Airline ancillary revenue will reach $36.1 billion worldwide in 2012, according to a new study by IdeaWorksCompany and Amadeus in the Amadeus Worldwide Estimate of Ancillary Revenue. The new study projects that airline ancillary revenue for 176 airlines will reach $36.1 billion worldwide in 2012, an 11.3 percent increase from 2011.
"The next surge of activity will occur when the sale of optional extras becomes more prevalent in the automated booking systems used by travel agents," the study says. "Look for airlines to become better retailers through all distribution channels during the next three years.”
North America continues to lead all other regions with ancillary revenue forecasted to reach $15.614 billion in 2012, followed by Europe ($10.077 billion), Asia/Pacific ($7.606 billion), and Africa/Middle East ($1.733 billion), Amadeus reports.
Among the study highlights:
• The Traditional Airline category (for carriers outside the US) has the greatest share of revenue by carrier type at $12.788 billion (35.4% of the global total); followed by the US Major Airlines category at $12.399 billion (34.3% of the global total); the Ancillary Revenue Champs category at $5.555 billion (15.4 % of the global total); and the Low Cost Carriers category at $5.376 billion (14.9% of the global total)
• The US Major Airlines category is down 0.8 percent since 2011, largely because Delta redefined how it discloses ancillary revenue results.
• The majority of ancillary revenue for U.S. major airlines is generated by the sale of frequent flier miles (50%) followed by baggage fees (20%).
• Key ancillary revenue components for traditional airlines outside of the US are travel retail (30%), sale of frequent flier miles (30%), onboard retail (15%), excess baggage (15%), and other ‘a la Carte’ services (10%)
Earlier this year, Amadeus and IdeaWorksCompany reported the ancillary revenue disclosed by 50 airlines for 2011, the study notes. These statistics were applied to a larger list of 176 airlines to provide a global projection of ancillary revenue activity by the world’s airlines in 2012. The Amadeus Worldwide Estimate of Ancillary Revenue marks the third year Amadeus and IdeaWorksCompany have offered a projection of global ancillary revenue activity.
Ancillary revenue is generated by additional activities that yield revenue for airlines beyond the core movement of customers from A to B, the study notes. This wide range of activities includes: commissions gained for hotel bookings, the sale of frequent flyer miles to partners, and the provision of ‘à la carte services’, which provide increased consumer choice.
Worldwide Estimate of Ancillary Revenue:
2012 Estimate $36.1 billion (5.4% of Global Airline Revenue of $667 billion)
2011 Estimate $32.5 billion (5.6% of Global Airline Revenue of $577 billion)
2010 Estimate $22.6 billion (4.8% of Global Airline Revenue of $474 billion)
“It’s encouraging to see ancillary revenue growing at over 11 percent this year which demonstrates the significant commercial potential for airlines. However, to capitalize on this, it is imperative that airlines adopt a multichannel approach, accessing the opportunity presented by in-direct travel agency sales of ancillary services,” said Holger Taubmann, senior vice president, distribution, Amadeus.
“To power the sale of ancillary services, it’s paramount that airlines adopt the Electronic Miscellaneous Document (EMD) which provides industry standardization. In the first half of 2012, Amadeus said it issued 4.88 million EMDs. This is testament to the importance of ancillary services in driving revenues and supporting growth,” said Julia Sattel, senior vice president, Airline IT, Amadeus.
The IdeaWorksCompany analysis used natural groupings (or categories) based upon a carrier’s ability to generate ancillary revenue. The “percentage of revenue” results associated with four defined categories have been applied to a worldwide list of operating revenue disclosed by 176 airlines.
The four categories include::
• Traditional Airlines. This category represents a catch-all for the largest number of carriers. Ancillary revenue activity may consist of fees associated with excess or heavy bags and limited partner activity for a frequent flier program. The average percentage of revenue remained at 2.9 percent. Examples include Air Canada, Air New Zealand, Copa, Etihad, Finnair, and South African Airways.
• Major U.S. Airlines. US-based majors generate strong ancillary revenue through a combination of frequent flier revenue and baggage fees. The percentage of revenue for this group was 10.1 percent, which is a drop from the 2011 rate of 11.9 percent. Examples include Alaska, American, and United.
• Ancillary Revenue Champs. These carriers generate the highest activity as a percentage of operating revenue. The percentage of revenue achieved by this group was 19.7 percent, which is down slightly from 19.8% for 2011. Examples include AirAsia, Allegiant Air, easyJet, and Spirit Airlines.
• Low Cost Carriers. LCCs throughout the world typically rely upon a mix of à la carte fees to generate good levels of ancillary revenue. The percentage of revenue for this group was 7.2% and is above last year’s 6.5%. Examples include Jazeera Airways, JetBlue, Norwegian, Pegasus, Southwest, and GOL.
IdeaWorksCompany said it believes the majority of ancillary revenue for U.S. major airlines is generated by the sale of frequent flier miles notably those linked to airline credit cards. This financial activity exceeds $6 billion annually in the US alone. Baggage fees for US carriers represent approximately 20 percent of their ancillary receipts. The remaining revenue is produced by an array of à la carte and commission-based products.
Other sources the study says, include onboard sales of food, beverages, Wi-Fi, and commissions from hotel bookings. In addition, airlines offer an ever-increasing selection of services that add to traveler convenience such as priority security screening, early boarding, exit row seat assignments, and single visit access to airport lounges.
North America continues to lead all other regions largely due to its large market size and how thoroughly airlines have embraced ancillary revenue methods, the study says. Revenue results are projected to dip largely due to the methodology change described earlier for Delta, the study reports.
'Concurrently, baggage fee revenue disclosed by airlines to the US Department of Transportation has dropped. Some of this is due to increased fee waivers for travelers with elite frequent flier status and travelers checking fewer bags. However, a meaningful amount of baggage revenue (not typically disclosed by carriers) is now generated by the fees paid by banks that issue credit cards. These banks make payments to the airlines for the provision of “first bag free” benefits associated with a growing number of airline credit cards."
“The majority of the 11.3 percent increase can be attributed to increased passenger revenue posted by airlines all over the globe,” says Jay Sorensen, President, IdeaWorksCompany. “Low cost carriers will also contribute to the increase as they boost their ancillary revenue to higher levels through more products and better marketing. The next surge of activity will occur when the sale of optional extras becomes more prevalent in the automated booking systems used by travel agents. Look for airlines to become better retailers through all distribution channels during the next three years.”
"Despite the International Air Transport Association (IATA) revising its projection of airline profitability up by $1.1 billion for 2012 to an expected total of $4.1 billion, the operating environment remains challenging. The current situation has made ancillary revenue more attractive, and needed, for airlines all over the world," Amadeus says.
"If airlines were to forego the revenue contribution from the provision of ancillary services it would mean a loss for a great number. Ancillary revenue provides good amounts of cash to buy new aircraft interiors, invest in new equipment, and provide funds for expansion," Amadeus says.