17 September 2008

Ancillary Revenue - The New Poison Pill?

We are being bombarded with messages that Ancillary Revenue is good for all that ails the airline industry. Not content with spreading this far and wide in that sector now we see the behavior showing up in many different places ranging from Hotels to GDS providers.

But is this really a good thing.

On the face of it - yes. squeezing as much cash out of your existing customers has a lower cost of customer acquisition and a higher yield. Michael O'Leary's oft quoted statement of flying passengers for free and getting revenue from them in so many ways is still a mantra for many cash and revenue strapped businesses.

But what of the consumer? What do they think and are they happy about this? Well someone actually set out to ask a group of consumers this question.

SAS asked those who signed up for their News and Offers programme and they received 500 responses. So a pretty good representative sample of a typical SAS customer. Overwhelmingly the research found that 92% were frustrated by such ancillary revenue based fees. More than half (52%) cited checked baggage fees as the most infuriating hidden charge, followed by fees for using credit cards (23%) and for seat allocation (17%).

One respondent commented: ‘I am really angered by all add-ons to the price. I want one price which is the true price, all included.’

A note of caution - SAS is a full service network carrier who used to charge a one price fee. Like many others they are charging some form of revenue generating fees for services.

From our vantage point we worry that this is diluting the brand equity that Airlines have held so dear. Our position is simple and I repeat: Every touch point, every time - putting out your hand and asking for money is not good for building positive brand equity.

This is a classic short term benefit vs long term gain. For a low cost carrier again quoting MOL - Its a bus operation. I am sure that Lord King would be devastated if the same appellation was applied to BA.

So what do you think? is this a poison pill that has to be swallowed to survive or is the current logic of hiding the true consumer cost acceptable behavior? Don't forget come the end of 2008 the EC will require that all fees are quoted up front.

If you read my piece yesterday on taxation, you will know that I believe some of the behavior there is darn right bad.

Cheers

1 comment:

IAGblog said...

I concur that fees are awful - especially when they are "hidden" until the awful moment they magically appear. But there are other ways airlines can merchandise their business. We are working on exactly this - bringing "new" money which does not come from the passengers' pocket. And its working! More at www.iag-inc.com/otti. This is but the first stage, we are already working on a next level. A bit of creative thinking can make significant changes.