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2 years ago
 

Airline ancillary revenue rockets to a projected $49.9 billion globally

Airlines show no sign of relenting on the industry push towards ancillary revenue, with the latest projection suggesting a $7.3 billion year-over-year increase – that’s $49.9 billion of income for global airlines overall in 2014.

The estimate comes from the latest IdeaWorks/CarTrawler Worldwide Estimate of Ancillary Revenue, and pegs this ancillary total as the highest yet in continued efforts towards sustained profitability in a traditionally not-so-profitable industry.

The breakdown of the year-over-year growth of airline ancillaries shows the largest year-over-year increase for 2014 in terms of share of overall revenue since 2010:

Airline ancillary

As far as the airline type, the major US airlines have actually dipped a bit compared to last year, while the ancillary champs and low-cost carriers have gained share. This is an important trajectory for those two types of carriers, as profit is derived less from the lower fares and more from ancillaries.

Screen Shot 2014-11-04 at 10.34.53 AM

Traditional airlines are nonetheless trying to do whatever possible to gain share from the low-cost carriers, including offering no-frills fares and other basic flying options. From the report:

The largest contributor to ancillary revenue growth for 2014 is the bigger number posted by the Traditional Airline category. Approximately 41% of the $7.3 billion year-over-year increase is contributed by traditional airlines improving their ancillary revenue efforts. Many of these carriers are desperate to add revenue due to sluggish local economies and price competition. Airline executives are compelled by these factors to embrace a la carte methods to boost revenue.

Consumers are more accepting (or perhaps less combative) and the introduction of no-frill fare options – which don’t include a checked bag – can provide leverage against low fare competitors.

As far as what passengers are paying for when compared to last year’s report, the latest breakdown shows that major US airlines are relying less on the sale of frequent flier miles. The airlines have increased share of ancillary revenue coming from onboard retail and other a la carte services by 5%, while reducing sales of miles by that same amount.

Note the lag on these figures, as the ancillary revenue figure above is a projection for this year while the charts below are results from the full year prior.

Typical US airline

And yet, US-based airlines have not been able to increase revenue from travel retail, underscoring the continued struggle to merchandise effectively.

This is especially visible in a side-by-side comparison of other non-US traditional airlines, a group that enjoys double the amount of ancillaries from travel merchandising. Airlines outside the US are also less reliant on baggage fees.

Non-Us airlines

Most notable is the difference on the sale of frequent flyer miles – while the majority of US airlines are hauling in the ancillary revenue from the purchase of miles, other airlines have that segment of ancillaries as their smallest share.

This is enormously revealing, as non-US airlines appear to do better at selling prior and during the trip, meaning that these carriers are focused more on improving the quality of the product and customer experience rather than triggering purchases of award miles.

The poor profitability of global airlines is mentioned in the report, highlighting just how vital these ancillary merchandising efforts are to the long-term viability of the industry.

The desperation of some airlines can be understood, because so many airlines still suffer poor margins. According to the International Air Transport Association (IATA) the world’s airline industry will earn an $18 billion after-tax profit for 2014.

What at first may seem like a large number is in reality a mere $5.42 per passenger and a skimpy 2.4% profit margin. The importance of ancillary revenue is easily understood when the IdeaWorksCompany $49.9 billion projection is divided by IATA’s estimate of 3.32 billion passengers. This yields ancillary revenue of $15.02 per passenger, which is up from the 2013 projection of $13.64. Clearly, ancillary revenue for many airlines now defines the distinction between profit and loss.

The reports are available here for download.

NB: Paper airplane image courtesy Shutterstock.

 

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Nick Vivion

About the Writer :: Nick Vivion

Nick Vivion is a writer and strategist. He was a Tnooz reporter and global events lead between August 2012 and July 2015. He was the launch co-founder of Booty's, a global street food restaurant in New Orleans and was recently AVP Operations, North America, at Zomato.

 

Comments

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  1. tc

    Great article Nick.
    I wonder though on the end result for the passenger the total ticket price and how that has changed?
    In the old days, airlines included everything in the fare charged e.g. meals, seats, bags etc.
    Now they split parts out and call it merchandising/ancillaries.
    So have these ancillaries increased but the total fare stayed the same?
    In which case airlines havent gained anything more, they have just shifted their figures around.
    I genuinely do not know the answer.
    But if it is so, the old adage of lies, damned lies and statistics really applies!

     
  2. Simon Taylor

    The question is, with airlines making such a success of ancillaries, when will hotels realise they could be doing exactly the same? I’ve seen some dabble, but most can’t even get extra services bookable on their own brand.com website… so I wonder when the click will happen in the world of hotels.

     
    • Nick Vivion

      Nick Vivion

      Simon:

      This is an excellent point, especially given the array of add-on services and products available to hotel guests in-destination. Perhaps the issue is that there is too much decentralization in the hotel business versus the major carrier landscape in airlines? However, going that route, then the large hotel brands should be doing just as well at merchandising ancillaries as the airlines.

      N

       
 
 

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