Ancillary Revenue Analysis

Topics: Southwest Airlines, Low-cost carrier, Airline Pages: 9 (3079 words) Published: April 12, 2013
Issued: October 10, 2006 Contact: Jay Sorensen, 414-961-1939

Europe’s Top 4 Low Cost Carriers Generated 470 Million Euros (US$593 Million) From Non-Ticket Sources in 2005 But U.S. frequent flier programs produced revenues estimated at 2.5 billion Euros (more than US$3 billion) and better per passenger results. 1 Revenues from non-ticket sources, which are called ancillary revenues, have become an important financial component for low cost carriers (LCCs) in Europe and throughout the world. Michael O'Leary, Chief Executive of Ryanair, Europe's largest LCC, wants to offer free airline tickets by replacing traditional ticket sales with revenues produced by ancillary activities.2 His statement reflects how Europe’s LCCs have morphed the Southwest Airlines model of providing overall value into an a la carte style of offering ultra-low fares and charging consumers for services such as checked baggage. Mr. O’Leary needs to add a frequent flier program if he wants to squeeze more revenue from non-traditional sources. IdeaWorks estimates Ryanair’s aggressive use of a la carte pricing generated ancillary revenues of €7.76 (US$9.77) per passenger, while United’s Mileage Plus frequent flier program posted amazing results of €9.40 (US$11.98) per passenger. Even US-based LCCs are realizing attractive ancillary revenues from their relatively young programs. For example, the co-branded credit card linked to Frontier’s EarlyReturns program contributed revenues of €19.6 million (US$25 million) during 2005. An IdeaWorks analysis reveals growing distinctions between the LCC model that is prevalent in the United States and that which is developing throughout the world. LCCs in the United States are realizing attractive revenue streams from the sale of miles or points to program partners. LCCs outside the USA have cultivated a fee-for-service strategy that is designed to maximize the revenue potential of each passenger by charging for services that US-based LCCs normally include in the price of a ticket. Ancillary Revenues Defined As is often the case, the airline industry lacks accepted definitions. For example, there is substantial debate on which airlines qualify as LCCs. Perhaps the definition for ancillary revenues will be less elusive. The Random House Unabridged Dictionary defines ancillary as, “subordinate, subsidiary, auxiliary, and assisting.” This suggests the revenues should be linked to activities associated with passenger travel.

Ancillary Revenues Analysis for LCCs Page 2 In practice, ancillary revenues are often the a la carte services and features that passengers may purchase before or during their travel experience. Legacy airlines bundle these services into the price of an airline ticket. LCCs, and especially those outside the United States, tend to un-bundle the travel experience. Under this scenario, consumers purchase basic airline transportation and may pay extra for services such as advance seat assignments, checked baggage and onboard snacks and drinks. IdeaWorks proposes a broader definition to include revenues generated from frequent flier activities. The following definition of ancillary revenue is suggested: “Revenues beyond the sale of tickets that are generated by direct sales to passengers, or indirectly as a part of the travel experience.” This definition includes the commissions earned by many airlines on the sale of hotel accommodations, car rentals and travel insurance. IdeaWorks offers the following as examples of ancillary revenue activities that occur in the United States and throughout the world: Table 1: Examples of Non-Ticket Revenue Sources for Airlines Flight Related & Other Ancillary Revenues •Onboard sales of food and beverages •Checking of baggage or excess baggage •Assigned seats or better seats such as aisle rows •Fees charged for purchases made with credit cards •Commissions from the sale of hotel accommodations, car rentals and shuttle bus transfers reserved at the...
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