LONDON -- Just
how far will an airline go these days to earn a few extra bucks?
One airline
executive attending the third-annual World Low Cost Airlines
Congress here describes how a certain Asian low-cost carrier uses
blankets to increase its nonfare revenue: When in-flight sales of
blankets aren't going well, the flight attendants, who get a
commission on sales, ask the pilots to crank up the air
conditioning.
Most airlines
aren't taking things that far, but low-cost carriers in Europe and
Asia in particular are getting aggressive about increasing their
ancillary revenue, defined as revenue derived from anything other
than passenger ticket sales. Some airlines already have ancillary
revenue managers.
Besides, some
executives argue, it is not really a unique business model. For
example, Tony Davis, CEO of Tiger Airways in Singapore, noted that
"movie theaters make more money selling popcorn and Coke than they
do selling the ticket for the movie."
No airline is
making more money from ancillary sales than from ticket sales, but
the amounts are steadily increasing.
Diono Nurjadin,
president, director and majority owner of Indonesia's Mandala
Airlines, said the carrier's aim is to increase ancillary sales to
30% of its revenue within three years.
Ryanair reported
that its ancillary revenue rose 31% in the quarter ended June 30,
outpacing its 20% increase in traffic. That revenue was realized
primarily from hotel and car rental bookings and travel insurance
sales, but it also included in-flight sales and other sources. In
all, the ancillary category accounted for 13% of its revenue in the
quarter.
Last year,
Ryanair reportedly offered about a quarter of its tickets for free
(not counting taxes). CEO Michael O'Leary got lots of attention
this year when he predicted that ancillary revenue would get such a
boost from in-flight gambling that Ryanair might be able to offer
half its tickets for free by 2010.
At EasyJet,
ancillary revenue increased by 31%, or $1 per seat, for the six
months ended June 30, and accounted for 8% of revenue.
But the airlines
want more. At last week's conference, possible methods for doing so
were discussed by airlines and the suppliers who can help them do
it. A preconference workshop was also devoted to the
topic.
The basic
principle is one the cruise lines have embraced for years: Airlines
are not just carrying passengers; they're carrying a captive,
largely untapped consumer market. The airlines should try to sell
them whatever travel- and nontravel-related products they can while
in the air, as long as those products are compatible with their
brand.
"You've got your
customers trapped in your shop for two hours at least; now what are
you going to sell them," said Mezzo Movies CEO Dave Sampson, who
led the workshop. He's a former retail senior executive and mobile
phone company marketing manager who now pitches his company's
handheld entertainment devices as in-flight
money-makers.
Low-cost carriers
are using a variety of methods to try to increase their ancillary
revenue. Among them:
" Hotel,
car rental and travel insurance sales. Dynamic packaging
lets travelers mix and match their hotel, car rental and flight
arrangements. One delegate said one airline's conversion rate
increased by 20 times after it offered dynamic packaging. Airlines
still see room for growth in this area, including more sales of
destination shows and tours, in part by offering more free travel
guides at the time of booking.
"
In-flight sales of meals, snacks and beverages. The latest
trend in food sales is to offer passengers branded foods. The big
topic now is letting customers pre-order food as part of the
booking process, which would allow for a wider selection for
passengers and let airlines know how much food to bring on board.
Scotland's Flyglobespan already offers this option.
"
Gambling. Ryanair and U.K.-based Flybe both sell scratch
cards for prizes. Now Ryanair wants to move to full-fledged
gambling, probably on mobile phones, Sampson said.
" Video
gaming. Popular among younger consumers, this is seen as a
potentially lucrative market. Possibilities include multiplayer
gaming, not only onboard the aircraft but also with the gamer's
usual playing partners in cyberspace once broadband Internet access
is available onboard.
" Mobile
phone usage. Ryanair recently announced it would outfit
its entire fleet to enable the use of cell phones and PDAs, with
the first equipped by the second half of 2007. Ryanair will get a
cut of the international roaming or text-messaging fees.
" SIM
cards. Mandala Airlines, remaking itself as a low-cost
carrier, is selling SIM (subscriber identity module) cards to
passengers. SIMs make mobile phones compatible with the cellular
system used in the passengers' destinations, without incurring
international roaming fees.
"
Advertising. This has already moved well beyond in-flight
magazines to include ads in lounges, on aircraft overhead bins and
tray tables, and even on the aircraft fuselage. Tiger Airways has
Visa patches on some of its flight attendants' uniforms.
The payoff for
allowing a company to plaster the outside of an aircraft with its
ads can range from $450,000 to $750,000 per aircraft for two years,
said Richard Baker, commercial director for OnPack
media.
" Fee for
all. This refers to new fees such as credit card usage
fees and checked-bag fees. Flybe Chief Commercial Officer Mike
Rutter said that with Internet check-in now an option, Flybe would
like to start charging customers, within 12 to 18 months, for
airport counter check-in. Some airlines also have begun charging
for assigned and preferential seating.
"
In-flight entertainment. In addition to charging for
headsets, an idea still unproven for short-haul flights, JetBlue,
for example, offers live TV for free but also offers pay-per-view
movies.
"
Lounges. It was assumed that low-cost carriers could not
offer airport lounges because of the expense, but now EasyJet,
Ryanair, Virgin Express, SkyEurope and Air Europa are selling
access to lounges run by a private contractor.
"
Merchandise and services. The Web site of Ryanair, the
ancillary revenue champion, includes a smorgasbord of still other
products and services. For example, the airline has partnered with
a major bank to offer personal loans and with insurance brokers to
sell home and property insurance -- all promoted on its home
page.
All of this could
be just the beginning.
Bestselling
business author W. Chan Kim told delegates, "When I talk to the
other side of the industry, they want to use your industry as a
selling platform. ... You have bargaining power."
Sampson said many
companies also were willing to do demographic research on
passengers, provided the airline provides access to its basic data
for analysis. An analysis would give airlines another way to pitch
themselves to other companies.
There is no
guarantee that every ancillary revenue gambit will work. Sampson
expressed skepticism about the potential for gambling, which may
only appeal to a small segment of travelers, and about cell phone
service, because people may worry how fellow passengers will
react.
"In the retailing
space, you need to make sure you are marketing to customers who are
going to buy it," Sampson said. That means selling items on flights
that you believe passengers will be predisposed to buy.
The length of a
flight is also a factor, since passengers may not have the time,
inclination or motivation to buy on a one-hour flight. But many
low-cost carriers are flying somewhat longer distances these
days.
While the pursuit
of ancillary revenue is becoming a global trend, U.S. low-cost
carriers are relative laggards.
Jim Parker,
managing director of Raymond James, noted Southwest gets only 2%
from nonflight revenue and cargo, far below the ancillary revenue
numbers of carriers such as Ryanair and EasyJet.
"They are missing
the boat," Parker said.
Southwest,
however, takes a point of pride in resisting such charges. Its
press office just sent the news media an e-mail listing the "top
five reasons Southwest is different."
Among those
reasons is not charging for in-flight snacks, explaining, "We won't
nickel and dime you to death."
To contact reporter Andrew Compart, send e-mail to [email protected].