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. notice. on approaches to tap into that potential Carriers are less transparent with the and provide airlines with intelligent prices of individual seat selection. Yet solutions. some already implement a basic time- Dynamic pricing It is forecast that Spirit Airlines will based pricing structure. Time-based American Airlines changes about generate 50% of its total revenue through pricing structures increase or decrease 500,000 ticket prices daily. Sometimes the sale of non-ticket items in 2019. This pricing points at set intervals between the prices for the same service class will rise means 50 cents in every dollar yielded ticket release date and the date of the or fall multiple times over several days. comes from selling additional goods and flight. Normally the earlier a passenger

AIRCRAFT COMMERCE ISSUE NO. 126 • OCTOBER /N OVEMBER 2019 37 I AIRLINE REVENUES

Seat bookings are among one of the highest yielding ancillary revenue streams. Dynamic pricing optimises seat pricing to create the maximum yield.

books their seat, the cheaper it will cost. “DeepSeater adopts a three-step approach when implementing dynamic pricing to seat allocation,” says Spann. “Initially data is needed to analyse the performance of an airline’s seating options and the demand for pre-booking seating on individual routes during different days and months of the year.” The data provides insights as to how different markets react to advance seating bookings, and make it possible to dynamically adjust prices for different types of seats according to demand. If seats with extra legroom, or on the first row or aisle become appealing, then that premium-seat price points do not reliability mean more passengers can DeepSeater will adjust the pricing points drop below those of economy. The AI successfully connect to the internet on for these seats to optimise the seat agent will learn an airline’s pricing long-haul flights. selection revenue at departure. policies over time, and intuitively know Some US cellphone network providers Next it is possible to monitor how the seat pricing ladder. are offering free unlimited inflight passengers react by changing the price Subjective combinations could be that internet within their talk plans. This is point parameters. Obtaining more data all the standard economy seats are not about selling onboard connectivity to will add certainty to the best price that available, but the exit row only has a passengers, but about airlines creating passengers are willing to spend on seat middle seat available. This seat becomes partnerships with travel experience and selection across the network. less attractive, because people would destination retailers and media outlets, Introducing an artificial intelligence rather sit in a standard seat than a middle such as Netflix. (AI) agent means DeepSeater learns by exit seat. Connectivity means that airlines can itself through trial, error and correction. It is possible to create a sophisticated see the content passengers are viewing The price can be updated frequently, aircraft-seating pricing matrix. Least during the flight. This data can be used to translating to the maximum allocated popular seats, such as the ones located assist the airline in hyper-personalising seating revenue across that flight. close to the galley or toilet, could be the inflight digital sales experience to “If travellers are not pre-allocating priced at a reduced rate. DeepSeater can optimise revenue. By hosting an inflight seats at current prices, the system will provide an individual price point for each digital storefront, the airline can make a lower the price points to generate seat on an aircraft. However, the greater commission on each sale made. demand,” says Spann. “The AI system the number of price-points, the more can constantly adjust prices in real time.” complexity is needed within the system. It is conceivable for DeepSeater to DeepSeater will interface with an In-flight map update its price points many times during airline’s digital commerce website and According to research, onboard an hour. Yet how frequently price points booking app. It can also disseminate inflight duty-free sales have fallen by are updated depends on the airline’s special prices for passenger 11%. Inflight maps are popular with strategy. “It is recommended that airlines segmentations, such as discounted price passengers, and can provide an original periodically assess the price points, but do points for families or business travellers. and engaging platform that can influence not change them so frequently that it travellers’ destination spending. degrades the passenger booking Using a simple rule-based seat pricing FlightPath3D leverages ancillary experience,” says Spann. structure that adjust prices incrementally revenue by providing passengers with an Once a seat booking has been made nearer a departure date by can increase immersive onboard 3D map experience the price will remain fixed, and will not revenue by %10. with the functionality to let airlines sell change for that passenger. It is expected yields will be much and advertise products. “The price points will be more stable greater using DeepSeater with AI and Travellers often do not have fixed months before a flight’s departure date wider price segmentation. plans for what they want to do at their because of low demand for ticket and destination, and are looking for seat allocation. It is recommended that inspiration. DeepSeater reviews the price points Connectivity FlightPath3D vice president for nearer the departure date every six to The biggest opportunity for marketing, Jon Norris says: “Today it is eight hours,” says Spann. leveraging ancillary revenue is by inflight not about passengers’ paying for It is possible for the airline to set a connectivity. Many flights across connectivity, it is about the passengers’ minimum and maximum seat allocation mainland Europe and the US now have destination spend wallet. Access to this price with the AI agent. Furthermore, it is access to onboard internet connections. market increases dramatically once you possible to configure the system to ensure Moreover, ever increasing bandwidth and have connectivity.”

ISSUE NO. 126 • OCTOBER /N OVEMBER 2019 AIRCRAFT COMMERCE 38 I AIRLINE REVENUES

Passenger onboard spending is moving away from the traditional duty free product and gravitating towards destination spending. Interactive onboard provides a creative way to influence passengers to book holiday attractions and excursions.

something else. It is possible that a portion of the seatback screen may be allocated to showing the map. If passengers are watching a film, the map can highlight information about where a particular movie scene was filmed and give background information. Alternatively, a tickertape banner at the top or bottom of the display can highlight information such as the flight time to a destination and the aircraft altitude. Many carriers have surficial adverts in between the map display screens, or add placements on different parts of the map. These will be displayed while passengers cycle between screens or browse the map. Destination shopping, experiences passengers are looking at on the map, it is FlightPath3D produces an onboard and services are a segment of passenger possible to serve ideas and the airline’s map solution that can interface with the spending that is on the rise. Typical routes and services to the passenger. IFE seatback system and passengers’ destination services can be excursions, “Instead of just randomly suggesting portable electronic devices (PED). restaurants, hotels and transportation. destinations, when they are of little The airline can embed as many relevance, FlightPath3D takes a destination services as it wants within the personalised approach,” says Norris. AD power map’s architecture. When the passenger is “The passenger can browse the seatback The widespread introduction of engaged in the map experience it will screen for a long time. This enables the wireless IFE systems means that its highlight partnered services that are airline to gather data and make the best- centricity is gravitating away from available in any geographical location. informed proposals to that traveller.” seatback display systems to PEDs. It has “Many airlines offer travel packages By analysing billions of traveller been forecast that by 2028 there will be as part of their service. British Airways reviews, photos and other social 14,000 aircraft installed with wireless IFE and American Airlines frequently interactions, Flightmap3D can inform systems. Of this number it is expected advertise travel bundles that include passengers which destinations and that 11,500 will be narrowbody aircraft. hotels and hire cars. It is possible to activities are trending. It is possible to Travellers rely on their PEDs for a integrate any permutations of these offers identify more than 400,000 attractions multitude of tasks such as arranging into the map,” says Norris. “It is possible worldwide and see how they rank by airport transfers, obtaining directions and to add any product that can be linked by popularity. contacting friends and relatives. a geolocation to the map.” Travellers will therefore seek to recharge Therefore, if a passenger is using the their PEDs when they are onboard. map to browse around the London area, Routes Most wireless IFE systems include a they will be informed of numerous Most inflight magazines feature a USB port installed in each seat to enable attractions within the city. Furthermore, map that shows airline routes and the passenger to recharge their PEDs the map will enable the traveller to book destinations. These can be very static and inflight. This means that passengers can and pay for the experience they choose. do not include much detail. FlightPath3D have continued access to the IFE system, “If I am looking at Big Red Bus tours map will highlight destinations, as well as without their PED running out of power. around San Francisco, then I just click on information about the flight and make it Dave Phillips, head of business the secure link to the Big Red Bus possible to examine the flight schedules. development IFPL, says: “Most booking engine for information on tours, If the aircraft is connected, it is possible passengers like to use and charge their availability and pricing,” says Norris. for passengers to book a future flight PED onboard the aircraft. IFPL has a Flightpath3D uses data in the public while onboard. solution that triggers an advert of the domain, so it can suggest relevant “If a traveller is on a flight from JFK airline’s choice on the passenger’s PED destination services based on what the to LAX, and viewing points of interests in when they plug it into in-seat USB passenger is viewing during the flight. “If San Francisco on the moving map, it will socket.” you have been browsing the San offer suggestions, such as the flight The in-seat USB outlet is managed by Francisco area, the map will use this data schedule, routes and costs. The map will the airline App. When the passenger to recommend destination services for the suggest other attractions in San connects their PED, the App messages the passengers,” says Norris. Francisco. It can be tailored as little or as USB outlet an encrypted payment token. FlightPath3D map can add context to much as the airline chooses,” says Norris. Once the advert has been watched, the the customer retail experience. By Passengers want their IFE experience token will activate and in-seat USB power knowing where the customer is flying to to be immersive; they do not want to stop will be enabled. or from, and analysing what the what they are watching to view For short flights it is recommended

AIRCRAFT COMMERCE ISSUE NO. 126 • OCTOBER /N OVEMBER 2019 39 I AIRLINE REVENUES

Economy Skycouch is a row of three economy seats that can be transformed into a couch or bed for two passengers. Airlines must make pricing assessments between selling two seats against three.

that the system circulates one advert. For longer flights it is recommended that an advert is activated every time a passenger plugs into the USB outlet. Ad Power can make it possible for the airline to levy passenger access to in-seat USB power. Passengers can buy in-seat power when they book their ticket online. Once purchased, metadata will be sent from the digital booking platform to the passenger’s app. When the passenger connects their device to the USB, in-seat power will activate immediately. “If a carrier charges two dollars per passenger, a 20% uptake on a 180-seat aircraft will yield $74.40,” says Phillips. “An aircraft that flies six sectors a day will yield $446.40 per day. If the aircraft calculated against customer responses to competitor is doing well. is operating for 330 days per year, the single questions. “We let the data dictate what we talk total yield will be $147,000.” Fethr uses social data to increase to our airlines about, so we do not apply Payment can be made by airmiles or ancillary revenue by highlighting the any pre-existing hypothesis at the first vouchers. The ability to levy for in-seat passenger’s voice for many different parts stage,” says Cooper. “We spend time power means that airlines can diversify of the overall passenger experience. The calculating what is important to their service class. For instance, in-seat data is used to predict what passengers passengers. If it is important, passengers power could be provided free as part of a want so that airlines can tailor their will be talking about it online.” business-class and premium-economy products to them, hence increasing It is important to understand the package. Furthermore, it is possible to ancillary revenue while increasing the context of the social data. Influences that run promotions and incentives with customer satisfaction score. drive customer satisfaction for a partnered brands. Social data is information that social European LCC are different to a long- Ad Power is compatible with Apple media users publicly share. Platforms rich haul legacy airline passenger. Therefore and Android devices, and will integrate with social data are Facebook, Twitter when the context changes, the passenger with current airline IFE equipment. and Instagram. Other sources can be needs change. internet forums, chats and video blogging The system will not compare airlines sites such as Youtube and Vimeo. against each other. “For example, it Fethr Analysing social data allows airlines would not make sense to compare easyJet One of the key issues is how airlines to get closer to the moment, and get some against Emirates, because each has very can improve ancillary yields seamlessly predictive points of view about the different missions,” says Cooper. “We without endangering the passenger’s core customer experience and how it is relate bespoke social data insights to each experience by offering products they do resonating with airlines. individual case. We do not apply any bias not want. According to Fethr insights director, into the data; we let the data speak for It is always possible to increase prices Will Cooper: “It is about informing itself. The sample size of the data can or to market and monetise a multitude of airlines and getting them to be more vary between airlines, but all the data sets items, such as baggage and beverages to proactive in their approach, so that they are of a significant size to analyse, which boost revenue. But commoditising can can better decide which services and means that airlines with smaller data sets have a negative impact on customer products to provide, based on a thorough are not penalised.” experience and brand loyalty. understanding of what is important to its There are processes in place to ensure Fethr works with the aviation and passengers and how to better cater for that when the data is imported it is travel sector to convert raw data into their needs.” enriched and cleaned to guarantee that profit. By using a data-positive approach, Advantages in using social data is that the relevant conversations are being it is possible to reduce wastage and it is accessible in the public domain. identified. One of the major investments increase customer satisfaction, which has Therefore, there is nothing preventing Fethr put into building the dataset is to a direct impact on ancillary revenue. Fethr from performing analytics on it and ensure that the solution is accurate and Social data is a new channel that can informing operators how they are effective at isolating conversations be used to get a better understanding, performing. pertaining to the airline. without having some of the negatives Subsequently, Fethr can perform Cleansing the data increases its associated with Net Promoter Scores analytics on competitor’s social data, so it validity and its robustness, so if (NPS). Many airlines use NPS to gauge is possible to learn the performance of a passengers are talking about an airline the loyalty of their passengers and how competitor. These insights are useful; by purchase it is possible to identify where well they are. NPS scores are based on a using them it is possible to gain a and how that purchase was made. customer satisfaction survey that is commercial advantage and know what a Fethr implements both social listening

ISSUE NO. 126 • OCTOBER /N OVEMBER 2019 AIRCRAFT COMMERCE 40 I AIRLINE REVENUES

Wireless connectivity solutions transmit content to passenger mobile devices without the need of a seatback screen. Ad Power makes it possible to levy passenger usage of the in-seat USB power supply.

“Because passenger needs can be unique, sometimes items that are trending on the ground do not trend in the air,” says Cooper. “While on the ground passengers may want to eat very healthily, but within the inflight experience they may want to indulge a bit. Viewed as a time to relax, many normally health- conscious passengers will reward themselves with less healthy foods.” When it comes to analysing conversation, context is key. Short- and long-haul flights will have different passenger needs. Some passengers would like an and social prediction, which uses tangible shift in what passengers would authentic dining experience that reflects comprehensive algorithms to enable the like to buy onboard,” says Cooper. the destination that they are travelling to, solution to model and predict customer “Passengers are buying traditional duty- while others would prefer more variety in requirements, expectations and wants. free items in the airport, such as perfume, the children’s food menu. Passengers may Social listening is very-in-the-moment, alcohol and cigarettes. On the aircraft simply want a coffee for short regional so it is more about what is trending and passengers are increasingly buying flights. what users’ sentiments are. Social destination services and experiences.” Passengers will spend more money if listening applies pre-defined search terms Airlines now have the opportunity to they are presented with items that they to see what conversation exists around drive these types of services, and to invest want to consume. By concentrating on those search terms. in destination services. Insights to what this, it is possible to improve passenger Social prediction requires looking at products passengers will want to buy experience, loyalty and revenue. trends that are occurring now on the mean airlines can pick the products and ground and how they will manifest in the services passengers want. aviation and travel sector in the future. It is possible to predict what ancillary Convenience Duc Huy Tran, Fethr head of strategy, products and services passengers will Opportunities to create ancillary says: “Social prediction is much more want in the future. Fethr has conducted revenue can be attractive to passengers actionable for airlines so they can research, such as which movie titles because of their ability to benefit the prioritise. One of the biggest problems should be uploaded onto the aircraft. passenger in terms of time saving and airlines have is that they have so many For food and beverage, Fethr is convenience. decisions, and it is difficult for them to working with airlines to determine what Passenger convenience significantly know the impact of a product on NPS. In passengers are enjoying eating today, and more important now that it was three the end, they want a tool to be able to how tastes will evolve. By analysing years ago. Research suggest that prioritise their offerings.” growing dietary and wellness trends, the consumers who are stimulated to order There are many areas where the solution will predict what passengers will ahead of their flight are the passengers solution can leverage ancillary revenue. want to eat and drink in the future. who spend wallet is the highest. One of these is around looking at what Detailed insights into passenger Furthermore, the ability to shop from the future of inflight retailing should be requirements mean it is advantageous an App to be able to collect the purchase from a passenger experience perspective. when negotiating tenders with suppliers from the destination airport on hotel is Insights to passenger expectations mean it and retailers for future product selections. increasingly becoming a higher priority is possible to predict how passengers “Airlines will be optimising their for these passengers. want to shop and what products they ancillary inventory because they will Therefore, to drive ancillary revenue would like to consume. It is possible to know what products passengers want to in the future airlines need to focus on gain insights from a wide range of topics purchase and consume,” says Cooper. passenger solution offer passengers from passenger paying preferences, to “Knowing the optimum inflight inventory tangible time saving and convenience. what the ideal airline user interface inherently improves operational Because of the time and convenience should look like. economics by not throwing away food saving, passengers are more willing to There are many areas the solution can that passengers did not consume.” pay a higher price for these products and look at, One of these areas is what the When analysing trends, it is important services. This means that products need future of inflight retailing should be from to determine how the online conversation not be heavily discounted in order to a passenger experience perspective. How is working in relation to the aviation set. incentivise buyers. do passengers want to shop, how do they For instance, if trends were only taking want to pay, and what do they want place from insights happening on the To download more than 1,200 passenger user interfaces to look like? ground, then it is likely airlines will stock articles like this, visit: “Broadly speaking, we are noticing a the wrong food items. www.aircraft-commerce.com

AIRCRAFT COMMERCE ISSUE NO. 126 • OCTOBER /N OVEMBER 2019