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Ancillary Revenue Solutions for the Cabin

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Ancillary Revenue Solutions for the Cabin 35 I AIRLINE REVENUES Investigating the latest solutions and possibilities airlines can adopt to streamline its ancillary revenue streams. Plus the capability of these solutions to increase airlines profits and yields are analysed. Ancillary revenue solutions for the cabin he aircraft cabin offers the airline is offering a superior product. in first or business class, then the airline potential to generate passive Furthermore, collaborating with will set a base price that they are willing and active streams of ancillary individual brand names can differentiate to accept for those seats.” Trevenue. These are important to a carrier from other airlines.” In the past consumers’ buying airlines because their yields can now Zoe’s Kitchen is a fast-casual food behaviour was influenced because they make the difference between making a chain with headquarters in Texas. It knew it was always possible to buy a profit or a loss. serves dishes such as chicken salad, pasta heavily discounted business-class ticket at Passive ancillary revenue streams are salad, pittas and sandwiches. The chain the last minute. Therefore, instead of typically yielded by advertising, which is has grown to include 203 locations across booking in advance and paying market traditionally done through the inflight 17 states, with further plans to expand. value for an upgrade, many passengers magazine, which is revenue-neutral or American Airlines has recently signed will wait until prices are lowered. revenue-positive for most airlines. a deal with Zoe’s Kitchen, giving the “If carriers reduce the price of an This is because the magazine’s carrier a unique branded product. “The upgrade before departure, it trains the content, distribution and publication idea is that if it is a brand that passengers market to wait and get the best deal. costs have to be covered and paid for. If associate with, it will incentivise purchase Ideally airlines want customers to think the revenue yielded by advertising is and leverage higher yields,” says Ozores. they will get the best deal the earlier they greater than the magazine’s total Unique brand collaborations mean book,” Ozores explains. production costs, then it is revenue- airline customer ratings are naturally The auction of an upgrade encourages positive; if it is just enough to cover improving. Passengers can order meals in passenger expenditure. Introducing a low production costs, then the magazine is advance, while booking and on the threshold upgrade price prompts revenue-neutral. airline’s app. Using digital technology to consumers to want to take part in the According ICF Aviation principal, pre-order food and beverages increases auction. Carlos R Ozores: “Many low-cost sales and leverages ancillary revenue. AeroMexico has reported it has carriers (LCCs) are advertising on their generated twice as much upgrade revenue cabin tray tables and overhead lockers. in a year since using the Plusgrade Increasingly many legacy carriers and Seat auction solution. SAS has reported a 22% LCCs are generating advertising revenue Seating upgrades have always been a increase, while Royal Brunei Airlines has by painting the exterior of their aircraft in rich source of airline ancillary revenue. noticed a 18% increase in business-class special liveries that promote sporting Many airlines have, however, been selling load factors during a five-month period. events, movies and holiday resorts.” late upgrades to first- and business-class If an aircraft is fitted with a wireless seats well below their market value. or seatback inflight entertainment system Plusgrade hosts a backend solution Economy sky couch (IFE), then digital advertising is a possible that interfaces with the airline’s online Air New Zealand has created a seat ancillary revenue stream. booking and reservation pages. The upgrade called Economy Skycouch. In the past airlines commonly relied airline sets the criteria and minimum Installed on selected Air New Zealand on duty-free sales as their primary source reserve price for unsold first- and 777s and 787s, Economy Skycouch is a of active ancillary revenue. Now airlines business-class seats. Passengers that have row of three economy seats that can be are introducing many different dining purchased economy or premium seats can transformed into a couch or bed for two options and upgrades, as well as offering bid on the auction for the chance to buy passengers. digital retail and destination experiences. an upgrade. Economy Skycouch gives passengers “Airlines are offering a much wider “Empty seats in business or first class extra space and provides significant gains selection of meals to better cater to translate to spoilt inventory. Auctioning in comfort over a standard economy seat. diverse tastes and diets,” says Ozores. makes it is possible for the airline to “This generates additional revenue, “Carriers are collaborating with high monetise these empty seats without because there is a premium to book the street and many recognised brands. This diluting their worth,” says Ozores. “If seat. Most Air New Zealand long-haul gives passengers the feeling that the there is a flight with a lot of availability flights are more than 16 hours, which ISSUE NO. 126 • OCTOBER /N OVEMBER 2019 AIRCRAFT COMMERCE 36 I AIRLINE REVENUES Many airlines are working with advertisers and partners to create unique aircraft paint schemes. These special designs are typically sponsored by movies, sporting events or holiday resorts. services. One of the biggest generators for ancillary revenue onboard is from baggage initiatives. US frequent flyer credit card commissions have the highest ancillary revenue yield across the sector. This is because light or basic airfare tickets commonly do not include check-in luggage within their price. Airlines set individual terms and conditions on their baggage fees and allowances for passengers that want to stow luggage in the aircraft’s hold, or travel with extra cabin carry-on cases. The second biggest source of ancillary translates to high demand for a sleeper- Carriers have to sell the highest number revenue is seat selection, where style seat in economy class,” says Ozores. of seats for all flights at the highest passengers can pre-book their seat on the The airline has to make an assessment possible price to improve yield mix. It is aircraft. against the revenue generated by selling inefficient if an aircraft operates with Advance seat selection can be two Economy Skycouch tickets rather only a small number of expensive tickets disseminated in many ways. Different than three standard economy tickets. sold, or with a high number of cheap seat pricing points can apply to standard Ultimately the airline must yield a higher tickets sold. It is a balancing act to sell seats, economy-plus seats and window revenue selling Economy Skycouch tickets the maximum amount of tickets for the seats. For example, seats with extra than it does at the standard fare. highest price possible. legroom are priced higher than an According to Ozores, if a flight is at Dynamic pricing reacts to demand economy seat to reflect the limited supply capacity, the price of Economy Skycouch and the speed at which tickets sell, as well and higher demand. The airline specifies is expected to increase at a higher rate to as operational factors such as fuel prices. the price points and how they classify and cover the costs. Low demand flights mean If prices constantly rise nearer the day of value individual seats or rows of seats. that the fare for Economy Skycouch can departure, many price-sensitive LCCs can have as many as nine seating be dropped, yet still generate a higher consumers will not buy tickets. This is price points in a single-class cabin. yield. not the case for business travellers, whose “We have developed DeepSeater schedules mean they must travel at based on our assumption that an airline’s specific dates and times. business model will be more willing to go Deepseater Typically, ancillary revenue items use into dynamic pricing for seats first before All airlines must make a significant a static pricing structure; meaning their pricing bags,” says Spann. “This is amount of money from ticket revenue prices are fixed and change infrequently. because choosing a seat may not be because it is their core business. A rising Christian Spann, senior analyst, essential to a passenger, while travelling number of airlines is unbundling fares, so zeroG says: “If you look at a typical with luggage is often a necessity.” there is now a higher impetus on carriers legacy hub carrier, about 10% of the total When consumers shop for a ticket, to maximise ancillary revenue yields. airline revenue will be generated from they will often compare prices with Ancillary revenue is worth $93 billion non-ticket ancillary sales. This is a luggage. In some regions, the internet per year; $12 billion of this is derived significant yield for legacy airlines. pricing tool Google Flights will factor from passengers paying for seating Ancillary revenue can be higher for non- baggage fees in its comparison results. allocation. legacy airlines.” Ancillaries are a Many airlines aggregate the baggage Carriers spend a lot of time and fundamental revenue stream for airlines. prices into the ticket price for longer resources optimising ticket revenue, yet By combining them with a flexible pricing routes or include a luggage upgrade do little to augment ancillary revenue. model, they will get even more important option. Carriers produce marketing Typically, carriers will amend ticket prices in the future. material with ticket and baggage price regularly to ensure they are selling them Therefore, zeroG, a data science points months in advance, so dynamically for the optimal rate. Dynamic pricing is subsidiary of the leading airline IT pricing baggage can be more challenging the reason air fares change at short provider Lufthansa Systems, is working to implement than seat allocation.
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