Airline ancillary revenue will reach $42.6 billion worldwide in 2013, according to a new study by IdeaWorksCompany, a research firm, and CarTrawler, an online car rental distribution system. The CarTrawler Worldwide Estimate of Ancillary Revenue represents a massive increase of 89 percent from the 2010 estimate of $22.6 billion, the firms note.
Ancillary revenue is generated by additional activities that yield revenue for airlines beyond the core movement of customers from A to B. This wide range of activities includes: commissions gained from hotel bookings, the sale of frequent flier miles to partners and the provision of a la carte services − providing more options for consumers and more profit for airlines.
For the first time, IdeaWorksCompany offers a global projection of revenues specifically from a la carte fee activity, the company says. Revenue from optional services, such as onboard sales of food and beverages, checked baggage, premium seat assignments, and early boarding benefits was determined to represent $23.7 billion of the projected global total. The smaller share, at $18.9 billion, comes from non-fee activity such as the sale of frequent flier miles to program partners and commissions earned on the sale of services to travelers, such as hotel accommodations and car rentals.
Earlier this year, CarTrawler and IdeaWorksCompany noted they reported the ancillary revenue disclosed by 53 airlines for 2012. 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 2013. The CarTrawler estimate marks the fourth year IdeaWorksCompany has prepared a projection of global ancillary revenue activity, and is the first year that CarTrawler’s sponsorship of this forecast includes a series of ancillary revenue reports.
“Today, airlines are not just competing with each other for a share of the passenger market, they’re also competing for a cut of each passenger’s total travel budget,” says Mike McGearty, CEO of CarTrawler. “It’s simply not enough to add travel products to your website and expect customers to purchase. Today’s online shopper has more choice than ever of what to buy and where to buy it. If you don’t satisfy their demands, they will take their business elsewhere. The airlines that will win the ancillary revenue race will be those who adopt a proactive approach to online retailing by focusing on satisfying the needs of the customer along every step on the sales journey and by ensuring that their ancillary partners do the same.”
IdeaWorksCompany believes the majority of ancillary revenue for US major airlines is generated by the sale of frequent flier miles, mostly those linked to co-branded credit cards. Baggage fees for US carriers represent approximately 25 percent of their ancillary receipts. The remaining revenue is produced by an array of a la carte and commission-based products.
Other sources include onboard sales of food, beverages, Wifi, 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, single visit access to airport lounges, and VIP-style services at the airport.
“A la carte activities, such as those linked to fees charged for checked bags, onboard cafes, and early boarding privileges, are a big part of the ancillary revenue story,” says Jay Sorensen, president, IdeaWorksCompany. “Globally, about 56 percent of ancillary revenue is produced by the optional extras sold to consumers at airline websites, onboard aircraft, and increasingly through travel agents and online travel retailers. This leaves a significant 44 percent share provided by business opportunities linked to a passenger’s trip such as hotel and car rental bookings, and even the use of a co-branded credit card to accrue frequent flier miles or points.”
The world’s airline industry is enjoying better financial results and a rare glimpse of profitability, the research shows. The boost provided by ancillary revenue can help ensure these results are firm and not fleeting.