Ancillary revenues; smart or stupid?

Ancillary revenues are becoming more and more a standard in aviation and have grown over the last years with even non-low-cost airlines introducing them. According to service provider Amadeus; almost 20% of the total revenue of airlines is now made up of them. What is this practice, what is it doing to the monetisation models of airlines, what’s the future and most importantly; what do passengers think of them?

What are ancillary revenues?

Ancillary revenues are the revenues that companies generate on top of their core business. Examples are mini-bar beverage charges by hotels, gas stations selling car wash vouchers, cinema’s selling popcorn and airlines charging for a checked piece of luggage.

Focussing on ancillary revenues allows companies to grow their cash-flow without having to expand into other businesses. Many companies have some form of ancillary revenues and often we as consumers are not even aware of their existence.

Its perfectly normal that you are able to buy a cup of coffee in the shop attached to the fuel station and popcorn is something that is “ying and yang” if you go to the movies. But with airlines; the practice of ancillary revenues only started to appear bout a decade ago.

Introduction

Anyone that has ever made a charter holiday in the 90’s remembers flight attendants walking around with a cart full of duty-free perfume, toys, electronics, cigarettes and other luxury items that people usually never actually wanted. This was the first ancillary revenue strategy that can still be seen on board of many flights; Charter, low-cost and traditional airlines now (although KLM has stopped selling cigarettes on board).

In the 90’s low-cost airlines started unbundling their fares and required passengers to pay extra for different extra services. In the 2000’s many leisure airlines followed suit; not offering free meals and drinks on board anymore. A few years later, checked luggage was also unbundled.

Only since 2010 and onwards, several network airlines have adopted the policy of unbundling fares. The big network airlines in the United States (United, American and Delta) all introduced checked baggage fee’s around this time and in 2013, Dutch airline KLM was the first to introduce checked baggage fees on European flights.

Examples

There are many examples of ancillary revenues that airlines can charge on top of the fares to fly them. Ancillary revenues have become a core strategy for not only low cost airlines but has been adopted by the more traditional airlines as well to increase their margins.

It depends per airline and strategy what kind of services can be offered, however, below you can see an overview of some of the possible things airlines may charge you for these days:

  • A fee to select your seat
  • A fee to bring a larger carry-on item (than a handbag)
  • A fee for food and drinks on board
  • A fee to check in a piece of luggage
  • A fee to print your boarding pass at the airport

There are of course many other opportunities and airlines are becoming more and more creative with finding new areas to squeeze out more money from their flyers. A nice one is the yearly recurring April fools joke of Ryanairs’ Michael O’Leary to charge for toilet usage.

The monetisation of ancillary revenues

According to research performed by Ideaworks, the total annual revenue of airlines combined was over €28.000.000.000 in 2016. Some airlines generate more than 30% of their full revenue out of ancillary revenues. Impressive to say the least although these airlines are all focussed on providing the flyer with very low ticket prices.

Frequent Flyer programs

Even though one would probably not consider frequent flyer programs to be part of an ancillary revenue strategy they actually are an important asset to many airlines. Loyalty programs are not only an asset to retain loyal users and reward them but also to make the airline some serious money.

Frequent flyer programs are not only about collecting and spending miles anymore but have evolved into a complete ecosystem including many commercial partners including credit card companies that bring in a lot of extra money.

Airlines can still generate a lot of turnover from these frequent flyers spending their miles on all kinds of products because the exchange rates are in general extremely unfavourable for the spender. Yet, since most miles are collected on business flying (paid by employer), the flyer still feels the flights paid for with miles are “free”.

The table below shows how big of an impact these frequent flyer deals may have on the total ancillary revenues of big airlines.

Passenger opinion

So what do passengers think of all those extra costs? As someone who owns a few big travel related social media pages I can share that many consumers aren’t too happy with all the extra prices; especially when airlines are having big sales with low ticket prices that are shown without the extra costs. In general; the reception of these fee’s among the public is not very positive and I can imagine why.

When checked baggage on European flights was introduced at KLM I remember a quote from the CEO: “This fee allows us to decrease the prices of our tickets to ensure that only people that really need the suitcase are actually paying for it“. You can guess it; none of the fares was decreased with the €30 that had to paid for the suitcases.

Photo by Remco de Wit

Consumers know this and generally, regard the extra fees as a cash cow and a way to make more money from them. On the other hand, they also realise that they are paying very low prices for their flights and that, if they wish to, are not forced to pay for the extra services. This has led to some interesting cases of creative travellers (such as this guy that wore ALL his clothes to avoid being charged a checked bag fee).

I think its a matter of maturity; travellers will more and more get used to the fact that fares come without services until its the full standard.

The future of ancillary revenues in aviation

With the introduction of long-haul low-cost airlines, ancillary revenues were introduced on the long haul. Dutch Airline KLM followed suit with their “transatlantic light fares” that didn’t include checked baggage so my expectation is that this trend is not done yet. Unbundling is becoming big and ancillary revenues will keep making a bigger share of the total turnover generated by airlines!

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About Ingmar Bruinsma

Ingmar Bruinsma is an entrepreneur in the travel industry. He also provides consultancy services in the field of marketing, business development to clients in travel & aviation. He blogs about topics in tourism, travel, aviation, digital marketing.


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