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Targeting Ancillary Revenue Growth
in a Feasible Way

by Ritesh Gupta
March 7, 2012

IN-DEPTH: “As ancillary is ancillary, not the core business - the guiding principle is that as long as the ancillary products can add value to customers and bottom line with marginal revenue out weighing total marginal costs involved, it’s a good product to offer and core business will be beneficial”. Is it the right way of assessing ancillary revenue today?

Travel businesses continue to gather customer preferences and have been looking to offer improved personalised features to their travellers.

In its regular interactions with specialists in this arena, EyeforTravel has found that travel companies are attempting to better serve their most loyal customers while also working to differentiate themselves from competition on features other than cost. A lot of these efforts are focused online in gaining a deeper understanding of the plans that a user has already made, and then using that information to market travel enhancements, upgrades, or add-ons.

In case of airlines, merchandising and ancillary revenue are helping airlines in improving their bottom line results. Baggage fees, travel insurance and vacation packaging are among the top revenue generators.

Airlines assess various ancillary revenue options first from the perspective of customer whether that is adding values, comfort and convenience to passengers, then followed by revenue and costs associated as well as whether that can help incremental air sales and operating costs saving.

Any discussion of ancillary revenue should also include a realisation of the how the core revenue is being sold. Any supplier can sell ancillary items, but it shouldn’t be without an overall retailing strategy. As an executive from Cathay Pacific Airways stated last year, as ancillary is ancillary, not the core business - the guiding principle is that as long as the ancillary products can add value to customers and bottom line with marginal revenue out weighing total marginal costs involved, it’s a good product to offer and core business will be beneficial. It is also highlighted that as long as the products add value to the customer, it’s not important whether it’s a standalone product from the airline or if it’s in cooperation with a partner. As far as selling is concerned, the customer should never feel that the airline is ripping them off by adding something that they can’t decide freely.

EyeforTravel’s Ritesh Gupta spoke to Michael Smith, founder, Sea Mountain about cross-selling and up-selling, unbundling of fares, getting the merchandising right and more in detail.

study last year indicated that cross-selling and up-selling through the booking process will be the fastest-growing area of ancillary revenues for travel businesses in 2012. What do you make of this assessment?

Michael Smith:

This is an interesting one. The industry has been on a bit of a journey. Way back in 1998 when I was at BA we introduced travel insurance to ba.com long before the term “in-path” had been coined and before the whole current ancillary movement had really started. That was one example of cross-sell that the Internet made a lot easier. It wasn’t very sophisticated but it was a start.

Since then, cross-sell has been the push from the people (initially) selling travel insurance/hotels/car hire and then subsequently on-board meals and other “airline” items - by that I mean the airline “owns” the inventory. That was then followed by the up-sell, mainly focusing on getting people to move cabins. Optiontown and others have been helping airlines maximise that source of revenue without diluting yield by encouraging this upsell.

So, some of this has been pushed by the technology vendors – saying that it will be fasting growing area. To an extent that is true, as it is coming from a lower base. I work very closely with Jay Sorensen at the IdeaWorks Company and we both think that the growth area is still going to be checked bags. Look what United Airlines has done on international routes for example. So, whilst cross-selling and up-selling are way more sexy, the nitty gritty of bags and getting a-la-carte pricing to work better will probably be the area delivering for the bottom line.

The unbundling of fares and services over the years has seen the growth of ancillary products such as checked baggage, meals, upgrades etc. What new trends have you witnessed in this arena? How are these offerings shaping up as ancillary products?

Michael Smith:

Subscription services – the likes of United Airlines and American Airlines going down this route. Not only does it make collecting money easier – and adds to cash flow, it means that you are locking people into to your airline as they want to get value from money from their service. It also frees up real estate – if you have already sold, say, lounge access and priority boarding then you can focus on selling other, higher margin products and services.

In terms of new trends – onboard seems to be an area of focus. Carriers with cashless cabins are looking at how they can pre-sell items before boarding either as part of a fare family or as a standalone item – e.g. (say) JetBlue bundling onboard TV with food and drink purchases – for example saying buy a $40 value voucher but if you prepay you only have to pay $25.

Onboard tablets – main thing here that stands out from the crowd is MI.Airline – they have the option to pay direct from the tablet which I haven’t seen elsewhere. And, if the airline lets them, you can pay for miles!

“Intelligent” search. This fits in a bit with cross- and up-sell. KLM has, along with their partner, RightNow, released a product that when customers search for information not only is better information returned but the banner ads that are displayed are relevant to the customers search. I call this the “googlisation of airline search” – more targeted ads that improves cross- and up-sell.

In the past you have mentioned that getting the merchandising right is all about creating a better customer experience. What do you think is the key to achieving the same? What factors does one need to take into consideration?

Michael Smith:

Customer Experience is really the Holy Grail. At the end of the day, most people are flying from the same airports and generally with the same type of planes. So how do you differentiate and make money? Ryanair does it purely on price and others are trying via the customer experience route.

Probably two main areas. The first is understanding your brand and your corporate culture – can’t see Ryanair making a marketing proposition out of a fantastic premium customer experience when their culture is geared around everything being screwed to the floor ! That allows you to work out what is possible to deliver, day in, day out. The second is understanding your market and what people are willing to pay for. All business class was a great customer experience, but there weren’t enough people willing to pay for it, hence one of the reasons why the all business-class carrier Eos Airlines and the likes didn’t survive.

Once you have those two areas worked out then you can consider how you train people, market it, use technology to help deliver it. CRM rather failed because it was driven by technology rather than people/strategy/culture – hopefully Customer Experience will not be another buzzword that crashes and burns.

How do you assess the maturity level of cross-selling and up-selling strategies in terms of them being tailored to match benefits and promotions to customers’ profiles? What sort of trends have you witnessed in this arena?

Michael Smith:

Many people are at a very basic level. They have some products to sell and they are slowly getting there. Even people like EasyJet who are pretty good, still have trouble populating offers – e.g. if you are flying from airport x and they offer parking make sure it offers that airport first.

If you keep offering me first class and I never take it, why keep on doing it? Which is what lots of carriers do as they are not yet at the level of sophistication to deliver up better offers. RightNow is doing some great stuff in this area. People like Beyond Analysis are also working in this area to help people turn their data into actionable information, but, airlines are awash in that information and not overly great at using it.

Many years at BA there was a promo called “Magic One Way” which looked at people who were only buying one way tickets long haul and were clearly not emigrating. Offering them a return deal had good results – something simple and relatively easy to do and many airlines are not doing these things.

I’m doing a fair bit in the payments arena these days and that’s another area rich in transactional data that some airlines are starting to use to get better insights.  For example, LAN increased its sales conversion on its payment page by 20 percent by working with its PSP (payment services provider - in this case Adyen) to better understand what was happening and then re-configure the page layout.  Several of the PSP’s like FirstData, WorldPay and Ogone offer similar type services to help airline merchants.

However, compared to the mail order company that I worked at before BA way back in the ‘90’s they were streets ahead even then of where most airlines are now.

Travel companies are attempting to better serve their most loyal customers while also working to differentiate themselves from competition on features other than cost. A lot of these efforts are focused online in gaining a deeper understanding of the plans that a user has already made, and then using that information to market travel enhancements, upgrades, or add-ons. What do you make of such efforts?

Michael Smith:

Again, it is the Holy Grail.

Companies like TripIt have gone down a subscription model for their services – they know more about me (and their regular users) than any one airline as it has all my hotel and flying activity in it, but, airlines are not yet into getting that data or even exploiting the data they have themselves. Some people are advertising on these services (mainly car rental and hotels) but it hasn’t taken off - pardon the pun! In Australia, Qantas has done a good job at selling activities as part of the flight process, but, if any of the carriers are being ultra sophisticated about this, they are doing a good job of keeping it quiet!

What factors do you think a supplier should take into consideration while going ahead with offering ancillary services selling via mobile phones and tablets?

Michael Smith:

This is a very, very new area. BA, for example, is focusing on its onboard tablet (understandably with an outsourcing partner) and there are plans to sell the concept/product elsewhere for the onboard offering.

There are a lot of factors to take into account:
  • Who owns the app in terms of the IP
  • How does it touch the airline system (reside in it, cross the firewall and so on) and what are the security/data protection implications
  • How often and how does it update
  • Is it only your airline or multiple airlines
  • Platform – just phone (Android/apple etc) or tablet and phone
  • Is it a cut down version of your regular site or an optimised version
  • What do you want (can?) sell on it
  • How do people pay on it – how do you manage refunds?
  • How do you manage disruption and change of plans/aircraft and failure to deliver the agreed product
And those are just a few things!

What according to you are the dos and don’ts in Ancillary Services Selling via mobile phones and tablets?

Michael Smith:

Some of the points I would recommend:
  • Don’t think it is easy
  • Don’t think it is cheap to do -although it might be cheaper than other ways of selling!
  • Do test it to make sure it works
  • Do keep it simple – not everyone has 3G or higher services or a smartphone
  • Do look at it through your customers eyes – how many check in apps do you want to have if you travel a lot on multiple carriers?
  • Don’t get caught up in the hype
  • Again the list above could go on.
About EyeforTravel
EyeforTravel is a leading business intelligence provider for the online travel and tourism industry. As well as providing some of the most in-depth research into global online travel markets and trends, EyeforTravel produces a series of senior executive travel conferences on a diverse range of topics including travel distribution, online marketing, social media, mobile and revenue management.  For more information visit www.eyefortravel.com.

 
Contact:

Rosie Akenhead
Director of Events & Industry Analysis, EyeforTravel
rosie@eyefortravel.com
Toll Free: 800 814 3459 ext. 7229


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