In the March edition of this column we examined the trend of making the price of product attributes like baggage, priority boarding and others more explicit. It is a popular trend, and more low-cost players are joining in, bringing some new dimensions that have investment consequences.
Previously we commented that any add-ons had to be profitable. In some segments the add-ons are necessary to be able to compete for better yield traffic. The initial response of most - but not all mainline carriers - was to cut fares, but offer a number of attributes. In the UK the next stage of the competitive reaction is being seen. It has been most eloquently stated by easyJet when it announced in June that is was "targeting British Airways' business passengers with a big expansion of routes and frequencies at London Gatwick". But more than this as it also stated that it "has succeeded by matching BA's route network and providing a range of services at a much better price than BA".
These services include a number of free ones, which BA already offered or now matches: online check in; 23kg (50lb) carry on baggage; and a number of paid for enhancements - including priority boarding (£5/$9) and lounge access (variable but in the order of £15-20). At the same time it is increasing the frequencies offered on its target routes. Only time will tell if it will be a successful strategy. EasyJet will want to see a loss of higher fare traffic by BA on the one hand and an improvement in its own financial performance. That will include a reduction in the breakeven load factor of the airline.
While BA underlined at its recent annual general meeting that it also offered free refreshments and more legroom, and it is not likely that easyJet will match this, it is clear that the rules of competitive engagement have changed.
While these actions by easyJet seek to enhance its yield there should be little doubt that underlying yields will continue to fall in Europe and that all airlines should be seeking to increase ancillary revenue if they are not already doing so. In this respect BA may be said to be following in the tracks of easyJet and Ryanair. The recent excitement over easyJet's share price (upwards this time) followed the announcement of its June traffic figures which was accompanied by news of a sharp increase in unit revenue in the quarter. This partly resulted from the timing of Easter, but more significantly from a marked improvement in ancillary revenue that on a per passenger basis is now expected to be up around 30%, translating to a 3-4% increase per seat.
Calculating it in this way shows its importance to the business in terms of its contribution to profit, for although it may account for a 10% increase in revenue there is a very high gearing effect through to the bottom line. This resulted in an expectation that the profit increase in the current year would be some 40-50% rather than the 10-15% previously forecast.
Although easyJet is in effect moving closer to Ryanair in this area, BA, as it seeks to compete in the same market area for short-haul passengers to boost its load factors, is following suit. It quite rightly sees this group of passengers as one that has demonstrated a willingness to package the non-flight elements of its trip. The need for BA and other mainline carriers is to ensure that their websites and IT systems will enable this stream of revenue to be tapped and maximised.
There is, however, one area of revenue potential that BA can draw upon that is not open to a "traditional New Model Airline" or low-cost carrier: upselling. This is, in other words, offering a seat in business class, but without the accompanying frequent flyer points for in effect a market clearing price that might be as low as £50. The contribution from such a source of revenue is potentially very significant, with perhaps 90% flowing through to the bottom line. While BA continues to report its premium traffic growing more rapidly than economy, these figures include long-haul where premium growth has exceeded that of economy in most markets.
However, the latest IATA figures also show that within Europe in the first five months of this year economy traffic was up by 6.8%, but premium traffic was just 1% higher.
It is clear that the new battle lines are drawn for those airlines that are sufficiently close substitutes. From a customer point of view, it is likely to continue to be a case of getting more for less. ■
Source: Airline Business
