Airlines as retailers and retailers as airlines: understanding ancillary revenues
While commercial airlines have always been retailers, selling seats on planes, there used to be blue sky between what we all thought of as an airline and what we meant when we talked about retailers. Today that space has reduced considerably and it’s not always clear which is which.
We’ve been talking about this with Ishka and we made the point again at the Ishka Aviation Finance Festival Conference held in Dublin last month. If you are interested in understanding airline performance, especially from an investment point of view, you need to understand the role ancillary revenue is playing.
The 2018 CarTrawler Yearbook of Ancillary Revenueestimates that the Top 10 airlines in the world in terms of the revenue generated from sales of ancillary products generate around USD30 billion between them in this way. Compare this to the estimates of 2019 total industry profit made by IATA at the end of last year of USD36 billion and it’s easy to see that ancillary revenues have the potential to make all the difference to the bottom line. Of course, the biggest players in this space are the low cost carriers, with US airline Spirit heading the pack with 47% of revenue generated in this way. They may grab attention through headline grabbling fares for airline seats but that disguises a business model that is very much about retail.
While the low cost airlines have long made a success of this business model, the legacy carriers are rapidly moving into the space, offering branded fares and supported by IATA’s New Distribution Capability (NDC).
While Ryanair has stated its aim to be the “Amazon of travel”, the real competition to the industry may well come from outside, from the Googles of this world, and even from Amazon itself. In May Amazon teamed up with ClearTrip to sell airline tickets for domestic travel in India with a number of Indian airlines. What’s more, Amazon Prime customers were given cashbacks for trips booked.
For those interested in understanding the contribution of ancillary revenues to the airline business, it’s worth bearing in mind that today’s sophisticated online retailers are able to use the data they gather on passenger spending and preferences to drive the business forward. Those airlines making good use of ancillary revenues are in a position to gather even more data about passengers and their preferences and use that to upsell, target sales and ultimately fit their product offering to customer demand. They potentially have more wriggle room to manipulate air fares as a competitive response and in leaner times. Unbundled product offerings may well lead to a more sophisticated understanding of the costs associated with each part of the consumer offering – all of which leads to improved financial management.
Of course, as Ishka’s recent reporton this topic points out, ancillary revenue strategies are not a one-size-fits-all and there are variances between airlines and regions of the world. Nevertheless, airline performance is about much more than the yield, the traditional measures of seat revenue per kilometre flown.