American Airlines in May will begin to charge coach passengers $8 for a pillow and blanket set, according to USA Today.

Citing an Associated Press report, USA Today quotes an airline spokeswoman as saying: “American evaluates all aspects of the business to ensure that economic decisions are prudent and strategic for the long-term success of the company.”

It almost sounds like a hoax.

But, apparently JetBlue, which doesn’t charge — yet — for a first checked bag, began in 2008 selling blanket and pillow sets on flights of at least two hours for $7, the New York Times reported.

The AP reports that US Airways, too, charges $7 for a blanket and pillow, but tosses in ear plugs and eye shades, making it a relative bargain compared to American Airlines’ plans.

In its all-out drive for to implement ancillary services and deliver new revenue, is American going too far?

Will other airlines match the move?

Even though travelers may rebel in the belief that they are being fleeced?

Southwest Airlines chairman and CEO Gary Kelly says he’d welcome the prospect of other airlines stepping up their bag-fee increases because they have provided impetus to Southwest’s market-share gains.

“Let them charge $100 for bags,” Kelly says. “We’ll have 100% load factors.”

Speaking to analysts Jan. 21 after the airline recorded $116 million in profits for the fourth quarter, Kelly notes that overall the U.S. domestic airline market is not growing, yet Southwest picked up 1% in market share, which he labels “huge,” on increased passenger traffic despite a capacity cut of 8%.

He credits the market share gains to Southwest’s low-fare brand marketing focus, including its “Bags Fly Free” campaign, which helped fuel about a 10% increase in advertising spending.

“We are not going to be charging for bags,” Kelly says, flatly.

But, what the casual observer might miss in all of Southwest’s “Bags Fly Free” marketing is that the airline indeed has an ancillary revenue strategy and took in almost $25 million in incremental revenue in the fourth quarter from EarlyBird Check-In, a new pet fare,  an unaccompanied minor fee, and excess and overweight bag fees. EarlyBird Check-In accounted for some $13 million of the almost $25 million in the fourth quarter.

Looking ahead, Kelly sees a “very significant” opportunity for ancillary revenue in revamping the airline’s Rapid Rewards frequent flyer program, which has under-performed competitors’ programs.

Kelly says Southwest understands the deficiencies of the current program and will have fixes in place by 2011. The strategy, he says, will be to make Rapid Rewards members “stickier” — i.e. get them to fly Southwest more often — and to incent them to use the Southwest Airlines credit card more frequently.

In other news, Southwest Airlines CFO Laura Wright says improvements to Southwest.com have spurred higher better look-to-book ratios and the booking of higher average fares. Further improvements to hotel and car rental offerings also are looming on Southwest.com, she adds, and they represent another significant opportunity to increase ancillary revenue.

The airlines of late have toughened up their ticketing policies in a number of areas.

These policies are designed frequently to make sure that revenue collected stays that way. With yield management more of a dark science, revenue management can be just as important.

But now it is time to talk about ADM – airline-issued Agent Debit Memos.

As there are many non-agency and airline people who read these posts – I will go a little deeper into the mechanics of the process.

Airlines – have started to place increasing focus on the correct use of fares both contract and published. With fares being very complex and getting more so – the issue of a valid fare can become a very tricky thing to ensure.

The airlines have in recent time hired external parties to audit, verify or otherwise check the tickets issued. In times gone by this was done on a manual process called a ticket lift usually on a small dipstick sample size appraoch.

With almost everyone now on electronic tickets, the ability of an airline to electronically check the ticket and then reject it becomes a lot easier.

Many of these companies have become better at ensuring revenue integrity for the airlines. For example IATA favours KALE systems as a certified provider.

There is an inherent bias in the system towards airlines who are judge, jury and executioner which favours the carriers in the way fares are sold and managed.

Airlines via the BSPs (including ARC) have the ability to shoot first and discuss later. If they don’t like the way a fare is issued they don’t just collect the different – that would be too easy.

The airline in effect decides that if it doesn’t like the fare, it collects not just the difference between the airline’s in effect lowest fare and the fare charged but with the highest coach fare extant.

Thus the differential can be many times that of the fare originally issued (allegedly badly). The system also doesn’t give a lot of time for appeal.

The airline can wait for some time to issue the failure notice and then there is a short period of time before the airline collects the extra money.

Some airlines it is reported have started to systematically set the parameters for rejecting a large proportion of fares and collecting the money. Then if the agency complains they may back down.

At best the airline collects the money via the BSP and hold onto it until resolved. At worst if the agency doesn’t complain then the default is the airline winning an additional revenue that may not be correct.

The onus being on the agency to prove the airline is wrong. This amounts to a stealth form of revenue.

Even at best the airline is going to benefit from holding the money for a period of time and pocketing the interest.

Is there a resolution to this problem? Actually there is – it is the creation of a Trusted Fare.

This facility exists within several systems and the concept of trust has existed in the airline inventory distribution services for a long time.

I believe that now is the time to revisit a more generalized approach to Trusted Fares. Then fares can be issued in confidence.

At present the use of trusted fares is at a low level. The complex nature of fares means that there is a lot of time when the results are “open to interpretation”.

So what do you think?

I am now a convert to the concept of Ancillary Revenue and it’s a bit like giving into my secret most desires.

I want to say NO! but the economic case is compelling.

So I have surrendered to the inevitable and accept the concept both as a user and as a commentator.

So while I arrived at this momentous decision – I think it’s important not to overestimate the value of it and also NOT TO BLOW IT!

Chaps it’s really important not to make it too complex. If you do then you risk the ire of the consumer. And he will not thank you and be very resentful unless you have a compelling reason for him to get over that objection.

Professor Sabena pointed out last month the excessively complex seat assignment policy for British Airways – a mammoth 21 pages. I agree with his astute point of view.

So I decided to look at several other airlines policies on the largest source of ancillary revenue – baggage.

According to Forrester – baggage fees are the largest single source of extra fees. Indeed this is not just a US phenomenon EasyJet in its last quarter’s results singled out baggage as contributing the lion’s share of its non-ticket revenue.

Take a look at Delta Airlines’ policy. If that doesn’t make you cringe then lord knows what will.

In comparison – while there are a lot of additional charges, Ryanair’s fee structure is remarkably simple and easy to comprehend.

Its ENTIRE fee structure is listed here: it covers dual currency, which is even more interesting how simple and easy it is to comprehend the requirement.

Easyjet, which is normally pretty good about explaining things, couches everything into the general carrier conditions.

Of course, there is also Southwest – well, it just flies free, but check out the restrictions!

My point here is that trust is all about setting an expectation and delivering against it.

Ryanair continues to run rings round just about everyone. It is also the undisputed King of Ancillary Revenue.

No matter that it consistently ranks at the bottom of branding studies, however I would hazard a guess that users may dislike the antics of the boisterous Irishman who heads Europe’s largest single brand airline by pax numbers, they know what they are getting. It sets a low expectation and doesn’t disappoint.

So if you are going to dive into the Ancillary Revenue pool – do so, but do so wisely.

U.S. airlines took in some $2 billion in fees for ancillary services in the third quarter, a 36.4% increase over the same period in 2008, and Delta Air Lines clearly was the most aggressive carrier in its fee-collection activities.

The details, from a report by the U.S. Bureau of Transportation Statistics, show that Delta’s ancillary revenue  efforts, which brought in $447.5 million, had no serious competition. American Airlines came in second at $261.2 million for the quarter.

Plus, when you take into account that merged airlines Delta and Northwest Airlines reported their numbers separately, then their combined $670.8 million in ancillary-fee revenue stands out as even more impressive — or notorious, depending on your perspective.

At times lost in the discussion about ancillary revenue is the fact that the category takes in much more than bag fees. In fact, the above numbers also include change fees and charges for pet transportation, standby and sale of frequent flyer miles to the carriers’ business partners.

Delta also topped the other airlines in the ancillary fees it took in per passenger at $24, but the airline was far less dependent than other major U.S. airlines in getting that revenue from bag fees, according to the DOT numbers. So Delta collected $7, or 29.2%, of that $24 from bag fees. [About $6 of the $24 in fees that Delta collected per passenger came from change fees.]

In contrast, airlines such as United Airlines,  Continental Airlines and AirTran Airways took in roughly half of their ancillary revenue from bag fees.

Clearly, ancillary revenue is a category in the process of undergoing a radical transformation, one with far-reaching implications for travel technology, distribution and customer service.

Two years from now the pecking order among airline fee-collectors may be substantially different.

And, certainly the types of fees collected will be much broader.

Let’s face it – a seat is a seat is a seat. Or is it?

When you think about the motivation you have to choose one airline over another – in the past it was accepted that you would purchase a bundled product.

Thus the sale of the final item required an assessment of a basket of features that came bundled with the ticket.

Fast forward to 2009 and the airlines have woken up to the fact that by unbundling their products they can make more money. Great for the airlines but what about John and Suzie Q Traveller?

Is this necessarily a good thing for them. Actually I believe it is.

The airlines from time immemorial have always wanted to obfuscate the price of the ticket that you buy. Why else would they have such a complicated product.

The spectrum of carrier product offerings is enormous. You have your bare bones product – yes it is technically possible to get a Ryanair ticket without paying for check in – but it sure is not easy.

Or you can sit back and relax and buy a bundled product on BA and get everything included – and get a nasty shock when you find it isn’t. Frontier even lets you know the choice and powers its website with options that span the spectrum.

In 2010 as the airline emerge from their lethargy of recession based slumber to power ahead with new ways of differentiating their product you will be presented as a traveller with a wide (some might say wild) array of choice.

In some cases it will be too much choice. If they do a good job people will be able to buy standardized products as bundles or pick and choose what they want. So much for the 3 click purchase model!

That the airlines will offer this wide array is not in doubt. How will the market adapt to it will be very interesting. Firstly let me just get my current pet philosophy out of the way.

I absolutely believe that the legacy GDSs will fail dismally in providing tools to the intermediaries for the purchase of these differentiated products. Anyone who doesn’t believe this will be just road kill along the way.

So the airlines and the smart intermediaries and companies who are going to provide the tools for this will start to distance themselves from the legacy environment of the traditional GDS based model.

Compensation and use will fragment even further than it already is. If you don’t believe me – just take a peak at your current GDS contract and your airline contract and see if they match up!

Airlines will offer trade up options. Many airlines already do. For example United will allow you to purchase an upgrade to a better seat on just about any fare.

The restriction of only purchasing at the point of airlines website or service delivery (eg airports and on the plane) will also fall and the user will be able to trade up and buy ancillaries at the point of sale – online or offline.

TMCs and corporates will also start getting into the act. Corporations will now clearly show which options they will pay for and which ones they wont. And 2010 will see that the generic “Additional Airline Charge” will give way to a specific charge on the credit card receipts.

Intermediaries will also get join the crusade offering differentiated products such as insurance or perhaps even airport parking. Smart intermediaries will use the opportunity to merchandise to their customers and create a differentiation at the point of sale.

Something that in the past was almost impossible to do as a mere travel agent. For example – if the airline choice is pretty much the same – would you choose where you buy your product if you received real (as opposed to imaginary) customer service differentiation rather than price alone?

This process benefits just about everyone.

However let me issue a warning that I hope all the players heed. Do not make it too difficult and ALWAYS OFFER A SIMPLE PRODUCT OPTION.

The chances are that the products available will start to become so complicated with the vast array of options that the user might actually not be able to make these choices. Particularly when you are in the purchase flow.

Remember the old adage. Don’t put obstacles in the way of the sale of your product.

For now – this is going to be a fun ride. Get prepared for it and start thinking how you can join this bandwagon.

There is a lot of money to be made. Just make sure you know how and when. This is not the time to be passive. If you don’t have plans in place in Q1 – you will be outpaced by those who do.

NB: For a recent discussion about merchandising and GDSs, listen to this podcast produced by IAG blog with Tnooz editor Kevin May and Timothy O’Neil-Dunne.

Open GDS

IAGblog Podcasts

Tnooz’s ten-part series Understand and Boosting Ancillary Revenue concluded this week.

The articles were written by Janet Titterton of Collinson Latitude.

Each day we featured a different approach to getting to grips with ancillary revenue – appropriate for airlines, online travel agencies, tour operators or other suppliers.

Here is the full set:

• Day One of Ten – Understanding and boosting ancillary revenue: Introduction
• Day Two of Ten – Understanding and boosting ancillary revenue: Formalising a strategy
• Day Three of Ten – Understanding and boosting ancillary revenue: Focus on the customer
• Day Four of Ten – Understanding and boosting ancillary revenue: Stick to brand position
• Day Five of Ten – Understanding and boosting ancillary revenue: Adding long term value
• Day Six of Ten – Understanding and boosting ancillary revenue: Extend product offering
• Day Seven of Ten – Understanding and boosting ancillary revenue: Consider customer journey
• Day Eight of Ten – Understanding and boosting ancillary revenue: Select the right partners
• Day Nine of Ten – Understanding and boosting ancillary revenue: Use the data insight
• Day Ten of Ten – Understanding and boosting ancillary revenue: Measure, review, refine

Contact us to submit ideas for other ten-part How To series on Tnooz.

Measure, review, refine:

An ancillary revenue strategy shouldn’t be short term – as with loyalty programmes, it’s a long term commitment.

This will benefit the brand as they can measure the programme over a period of time, making changes and refining the proposition based on review findings.

Travel brands should not relax on their first year success, they should go back to the plan and measure the performance against the original vision.

They need to take into account market conditions, ask for feedback from customers and adapt accordingly.

The market has changed, the current economic crisis, combined with the increasingly rapid customer adoption of new technologies is, we expect, going to be the tipping point of a revolution in the travel industry.

The developing social trend of focusing on value for money means even successful travel brands need to think differently to survive, compete and make a profit in the near future.

NB: This How To series is authored by Janet Titterton of Collinson Latitude

Use the data insight:

A good ancillary revenue strategy will not only increase customer loyalty and provide revenue.

It will also create deeper customer relationships that can offer a wealth of customer insight, particularly on buyer behaviour.

The success of an ancillary revenue programme will ultimately come from the way in which this data is utilised – and the data an ancillary revenue programme delivers can provide enough insight to target customers more effectively.

Customers value transparency, and in such a difficult climate they will always be keen to save money, so a relevant proposition will generate revenue whilst increasing customer satisfaction.

NB: This How To series is authored by Janet Titterton of Collinson Latitude

Select the right partners:

There are a number of companies that specialise in providing ancillary revenue products and consultancy.

Travel brands should look to choose a partner that will provide the right products to suit its customers and can manage the end to end service, journey and marketing support of these products effectively.

Partners must be able to adapt any software to fit to the brands existing loyalty programme and understand how to evaluate and target its customer base.

If a travel brand can find a partner to share the risk in terms of a risk reward pricing model, then all the better.

There are also technology partners to consider.

Sales of smart phones have jumped 27% in Q2 of 2009 and over one billion iPhone apps have been downloaded to date.

This combined with the reduced roaming charges, mean mobile technology will be an ever increasing consideration in the coming months.

An ancillary revenue programme should therefore be robust enough to adapt to changing platforms and new technologies.

NB: This How To series is authored by Janet Titterton of Collinson Latitude

Consider the customer journey:

Understanding the entire customer journey including all the touch points where value can be added for the customer is the key here.

And as well as adding that value for the customer, there is the obvious comfort that revenue will be generated – there’ll be a return on the relationship.

By understanding the journey a customer goes through, travel brands are better positioned to decide what to offer them and how to ensure it is viewed as worthwhile to the customer, not just pushing a product.

As described earlier, travel brands should take into account all touch points.

This starts at the online sites a customer uses, and links into a travel brand’s own a loyalty and ancillary revenue programme.

They should then look at the customer’s physical journey once they arrive at the airport, train station or ferry terminal.

Are there airport stores and businesses they could partner with?

What else might the customer need at any of these stages?

NB: This How To series is authored by Janet Titterton of Collinson Latitude

Extend the product offering:

A flight is usually the first purchase point for a traveller, so flights and the associated products (baggage, seats, upgrades etc) are obvious initial revenue streams for airlines.

However these products are just the start, travellers are also likely to need hotels, travel insurance and car hire at the very least.

Travel brands are actually in the prime position here as they know details of a person’s travel plans before anyone else in the travel process – but they have to use their data effectively.

Although travel brands should own the travel space, many of these services are also offered as part of added value accounts from banks.

The banking sector can provide strong learnings for travel brands regarding innovative revenue initiatives, with £874 million coming from positive fee incomes in 2007 alone.

Travel brands though, are obviously more suited to selling travel products than banks, so they should aim to extend their reach – the customer expects it!

NB: This How To series is authored by Janet Titterton of Collinson Latitude

Add long term value to relationship:

A recent survey from The Loyalty Practice on changing customer loyalty in 2009 found that only 3% of respondents are most loyal to travel brands.

This is compared to banks, which received 23% of votes and supermarkets, which received 33%.

This is clear evidence that the airline and travel sector suffers more than many other vertical markets in terms of loyalty, probably due to the fact that there is often a lack of frequent purchases.

To combat this, ancillary revenue can be used as a way to engender loyalty in the long term.

It should be used to enhance, not exploit, the relationship with customers.

In such a commoditised market place, brands need to offer something unique to stand out and ensure that customers want to maintain a relationship with them.

NB: This How To series is authored by Janet Titterton of Collinson Latitude

Stick to brand position:

Understand competitors and what they are trying to do, but don’t move away from current brand positioning.

Every travel brand has a position in the market and it’s important to stick to it as this is what has made them successful in the first place.

Look at how ancillary revenue can be used to add value to the existing offering and differentiate your brand from the competition.

For example, despite its criticism, Ryanair is unlikely to start adding benefits to their offering and increasing prices, as its position is to provide the cheapest flights.

By contrast, British Airways is expected to offer a premium proposition, so the introduction of seating and baggage charges could affect perceptions customers have of their brand – a brand that they’ve worked tirelessly to establish.

NB: This How To series is authored by Janet Titterton of Collinson Latitude

Focus on the customer:

A travel brand’s first concern should be its customer, as they are the most valuable asset.

They should consider what customers will respond to and what will improve the relationship they have with the brand.

Aside from being a great opportunity to drive revenue, ancillary revenue is a great tool to help engage and retain customers.

Too many companies don’t start with the customer’s needs, so they erode the relationship they have.

Our research recently revealed that 85% of the airlines surveyed see the financial performance of the programme as the one key success measure, be that revenue or profit per customer.

This is hardly surprising as this is about driving revenue, but what is far more surprising is that less than 10% or airlines consider customer satisfaction as an important measurement.

Another way to demonstrate customer focus is to segment the customer base and tier offerings accordingly.

This will not only ensure customer relevance, but will also drive greater revenues by effectively targeting key customer segments.

NB: This How To series is authored by Janet Titterton of Collinson Latitude