Ancillary Revenue by airlines grew to €15.11B in 2010 almost doubling since 2008

Ancillary Revenue by airlines grew to €15.11B in 2010 almost doubling since 2008

Strong revenue from baggage fees and co-branded credit cards placed US carriers in the first, second, and third slots, as revealed in the annual Amadeus Review of Ancillary Revenue Results, launched today.

IdeaWorks, the foremost consultancy in the area of airline ancillary revenues, with support from Amadeus, a leading travel technology partner for the global travel and tourism industry, has researched the financial filings made by 104 airlines all over the world to identify examples of ancillary revenue. In 2007, only 23 airlines worldwide disclosed ancillary revenue activity -a modest result of €1.72 billion ($2.45 billion).  The world has changed dramatically in four years with 47 carriers disclosing 2010 ancillary revenue activity of €15.11 billion ($21.46 billion).  This represents ancillary revenue growth of 38% over 2009 and 96% since 2008. The amount listed by 47 carriers comes close to the €18.4 billion projected by IdeaWorks in autumn 2010 as the ancillary revenue associated with a global list of 150 carriers.

Two trends are obvious from the review of the financial disclosures made by airlines for the 2010 Amadeus Review of Ancillary Revenue Results.  First, airlines already engaged in ancillary revenue activities are bringing more products to market.  This occurs through the introduction of new à la carte features and the inclusion of distribution methods beyond the carrier’s website.  Second, many of these airlines are becoming savvy retailers.  Branding has been emphasised, pricing is more sophisticated, and an increasing number of features are presented during the booking process.

“Ancillary revenue has become an enduring part of airline income statements, as revealed by this study”, says Ian Wheeler, Amadeus VP Marketing and Distribution.  True financial success for airlines is boosted when these services are available through online, travel agency, and corporate travel distribution channels. That’s why we are seeing growing momentum behind Amadeus Ancillary Services solution, which helps carriers sell à la carte ancillary services on their website, call centre and via travel agencies. Sixteen airlines have signed up for the solution and we are continuing to evolve the product functionality”.

Research carried out by IdeaWorks shows that ancillary revenue has definitely grown beyond its low cost airline beginnings. The oil price peak of 2008 caused huge losses and prompted US airlines to start charging travellers for checked baggage.  Ultimately, the ripple effect of these fees has eased the path for more airlines to consider à la carte additions and catalysed a stunning increase of 778% since 2007.

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The list of top players in 2007 was dominated by carriers such as Ryanair, easyJet, and Aer Lingus.  Since then, large carriers have learned how to generate large ancillary revenue numbers.  Continental disclosed its ancillary revenue results for the first time when it merged with United.  The combination has created an ancillary revenue giant with annual results in excess of €3.5 billion, or nearly $5 billion (based on current excess rates).

Second place Delta has embraced ancillary revenue as evidenced by the spread of baggage fees to transatlantic routes, and à la carte fees associated with in-flight Wifi, on-demand movies, onboard dining, and SkyClub lounge passes.  The big jump for 2010 can largely be attributed to more thorough financial disclosure of à la carte activity in its annual report and more SkyMiles programme revenue.  The carrier disclosed revenue from the sale of various à la carte activities generated $2.1 billion during 2010 with an additional $1.6 billion from its SkyMiles frequent flier programme.  IdeaWorks includes the sale of miles or points to partners as ancillary revenue activity. 

Qantas disclosed “ancillary revenue” of A$334 million (€252 million) from traditional à la carte sources.  However, it is the Qantas Frequent Flyer Programme that really piles on the profits.  Revenue posted by the programme was A$1.108 billion (€835 million) for 2010.  Points in the programme have seemingly gained the status of official currency through partnerships with major Australian retailers and banks.  With 7.2 million members, that’s a stunning A$154 (€116) for every programme member.

Ancillary revenue as a percentage of total revenue provides a better measure of ancillary aggressiveness and marketing acumen.  This method of measurement allows low-cost carriers to dominate the top-10 list for 2009 and 2010.

These airlines are known for low fares and thus it is easier for ancillary revenue to represent a larger piece of the total revenue picture.  They earn ancillary revenue through the complete array of à la carte activity.  Consumers benefit from a menu-based approach.  Rock bottom prices are possible for those who only travel with a carry-on bag, opt for non-assigned seating, and bring their own food and drink onboard.

Ten years ago Michael O’Leary, CEO of Ryanair, expressed the desire for ancillary revenue to eventually replace the need to charge air fare. The results on the table suggest this objective may top out at 30%; the best performers achieve rates of 20 to 29%.  Ancillary revenue certainly helps the bottom line and definitely reduces the pain of high fuel prices.  But its ability to eliminate air fares remains elusive for Ryanair and the airline industry.

Ancillary revenue expressed on a per passenger basis is another method to rank the ability of airlines to unbundle the fare.

AirAsia X has jumped to €29.45 (ancillary revenue per passenger) in 2010 from last year’s result of €17.07.  The result posted by AirAsia X demonstrates that travellers on long flights tend to spend more online and while onboard.  Consumers have embraced the long-haul - à la carte concept; the carrier’s continued growth and planned share offering are signs of this success.

The strong showing by a merged United and Continental is a significant development for 2010.  United has been hard at work for years perfecting its à la carte product offer under the Travel Options by United brand name.  Continental has been innovating too and added fare lock and extra legroom seating options during 2010.  IdeaWorks estimates the combined revenue from the sale of United Mileage Plus and Continental OnePass miles was approximately $3 billion (€2.1 billion) for 2010.  Synchronising the ancillary revenue efforts of these two airlines will undoubtedly produce higher results for 2011.

Ancillary revenue offers a broad appeal to virtually every type of carrier.  It is a revenue art practiced by global airlines known for luxurious first class suites such as Emirates and carriers that sell a bare bones product of a seat with a 30-inch pitch such as Ryanair.