The ancillary revenues generated by services such as food and beverage sales, seat upgrades, and baggage fees, have increased dramatically in recent years. In 2014, ancillary revenuestotaled almost $50 billion for all airlines, almost double the $27 billion the industry generated in 2012. The use of ancillary services to grow revenues has been particularly important to the many low-cost carriers that have proliferated in recent years.
A la carte features, commission-based products and frequent flier activities can also fall under heading of ancillary revenues, and be just as vital for an airline’s bottom line. Since travelers are likely to continue to resist attempts by airlines to increase ticket prices in the future, the importance of these revenues is likely to continue to grow rapidly as the profit margin on ticket sales decline. Airlines will need to think carefully about the reporting and IT solutions they use to track, analyze, and hopefully increase these revenues.
Staying Profitable with Low-Cost Tickets
Ancillary revenues first began to take off for the airline industry in 2008 with the sudden spike in fuel prices. As price-sensitive customers resisted efforts by the industry to compensate for the increased cost with higher ticket prices, airlines looked to ancillary revenues as a way to maintain or even increase profitability without scaring customers off with high ticket costs. The practice has allowed budget airlines such as Ryanair to thrive in a price sensitive environment. For some low-cost companies, such as Spirit Airlines in the US, ancillary revenues now account for more than 35 percent of total income.
The success of this new business model has led companies to look for additional services they can provide to their clients. Beyond the familiar channels such as bag check fees, change fees, and in-flight food and beverage sales, airlines are also exploring opportunities to monetize additional services, such as in-flight entertainment, retail sales, and Internet access. Over the last several years, ancillary services has expanded beyond just baggage fees and frequent flyer miles to include the unbundling of these types of add-in services. As this type of unbundled business model has become more prevalent, customers have begun to look more critically at the relative values of ancillary services. As ancillary services continue to proliferate, air travelers will increasingly shop around for the best value for the added services that they are interested in. Amenities such as priority seating, free Wi-Fi and in-flight entertainment options will increasingly become a way for airlines to differentiate themselves from the competition.
New Standards for Ancillary Revenue Data
As airlines have diversified their revenue streams to include services beyond ticket sales, new tools have been required to track and manage these new sources of revenue. The International Air Transport Association (IATA), for instance, created the New Distribution Capability (NDC) communication standard as a way to help facilitate the sale of ancillary services for airlines. NDC is an XML-based data standard designed to make it easier for airlines to sell ancillary services to their clients through third parties such as travel agencies.
The proliferation of a common standard will also make it easier for airlines to collect data on the preferences of their customers, allowing them to customize special offers geared especially to the needs of specific passengers. In addition, the NDC standard allows airlines to customize the way they bill clients for differentiated services.
Electronic Miscellaneous Documents (EMDs), meanwhile, is another standard adopted by IATA designed to provide airlines with a uniform way to document ancillary revenue figures. EMD is an important step for airlines to implement as they seek to move toward electronic record keeping. To date, the standard has been adopted by more than 180 airlines.
The Right Tools for the Job
New technology platforms can allow airlines to increase profitability by helping them grow ancillary revenues to their fullest potential. These next-generation tools can collect crucial data on customer preferences either directly, through their own website, or through third parties such as travel agents and corporate travel systems. A next-generation IT solution can also allow airlines to sell ancillary services across devices such as tablets and smartphones.
As revenues from ancillary services continue to grow and the types of services being offered continue to proliferate, airlines’ need for strong revenue management and accounting processes that can handle these types of transactions will only grow. This will be particularly important for airlines that generate a significant portion of the revenues, both core and ancillary, through third-parties such as travel agents.
The right IT tools allow airlines to customize the way they bill clients for differentiated services, while leveraging IATA and C&LP best practices. They also provide the functionality necessary to track sales across a variety of revenue streams and determine receivables. The latest technology platforms allow airlines to process sales from ancillary services, provide reissues, refunds, and exchanges. They can also process EMDs, Miscellaneous Sales Records (MSRs) and airline specific form codes, while analyzing sales and statistical reports to give financial departments a better picture of where their revenues are originating.
The development of ancillary revenue streams has been an enormous benefit to the airline industry in recent years. But for all that, ancillary services are just beginning to make an impact on profit margins. With the right IT tools and access to customer data, airlines can continue to develop their ancillary revenue streams to improve their bottom line.
*Figures cited from Travel Weekly.