Margins have airlines selling more ancillaries through agents

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Travel agents, the airlines' highest-margin distribution channel, are increasingly able to sell more ancillaries, the airlines' highest-margin products. And now several airlines are flirting with the idea of compensating them for such sales.

This is all happening because more airlines are putting their ancillary products into GDSs, making it easier for agents to book them. In 2012, travel agents booked 9 million ancillary services through Amadeus, which currently sells ancillary services such as lounge access and checked bags and sports equipment for 14 airlines, though mostly in markets outside the U.S.

The trend is growing rapidly. Amadeus today sells ancillaries through travel agencies in 45 countries, up from just 28 in 2012.

Sabre is currently booking ancillary services for nine airlines, with three more soon to be online and 21 more in the pipeline.

Travelport's Agencia product enables retailers to sell all of Air Canada's products, including its fare families. Travelport offers ancillary products from four carriers, with more in the pipeline.

All three GDSs are signing new content agreements with airlines that include ancillary services, and the majors are starting to come online. Travelport is listing Delta's Economy Comfort seats with extra legroom. Sabre is including US Airways' ChoiceSeats and is working on a deal to bring United's Economy Plus seats back into its lineup.

Jay Sorensen, president of IdeaWorks, which tracks airline ancillary sales worldwide, said that airlines and GDSs are finally filling the "black hole of ancillaries." IdeaWorks reported that ancillary revenue, which it defines as including not just a la carte options and bundled fare families but hotel and car rental bookings and income from co-branded credit cards, increased 19.6%, to $27.1 billion, in 2012.

Sorensen said that adding a la carte features to travel agency systems has been the "holy grail" of airline distribution.

Major airlines, he said, are realizing there is more to be gained by giving travel agents the ability to sell a la carte options than by trying to create "a walled garden" by offering ancillaries exclusively on their websites.

It makes economic sense, he added, to sell ancillaries in every channel possible because ancillaries are hugely profitable, producing margins largely unknown in an industry with razor-thin yields.

For example, IATA is projecting that the world's airlines will see a net profit margin of just 1.8% this year on revenue of $711 billion.

In contrast, some ancillaries have profit margins of 100%, said Mark Drusch, a former airline executive and now chief supplier relations officer for CheapOair, currently the only online agency to sell US Airways' ChoiceSeats in the booking path.

"Ancillaries are the difference between making money and not making money," Drusch said. "That is why everyone is focusing on understanding how to merchandise the product better."

The most profitable ancillaries are services that traditionally had been bundled into fares but are now offered for a fee.

That includes options such as seat selection, for which some airlines now charge, and early boarding. These go "100% to the bottom line," Drusch said.

Checking a bag is also high-margin because airlines already had the infrastructure and were paying staff for doing the work.

Charging for meals and WiFi is less profitable, Drusch said, because the markups on food are limited and the model for WiFi service typically is based on splitting revenue with third-party providers.

Selling ancillaries is an evolving effort, Drusch said, with airlines researching exactly what consumers are willing to pay for which products and services.

Even as airlines learn to become retailers, they are recognizing that travel agents excel at delivering the kinds of customers who are willing to pay for convenience, comfort and efficiency.

Cheryl Reynolds, manager of distribution for Virgin America, said that the airline finds being in the GDSs is important when it has premium seats to fill.

Cory Garner, managing director of sales and distribution for American, said travel management companies consistently book the airlines' highest-yield passengers, "so it's worthwhile to pay more for [travel management company]volume than for the typical leisure channel selling the lowest fare."

Agents are demonstrating that they can and will sell ancillary services, even if they're not in the GDSs and even if they aren't compensated for doing so.

A study by PhoCusWright last year revealed that a "significant majority" of leisure and corporate agents are booking ancillary services.

Some 95% of corporate agents and nearly nine in 10 leisure retail agents who have booked airline ancillaries have booked a preferred seating service. Seven in 10 corporate agents and more than six in 10 leisure retail agents who have booked ancillaries booked an advance or priority boarding service. About half of all types of agents report booking the nearly ubiquitous baggage fees.

Agents will book ancillaries without compensation because it's a customer service they provide, said Douglas Quinby, principal analyst for PhoCusWright.

The problem, however, is that booking even one ancillary can easily triple the time it takes to book an airline ticket, yet agents earn no additional compensation for it.

Bob Offutt, senior technology analyst for PhoCusWright, said, "The airlines have not offered to monetize a distribution channel for selling ancillaries," though he noted that a few have broken away from the pack and are flirting with the idea.

Airlines still pay agencies for their sales, though exclusively on a performance basis.

Graham Wareham, senior director of distribution and consumer-direct sales for Air Canada, said airlines want to display their products on as broad a shelf as possible. That means not only selling through travel agencies, he said, but also making sure agencies have all the information they need about ancillary products.

"Of course travel agencies have a role in the current environment," Wareham said. "Their relationship with an airline should involve compensation."

American's Garner said the carrier was eager to incentivize agents for sales that improve airline margins.

"We do compensate today for high yield," Garner said, adding that those incentives have been an industry practice for a "very long time."

What's different today, Garner said, is that as the data pipes that connect airlines with GDSs and non-GDS channels become capable of displaying not just fares but products such as American's Preferred Seats and Main Cabin Extra fare families, there's a "whole new revenue pie to think about."

"On the fare side," he said, "any time we think that there is potential for incremental revenue from a travel agency, there is an opportunity to share that value."

Garner said the same principle would apply to travel agencies generating incremental revenue for optional services.

"There is an opportunity to share the pie," he said. Still, he admitted that he didn't quite know what that pie would look like. "That could be a conversation we could have," he said.

However, Garner cautioned that profit margins are just one part of the equation. Truly demonstrating that a sale is incremental could be challenging when airlines can sell ancillaries at check-in, in the airport or onboard the plane itself.

"It's an emerging area," he said. "But common sense will tell you there may be some incremental opportunities out there."

Follow Kate Rice on Twitter @krtravelweekly.

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