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Air- and Non-Air Ancillary

Short-term profit or long-term death?

Imagine yourself in a restaurant, paying more for a window seat, being charged for making a reservation and paying extra for fast service. Does that sound like a 5* experience?

Unbundling of the flight product made Low Cost Carriers (LCC) big. A low entry price is the door to top positions in online booking engines (OBEs) and online pricing portals. Aggressive ancillary selling starts once the base deal is safe. The concept obviously works – the enormous success of Ryanair, Europe’s leading LCC, gives proof.

What is the answer of premium carriers? They begin to slice their product and start playing the game of low costers! They do so in full awareness of their disadvantageous cost structure.

What should be the answer? Focus on a better travel experience!

Low cost carriers succeed and account for 27% of globally flown seats.

According to IATA, the worldwide emergence of LCCs continued in 2016 but the actual LCC market share (measured as the share of seats flown) differs significantly from country to country:

Strategic alliances between LCCs (cf. “Value Alliance” in Asia), the recent strategic decision by Ryanair to develop operations towards a hub model and their intend to feed long-haul flights of partnering carriers such Norwegian or Aer Lingus are likely to further increase LCC overall market share.

Premium carriers are hit hardest as pax yields fall five years in a row.

Between 2012 and 2016 global passenger yields decreased continuously (CAGR: -7,2%) and the IATA forecasts yields to continue falling in 2017. It will be no surprise that Full Service Carriers (FSCs) with their comparably high cost structure struggle most and are severely challenged by their quickly rising low cost competitors. But how do airlines best possibly react?

The responses of commercial airlines across the globe differ heavily and since there is no “one size fits all” solution, FSCs have developed individual strategies:

At one extreme are some airlines which hold on to their traditional business model and continue to offer “all inclusive” fares. These carriers purposely do not implement ancillaries despite a changing market environment in air travel with growing domestic and intercontinental competition. Singapore Airlines (SQ) for example, a role model for this approach, has so far still not introduced common ancillaries to its service offering.

At the other extreme are former FSCs such as United Airlines (UA) which follow a completely different strategy and present various ancillaries in their portfolio. UA e.g. offers passengers purchasable access to check in and security fast tracks, sells lounge passes, charges for onboard F&B or markets a paid bonus miles multiplier.

But remember: this numeration is an extract only and FSCs around the globe became incredibly inventive to generate additional sources of income in times of shrinking margins. But the question that comes up is:

Can premium carriers win the battle when playing the LCC rules?

Without a doubt, most industry experts have witnessed and even non-frequent-fliers certainly noticed that there has been a shift to „Best Buy“ policies by travellers both in the B2B and B2C segment.

The question that remains is whether or not airlines can survive as a hybrid carrier without a clear value proposition or whether they need to focus their business in order to be successful in the long run. Does it really make sense and is it economically wise for FSCs to unbundle the original product and sell it in slices?

Industry experts claim that ancillary sales are the fastest growing source of income from an airlines perspective. According to IATA, ancillary revenues within the entire airline industry exceeded the landmark of 50bn USD within the last decade.

However, it still has to be kept in mind that in 2015 only about 9% of global airline revenues originate form ancillary offers which certainly leaves room for further growth. But does each and every traveller around the globe demand low fares with little to no service or…

Will customers pay a premium for a better travel experience?

Customer behaviour in other TTT (Travel, Transport, Tourism) segments clearly prove that there is a general willingness to pay a surcharge in exchange for a better product experience. Let’s focus on hotels: The traveller’s range of accommodation options varies from low budget to super luxurious lodging experiences. In New York City, for example, the average hotel price per night was about 390 USD in Q4 2015 but rates can skyrocket as up to more than several thousand USD per night.

But this example is not only chosen to point out possible price variations, it also demonstrates that customers value product differentiation. But…

Price premiums can only be charged by delivering a premium quality!

Guests paying a fortune for an overnight stay are willing to pay a premium for a holistic experience. This may e.g. include well-trained staff, excellent hotel facilities (such as fitness centers, meeting rooms, SPA treatments, free hotel shuttles), a 24/7 in-room dining offer or a free minibar just as a personal butler.

Similarly, product quality features in commercial aviation might i. a. include flexible (re-) booking policies, smooth airport check-in and transfer processes, spacious lounges, comfortable aircraft seating, exquisite catering and state of the art in-flight entertainment. But instead of focusing sales activities on premium passengers, many FSCs took up the battle against low costers – well aware of their adverse cost structure. From then on…

The industry has educated customers to place price first – a crucial mistake.

Especially since the emergence of LCCs on short routes (domestic or continental), it seems that the price has become the only purchase consideration that matters in commercial aviation. But the long-haul tells a different story. Although more and more LCCs venture to enter this business (too), there remains much more room for product differentiation than in short-haul.

Yet carriers from both ends of service quality standards (high vs. low) seem to make adaptions to their business models. LCCs upgrade their product and introduce travel classes with priority boarding and increased seat recline for business travellers whereas former FSCs unbundle their product offer while introducing more and more ancillary offers. As such, airport lounges become accessible against payment and overcrowded airport security fast tracks are now available against cash.

The consequence: Formerly premium and true 5* travel experiences, which used to be exclusively offered by FSCs, dilute.

Differentiation will decide about airline’s future success or failure.

Ancillary sales increase FSC’s short-term profits, but how about the long run?

Instead of adapting or continuing the trend of flight product unbundling, FSCs should much more focus on a clear product differentiation which will strongly support their justification for higher airfares. Commercial airlines which do so and create an added value for passengers by fulfilling their core needs (such as a smooth and hassle-free door to door travel experience) will set themselves apart from the arbitrariness of their competitor’s offers. This becomes especially crucial since FSCs will find it hard to win over LCCs on the cost side and thus need to find other ways to become the passenger’s favoured carrier if it was not the price tag.

UNEX makes your airline business profitable and future proof!

For more than 15 years UNEX consults airlines in strategic and operational challenges. Various domestic and international projects e.g. in M&A, strategic business development, sales optimization as well as pricing and revenue management give proof to our industry-specific expertise.


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