Network carriers in the USA, prompted by a tough operating environment, have been taking a leaf out of their low-cost competitors' book when it comes to chasing ancillary revenues. So-called full-service airlines have begun charging for the things passengers used to take for granted and a la carte pricing is starting to become the norm. But will this trend start to catch on with network carriers in other parts of the world? And how will the low-cost carriers respond to this blatant encroachment on to what has traditionally been their turf?
One US carrier that seems to be taking great strides to blur the line between the traditional, full-service network airline and the no-frills, pay-for-all-your-extras carrier is US Airways. The Arizona-based airline aims to generate $400 million to $500 million from its ancillary revenue programme in 2009. US Airways chief executive Doug Parker said at the recent Credit Suisse Global Airline Conference in New York that the carrier's ancillary revenue strategy, which includes charging for checked baggage and on-board food sales, has been "more aggressive" than its competitors, and the results have so far been better than expected.
United Airlines has also been boosting its ancillary revenue streams through a number of measures traditionally associated with its low-cost competitors. By increasing fees for changing tickets and charging for extras that used to be complimentary, United expects its ancillary revenues to reach $1.2 billion in 2009, a 140% increase over 2005 and up a third on 2008. Broken down, the carrier expects to raise $600 million from ticketing fees, $250 million from first and second bag fees, $250 million from up-selling seats and $100 million from additional travel options, such as its door-to-door baggage service.
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Alaska Airlines vice-president finance Brandon Pedersen has described ancillary revenues as "the holy grail" for airlines, and says Alaska wants to look into more options "in ways consistent with our brand". In 2009, Pedersen sees opportunities for in-flight connectivity services, buy-on-board initiatives and "other things we might sell on our website". The carrier already charges for checked baggage.
"I'm amazed at how quickly a la carte pricing has been adopted by US legacy carriers, and I'm also amazed that there hasn't been a passenger revolt," says Jay Sorensen, president of US consultancy Ideaworks' partnership and marketing practice. "With unbundling, the indications are that the base fare should drop, but what's odd in the US was that the product was unbundled and the overall price went up. Passengers were asked to pay a higher fare and to pay for things that were once included."
As a result of the success US carriers have had with their domestic ancillary revenue strategies, Sorensen believes the trend will catch on with airlines in other regions of the world. "The world has been watching with tremendous interest what's been happening in America with the major carriers and waiting to see if they were able to pull it off. We will see more of this activity worldwide," he says, adding that Ideaworks "has had contact with some surprising airlines that are not normally involved in this activity".
Mike Cox, managing director and head of corporate advisory at Seabury Group in New York, agrees that airlines in other regions of the world are taking notice of what the US network carriers are doing.
"US carriers have found that [charging for ancillaries] is a good source of revenue and it hasn't dampened demand. Airlines are studying it and watching the fine balance between what certain fees do to demand and whether there's resistance," he says, adding that airlines will "exempt their best customers from these fees".
Discount and unbundle
Sorensen says neither Europe nor Asia is "immune" from the ancillary revenue phenomenon because "airlines have a need for the revenue and consumers have more or less accepted their fate". However, he does not see higher fares combined with paying for extras as something that will continue to be tolerated: "With a la carte pricing, airlines are going to have to face a word they don't want to face: discounting. Smart airlines will take the opportunity to say 'we're going to discount and unbundle'. This will help airlines live with the discounting that will occur in 2009."
Boosting ancillary revenues could be a valuable strategy for airlines as they head into what IATA is calling "the toughest revenue environment in 50 years". Tim Jeans, managing director of UK scheduled and charter carrier Monarch Airlines, says that in the current climate ancillaries are "absolutely central to the ability of airlines to make a meaningful margin". He adds: "While there is still significant downward pressure on fares and many upward pressures on the cost base, it is imperative that the gap is filled by ancillary revenues."
Jeans accepts that network carriers will increasingly be getting in on the game when it comes to ancillaries, but warns that blurring the line between full-service and low-cost airlines too much could eventually drive passengers away from the network airlines. "It's inevitable that [network carriers] will unbundle their offering because they're relatively skinny on ancillaries.
"But the worry legacy carriers have, particularly in the economy cabin, is that the cabin doesn't look any different from one of our aircraft or one of easyJet's aircraft. The difference is maybe a free glass of water or a cold sandwich. Once they start unbundling bags, people will start to say 'why would I pay any premium at all to fly on these carriers'."
Network carriers do potentially face an obstacle that may make it more challenging to unbundle their offering, particularly when it comes to long-haul flights. That obstacle is their membership in global alliances and the possibility of facing opposition from alliance partners which have so far not travelled down the same a la carte route. Sorensen points as an example to a plan by United to test charging for food on long-haul flights, a plan that was later abandoned.
"I suspect that United had enjoyed ancillary revenue success domestically and too quickly implemented it internationally without telling its Star Alliance partner Lufthansa," he says. "Lufthansa's CEO probably read about the planned buy-on-board programme on United flights from Washington Dulles to Frankfurt and had terse words with United's CEO."
However, United insists that it withdrew the plan to charge for food on international flights out of Dulles solely in response to consumer pressure. "Flyers spoke and we listened," says the carrier, declining to address the issue of pressure from alliance partners. Sorensen believes alliance relationships "can tie the hands of carriers on ancillaries", and points out that "airlines outside alliances are free to do what they want, but alliances move more slowly and are more plodding".
Distribution issues
Another challenge facing network carriers keen to emulate the success of their low-cost counterparts on the ancillary revenue front is the question of how to distribute the newly unbundled fares. Sorensen says carriers are "becoming predominant again in travel services because [the global distribution services] can't handle the sophistication thrown at them by a la carte pricing".
Kyle Moore, vice-president of product marketing at Sabre Travel Network, accepts that charging for ancillaries will become more widespread among network carriers and is keen to see a standard approach that would enable the GDSs to come up with a universal way of incorporating unbundled fares into their ticket sales.
"Airlines have found themselves in a position where they can no longer profitably compete in the marketplace, so they're looking for new revenue streams. I fundamentally believe airlines will continue down the path of charging for ancillaries - this may be through a la carte pricing or a fare family approach," says Moore.
"The faster the industry can move to an industry standard approach will facilitate our ability to introduce these capabilities for airlines." Moore is keen to point out that Sabre was "the first GDS to introduce ancillary channels", and he highlights Sabre's new "branded fare shopping" solution, for which Brussels Airlines is the European launch customer.
The solution, called Attribute Based Shopping, will be rolled out in 2009 and is designed to enable passengers and travel agents to compare and contrast airfares that include or exclude different product or service attributes. These attributes will include the paid extras that airlines are beginning to introduce as they unbundle their fares, such as seat selection, baggage charges, lounge access and on-board meals.
Showcasing services
"We believe Sabre's Attribute Based Shopping will make the travel shopping experience more efficient for agencies and travellers, while providing airlines the opportunity to differentiate, showcasing their value through product and service options," says Sabre chief marketing officer Greg Webb.
The drawback of this initiative is that it will only enable passengers and travel agents to compare unbundled fares, not to actually book them. However, this is something that Sabre is working to address. "We certainly want to support this as much as possible," says Moore. "Some airlines will more rapidly adopt approaches that allow us to adapt more quickly. We will work aggressively with airlines to help them move forward. We are working with airlines around the world to facilitate [this] and we will have more announcements with airlines in all regions."
Moore adds that airlines are "realising that supporting ancillary sales in every channel is very important", and says it is "mission critical for us to ensure that airlines can market their products and services in all channels".
Network carriers may be entering the field of ancillaries for the first time and feeling their way along this new path, but what about the low-cost carriers that have based their business models on charging for extras since their inception? What's next for them on the ancillary revenue front, given that they have already incorporated most of the initiatives the network carriers are now studying into their businesses?
Monarch's Jeans acknowledges that finding new ancillary revenue streams going forward is going to be a "big challenge" for airlines. "The big ticket items such as charging for hold baggage have already been done by most low-cost carriers, although the legacies are still in a mess and can't seem to get their act together on that," says Jeans. "The question is, what's the next big item? There's a lot of talk about mobile broadband and in-flight entertainment but this is not going to deliver the same as baggage charges."
For easyJet, it will be a case of more of the same and building on the foundations it has already firmly laid. "2009 will be a year of getting the basics right," says easyJet head of ancillary revenue Bill McKimm. "Over the next six to 12 months we will look at doing what we do better - it's more evolution than revolution." Including fees and charges, easyJet is expecting "double-digit growth at a minimum" on ancillary revenues in 2009.
"The key is getting the core parts, such as hotels and car rentals, to perform to their highest potential," says McKimm, stressing the importance of converting as much web volume as possible to ancillary sales. "You just have to offer the customer the right product at the right price at the right time."
There are even opportunities to increase revenues by bundling together some of the products and services that were originally unbundled, according to McKimm. "Lots of airlines will unbundle their products and, likewise, we've been looking at bundling," he says. "For example, we've bundled 'Speedy Boarding' with bag charges, so the passenger gets a discount for taking both together."
Reverse psychology
In fact, Southwest Airlines has retaliated to network carriers jumping on the bandwagon that it pioneered by bundling some of its products and services together and carrying out a bit of reverse psychology. "Southwest has taken a bold approach by running in the opposite direction," says Sorensen. "Southwest, as the paramount low-cost carrier, is now trumpeting all the services it bundles in its product, while poking fun at the once full-service airlines."
Florida-based AirTran Airways prefers to see its ancillary revenue offering as a "value proposition", says the carrier's director of strategic planning and scheduling, John Kirby. "If a customer feels they got a good deal on an airfare they may be more willing to upgrade to a better seat or buy food on board," he notes.
In terms of what's next on ancillaries, Kirby says AirTran is "always evaluating". "It's likely that many ancillaries will stay and some won't. We continue to evaluate opportunities - for example, on-board entertainment could be an additional ancillary revenue stream. Like any industry, we're feeling our way through this process. It's difficult to add a whole bunch of fees without figuring out the competitive environment."
One thing network and low-cost carriers alike will have to keep in mind is that as we head into what could be the most painful global recession in decades, there will be certain things that passengers will be less willing to pay extra for as their disposable income becomes ever tighter.
IATA director general Giovanni Bisignani makes the point that there are two main problems facing airlines in a recession, "revenues going down and passengers disappearing". For this reason, he says carriers will "have to be careful not to discourage passengers" by charging for too many extras.
To read about how airlines are realising the benefits of mobile connectivity, go to:
flightglobal.com/mobiles
Source: Airline Business
