Zoom on the boom of ancillary revenues and their impacts on distribution
This year 2010, ancillary revenues are everywhere in the news, especially in the airline sector. In fact, at the worldwide level, airlines ancillary revenues passed from 1,72 billion in 2006 to 7,8 billion euros in 2008 (source : IdeaWorks Guide).
Introduced by low cost carriers (LCC), the rules of this model are now more and more inspiring legacy carriers. On the one hand, they are a new source of revenues for airlines, on the other hand their allow them to really enter in strategies of differentiation. However, the sale of ancillary services is impacting the whole distribution chain. They induce new business models for legacy airlines that lead to standardization needs and new sale processes for airlines and their partners.
What are ancillary revenues?
Ancillary revenues are corresponding to all revenues from non-ticket sources. We can classify them into two categories: direct revenues generated by airlines themselves and indirect revenues that come from cross-selling.
Direct ancillary revenues are often services that used to be included in the ticket like luggage, check-in, meals…The “a la carte” sale of these services is possible thanks to unbundled fares. These fares structures enable airlines to propose a basic product (flight + some services included) and allow customers to customize the ticket by adding or cutting some services. We often talk about “a la carte pricing”.
This allows a real personalization and differentiation of airline products, but it is yet limited by the possibilities of unbundled.
The second source of ancillary revenues has the advantage of being even more lucrative (because it is more flexible) and benefits from a better perception from travelers. These correspond to commissioned products proposed thank to partners: a hotel stay, a car rental, an assurance… They can be proposed during the flight booking process (that will lead to a package) or proposed in an additional manner through a white label or co-branded booking engine on the airlines’ web site.
Both (direct and indirect) ancillary revenues are of course complementary. If you look at the champions of these practices (Ryanair, easyJet), we note that they are mixing them.
Need of ancillary revenues’ standardization and tools to distribute them
Low cost carriers have a model based on a distribution almost mono-channel (their own web site) and always try to avoid intermediaries (cf : lawsuit between OTA and LCC). Moreover, their tariff structure is since the beginning very simplified. So, until now, standardization was not an issue for them.
Conversely, legacy airlines have a distribution very related to GDS and relying on various intermediaries: only 23% of ticket sales are made on their own site (deduced from Datalex Survey 2008). So, to deploy an optimal ancillary revenues strategy, they will have to involve their partners.
But convincing their partners to make the necessary developments to be able to sell these unbundled fares is not easy. The example of Air Canada illustrates this fact: in 2006, the carrier couldn’t find an agreement with Amadeus and Sabre about its new fare structure. In result, some of Air Canada’s fares have been excluded from the inventories of these GDS.
However, things are changing. In May 2010, several major intermediaries of the travel industry (GDS, OTA, TMC) agreed on finding standards that would facilitate the distribution of ancillaries services (source).
Moreover, GDS already propose some tools that enable to know the prices of these extras (Sabre Flight fees explorer), to search for fares including/excluding some extras (Sabre Attribut-based shopping and Sabre Red), or to easily integrate a cross-selling module into an airline booking process (Amadeus Cross-Sell Ancillary Services).
Yet, specialists have estimated during the 2010 CASMA conference in Montréal that it should take more than 12 months before GDS are fully capable of delivering all functionalities to really sustain the sales of ancillaries services.
Integrating ancillary into sale processes to support one’s strategy
Once the back office problem solved, the true stake will be to adequately display all these services and products. The performance of an ancillary revenues strategy will in fact more rely on front-end user interfaces.
OTAs and travel search sites will have to (suppr make) improve their search/booking engine to include more options. They will have to find relevant way to display these options from several carriers to remain competitive with other intermediaries, but also with the airlines’ own web site now selling holiday packages.
Concerning airlines, they will have to enter in e-commerce approaches to be able while proposing more and more services and products not to lose or annoy their customers. Now, the stake will be the optimization of ancillaries display to sell the right services to the right customers at the right moment.
Thus, all of these elements leave us predict changes on all tourism actors’ web sites. And maybe predict the coming of new players positioned on new search and booking experiences.