit per departing passenger for 2015 $250 $200 $205.37 Ancillaries $197.1 $8.27 Cargo $150 $100 Fare $50 $0 Revenues Cost Net Profit Source: Ideaworks and IATA economics research
Source: Ideaworks Ancillary Report and IATA Ancillary Revenue Growth Double $65 billion Double 22.6 32.5 36.1 42.6 49.9 10.3 13.5 Ancillary Revenue has become a critical source of Revenue for Airlines worldwide
European Airlines - Ancillary Revenue as % of Total Revenues 2016 data Wizz Air jet2.com Ryanair Flybe easyjet Pegasus Norwegian Vueling Aer Lingus Air France-KLM TAP Air Portugal Lufthansa Air Greenland Finnair Air Berlin British Airways Aeroflot Turkish Airlines 7.5% 7.3% 5.5% 4.6% 4.5% 3.8% 3.4% 2.8% 2.5% 15.1% 14.6% 12.6% 24% 21.2% 20% 19% 29.4% 36.4% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: Ideaworks The Car Trawler Yearbook of Ancillary Revenues 2016
European Airlines - Ancillary Revenue per Passenger (Euro s) 2016 data jet2.com Virgin Atlantic Wizz Air Flybe Air-France-KLM Aer Lingus easyjet Air Greenland TAP Air Portugal Norwegian Ryanair Lufthansa British Airways Vueling Finnair Pegasus Air Berlin Aeroflot Turkish Airlines 5.16 4.71 3.92 22.69 21.76 20.42 19.28 19.03 16.53 15.04 14.74 12.51 12.38 11.29 10.16 9.95 32.55 29.54 45.86 0 5 10 15 20 25 30 35 40 45 50 Source: Ideaworks The Car Trawler Yearbook of Ancillary Revenues 2016
Different Ways to Generate Ancillary Revenues (introduction) Baggage Exit Seat Holidays Selling Food
Ancillary opportunities Flight Related Ancillaries Baggage fees In-Flight Entertainment Lounge Access Meals/beverages Travel insurance Upgrades Priority boarding Reservation changes Seat Assignment Purchase Middle Seat (Clickair) Extra legroom Onboard Selling (Bus, train tickets) Scratch Cards Mobile Phones Payment through Credit and Debit card Onboard Internet Non- Flight Related Ancillaries Car Rental Hotel/lodging Fast track through security Ground Transportation Currency conversion Car Parking (Monarch) Cruises Golf, Spa s, Branded merchandise Purchase FFPs
Big Issue today is how to make additional revenue In 2007 ancillary revenue brought in $2.67 billion By 2015 Ancillary Revenue was worth $65 billion, while Air Cargo which has been carried since the Wright Brothers only generated $53 billion in revenues
Dynamic Packaging Companies such as Microsoft have advertised on this website
Revenue opportunities
Ryanair. Continued 2016 2011 Non-flight Scheduled 1 1,329 574.2 In-flight Sales 153.4 100.7 Internet-related 2 85.6 126.7 Total 1,568.6 801.6 Ancillary Revenues contributed 24% of Ryanair s revenues in 2016 1 includes revenues from excess baggage charges, administration/credit and debit card transactions, sales of rail and bus tickets, priority boarding reserved seating, accommodations, travel insurance and car rental 2 includes commissions received from products sold on Ryanair.com or linked websites Source: Ryanair Annual Accounts, F20
Key Ancillary Revenue components (2014) Typical US Major Airlines A la carte, onboard retail 1 10% Baggage Fees 25% Sales of FFP Miles 60% Travel Retail (Hotel, Cars, Insurance) 5% 1 A la carte includes: 1) assigned seats or better seats such as exit rows, 2) access to airport lounges 3) call center support for reservations, 4) fees charged for purchases made with credit cards, 5) priority check-in and screening, 6) early boarding benefits, 7) onboard entertainment systems, 8) wireless internet access.
Revenues ($millions) from Baggage Fees & Reservation changes for US Majors Baggage Fees Reservation Changes Source: Bureau of Transportation Statistics, Schedule P-1.2
Frequent Flyer Programs In 1981, American Airlines launched the world s first FFP as a marketing gimmick By 2015, almost every Full Service airline in the world has a FFP program FFPs are very important consideration when passengers are choosing an airline as passengers received a mileage allowance for every trip taken However, Airlines are the only segment that are NOT rewarding their passengers based on amount spent Groceries, Petrol, etc... Was it a no-brainer!!!! Then on January 1, 2015, when Delta switched from a mileage-based to a revenuebased programme, rewarding not the most frequent but the most lucrative travellers Based on the price paid for their ticket This was quickly followed by United Airlines and American updated its programme on August 1 this year, offering miles based on ticket price
The Reward Mechanism The reward is very evident when higher fares and top-elite status are considered and the process pushes passengers to upgrade to a higher Tier level to obtain the reward The Big 3 US Carriers all have same model
FFP Membership levels How many are Active Members? This typically ranges from about 10% to 25% Source: 2015 Annual reports. *2013 (Euromonitor International, 2014) and Ideaworks, 2016
Key Ancillary Revenue components (2014) Traditional Airline outside of the US.. not LCC Sales of FFP Miles 30% On Board Retail (Food, Duty Free) 15% A la carte 10% Baggage Fees & Excess Baggage 15% Travel Retail (Hotel, Car, Insurance) 30% Source: IdeaWorks, 2014
$10 Many carrier s are now catering to passengers who can't make a decision just yet but have found a good airfare. Once a passenger has locked in this fare their chances of taking the flight exponentially increases
Revenue Opportunities Many carriers have introduced pay for seating in economy class In 2015 British Airways made about: 40 million easyjet makes around: 100 million Extra Legroom Delta Air Lines generates around $125 million from its Comfort+ seating each Quarter Hawaiian generates $42 million from its Comfort + seating each yea British Airways made 49 million from checked baggage in 2015 The average per passenger revenue for Baggage for AA, Delta and United was $5.13 (US DOT). For Air Canada it was $4.09 Garuda generated 9.8 million in 2015 Allegiant Air carried 9.5 million passengers in 2015 but sold 452,000 hotel rooms and 1.2 million car rentals which contributed $40 million AirAsia increased the take-up rate for travel insurance by 40% to $21 million
Paying for seats in Economy Qantas example Advance Seat Selection is available online for AUD$20 per flight sector. AUD $
United Airline s Economy+ Annual Subscription Fee - 2016 Pre-Pay Plans Annual Price Features Economy Plus Seating Lounge Access Additional 5 inches of Legroom Seat near the front of the aircraft Baggage United.com Club $25 Includes 2 hold baggage Up to 8 people can use when travelling on same reservation This gives you back $5 back on every ticket you purchase at united.com Source: United
easyjet Plus Annual fee This is a service aimed at frequent travelers, especially those on business trips Annual Fee 170:This generates 58 million for easyjet each year SELECT YOUR SEAT DEDICATED BAG DROP SECURITY FAST TRACK SPEEDY BOARDING Choice a seat for free Saving up to 15.99 per flight ADDITIONAL CABIN BAGGAGE
Air Asia Innovation of Ancillary Revenues American Luggage Delivery Service American Airlines will deliver bags directly to your house / hotel within 40 miles of arrival airport for $40 for 2 bags Jet2.com Adult s meal 8, while kids eat free It also gives a 5 discount voucher when 40 is spent onboard for duty free goods
Innovation of Ancillary Revenues.. Cont Wizzair Wizz Discount Club Annual membership fee of 29.99 Membership provides exclusive access to promotional fares that can be cheaper by 10 per one-way flight. Virgin America: Red Entertainment & Retail System Orders are taken through the system and delivered upon request. The system keeps your tab open until the end of the flight to encourage one to spend more
KLM only 2 Seats in an exit Row KLMs aircraft KLM is the first carrier to offer seating for couples It allows you to sit beside the person that you want and Nobody is beside you, while it also offers ore personal space The price is 30 per person per flight Platinum status members receives the perk free; gold members receive a 50% discount, while blue members get 25% off
KLM Surprises
Virgin America lets passengers buy fellow passengers a cocktail via the IFE New type of flirting!!!! This is a new type of flirting as it can be followed up with a text message using the seat-to-seat chat function
Scoot is offering a child-free zone, called ScootinSilence Costs $14 for economy and $77 in Scootbiz seat
Travel Insurance Travel Insurance is a $1.3 billion industry in the US Travel Insurance is a 670 million industry in the UK
Food - Offering premium meals in economy class KLM pioneered upgraded economy class dining when it introduced a la carte meals to long haul flights in 2011. Air France sells business class meals to premium economy for 28 ($38) - signature meal branded by famed Parisian chef Austrian disclosed that it sold approximately 600,000 meals during 2012; that s about 6 out of every 100 passengers paying 15 ($20) for a premium meal (Source: Austrian Airlines 2013) Hawaiian offers its Premium Meals for sale in the gate area before departure When shown on website it has the potential to shift meal preferences and gain revenue Free $20 The tray on the left is free, the premium meal on the right is $20. Which would you prefer?
Gambling On Board Selling Scratch Cards? 8 out of every 10 people gamble every year 1.3% of disposable income is spent on gambling Gambling is a $279 billion dollar business Internet Gambling represents 6% of this $279 billion Estimated that $26.6 billion will be spent during 2012
Ancillary Items that did not work JetBlue - Travel Pillow and Blanket United selling food on Transatlantic flights
Restructuring the Airlines Pricing Mechanism Un-bundle Sell more airline related services Bag charge Change Travel Date Up-sell Sell a higher air fare Fastrack Thru Security Hotels Car Rental Travel Insurance Advanced Seat Selection Cross-sell Cross Sell other travel content (e.g. Car Rental, Hotels, Insurance) Upgrade to Premium Economy Access to Business Lounge
Innovative Pricing by Brussels Airlines
NO NO NO NO
NO
Hawaiian case study Dynamic Packaging
Hawaiian Airlines Website - 2015
Hawaiian Airlines - Extending the revenue opportunity The travel package can expand beyond the traditional hotel and car to build on areas already initiated across the consumer lifestyle experience
Hawaiian Airlines - Extending the revenue opportunity
Ancillary Composition Spa Golf Destination Tourism (e.g. Sailing, Diving) Cruises Sporting events (Tickets, Hotel, Flight) Car Insurance Travel Insurance Reservation Changes Priority Boarding House Insurance Upgrades Credit Card fees Duty Free WiFi Car Rental Unbundled Fares (Fare families) Seat Assignment Preferred Seats (widebody aircraft) Safety Schedule Reliability Express check-in IFE Hotels Theatre, Concerts & Events Tickets Resort and Theme Park Bookings Overseas Vacation Homes Exit Seat Business meals to Economy Pax Selling Miles to 3 rd Parties (e.g. Banks) Fare Lock Extra Leg Room Baggage Fees Fast Track Lounge Foreign Currency Airport Car Parking Airport Transfers Advertise on host Website (Rolex on Etihad) Travel gift vouchers Core Products Unbundled Products Commission based ancillaries Source: O Connell
Thank you very much