INTERNATIONAL. A new survey suggests that airline ancillary revenues are set to soar by +43.8% year-on-year in 2011, to over US$32.5 billion. The report was undertaken by IdeaWorks, a leading airline ancillary revenues consultancy, and airline technology company Amadeus.
The Amadeus worldwide estimate of ancillary revenue projects a US$9.9 billion increase in ancillary income for airlines. This, said the survey, “has lifted the airline industry from a loss making position and continues to provide a very effective hedge against runaway fuel bills”.
Earlier this year, Amadeus and IdeaWorks reported the ancillary revenue disclosed by 47 airlines in 2010. These statistics were applied to a larger list of more than 200 airlines to provide a global projection of activity for 2011. The Amadeus Worldwide Estimate of Ancillary Revenue for 2011 is the result.
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The IdeaWorks analysis reveals several key groupings (or categories) based upon a carrier’s ability to generate ancillary revenue. The “percentage of revenue” results associated with four defined categories were applied to a worldwide list of operating revenue disclosed by 203 airlines. The following describes the four categories:
• Ancillary Revenue “˜Champs’: These carriers generate the highest activity as a percentage of operating revenue. The average achieved by this group is 19.8%, which is slightly up from 19.4% for 2010. Examples include AirAsia, Aer Lingus, easyJet, Ryanair, and Spirit Airlines.
• Major US Airlines: US-based majors generate strong ancillary revenue through a combination of frequent flier revenue and baggage fees. The average for this group is 11.9%, which is a sizable increase above the 2010 rate of 7.2%. Examples include Alaska, American, and United.
• Low Cost Carriers: LCCs throughout the world typically rely upon a mix of à la carte fees to generate good levels of ancillary revenue. The average in this group was 6.5% and is above last year’s 5.4%. Examples include AirTran, Blue1, IndiGo, Jazeera Airways, Pegasus, and Spring Airlines.
• Traditional Airlines: This category represents a catch-all for the largest number of carriers. Ancillary revenue activity may consist of fees associated with excess or heavy bags and limited partner activity for a frequent flier programme. The average here remains at 2.9%. Examples include Air China, Emirates, Finnair, LAN, Qatar Airways, and Singapore Airlines.
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The US Major Airlines category continues to produce a commanding share of global ancillary revenue: The US$12.5 billion result (38% of the global total) represents just seven airlines: Alaska Airlines, American, Continental, Delta, Hawaiian, United, and US Airways. This heavily outweighs the second largest category, at US$10.9 billion (34% of the global total), which is generated by a far larger group of 140 airlines, the Traditional Airline category.
Amadeus said: “As proven by this revenue result, US-based airlines have readily adapted to an à la carte world, but they also benefit from consumers who are keen to get frequent flier miles.”
IdeaWorks said that the majority of ancillary revenue for US major airlines is generated by the sale of frequent flier miles, notably those linked to co-branded credit card activity. This financial activity exceeds US$6.5 billion annually in the US alone. Baggage fees for US carriers represent about 20% of their ancillary receipts. The remaining revenue is produced by a large array of à la carte and commission-based activities.
Other sources include onboard sales of food & beverage, wifi, and hotel bookings. In addition, airlines offer an ever-increasing selection of services that add to traveller convenience such as priority security screening, early boarding, and exit row seat assignments.
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The ancillary revenue profile outside the US is difficult to define due to carrier-by-carrier differences, the survey said. The outsized presence of frequent flier programme revenue is most obvious in the US. However, major carriers in other countries, such as Australia, Brazil, and Canada, do generate significant revenue from the sale of miles and points to banks, hotels, retailers, and even direct to programme members, it added.
Carriers in North America began to emphasise ancillary revenue after the oil price shock of 2008. Not surprisingly, this region leads the world for ancillary revenue production. IdeaWorks estimates the region will achieve a sharp +72% increase above the level estimated for 2010. Then, ancillary revenue rose across the globe and was largely driven by traffic and passenger revenue increases as the industry recovered from the 2009 recession.
IdeaWorks believes that 48% of the US$9.9 billion worldwide increase can be attributed to the higher overall level of revenue and passenger activity. The remaining 52% is attributed to carriers becoming more focused on ancillary revenue through better financial disclosure, stronger merchandising efforts, and adding more à la carte services for sale.
IdeaWorks said: “Savvy airline managers have learned ancillary revenue should not rely upon forced choices, but rather allow consumers to tailor travel according to their budget. Consumers who are treated fairly and receive good value will undoubtedly provide airlines with another good year of ancillary revenue growth for 2012.”
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