08 January 2010

Yes Virginia, Airlines Can Make Profit

Airline sales of Ancillary products are now driving carrier profits at a rate that has never been seen before. While not quite as revolutionary as some might think - it is clear that the model is here to stay.

I have recently seen some fairly wild estimates and some very pessimistic estimates for the size of Ancillary Revenues but we now have some empirical evidence. With Q3 2009 (Source BTS US) revenues from Ancillaries coming in at around $2 billion - we can safely assume that the run rate is of the order around $10 billion for the US carriers. Add in the European (masters of the art form) and you are looking at double this rate at a minimum. So if we take all airlines as a class we can say that the run rate for Ancillary Revenues could be in the range $20-$25 Billion per year.

Forrester's Travel Gurus - Henry Harteveldt and Elizabeth Stark have just published a Technograph: Airlines Need To Convince Passengers To Use Digital Channels To Buy Ancillary Products

One can easily infer from both the title and the document itself that the Airlines have a lot of work to do to expand this revenue footprint. The downside to service based ancillary revenue (as opposed to value added sales such as Non-Air Products) is that the fulfilment has to be convenient. At the present time that convenience is focused on the only places where the value transaction can occur - IE the airline website and the kiosks.

This is where the current technology generation of tools and services is clearly falling short. Many of the decisions need to be included into the work flow of the sales process. This is a new role for those who are involved in that work flow - either self service or guided modes require this level of capability. However it doesn't exist.

Breaking through the Gordian knot of current TPF and similar based systems to move to an a la carte service model is going to take some time. But the functionality needs to go from the pure airline environment into two distinct areas.

1. Airline partners - such as Travel Agents
2. Third party service providers such as airport based kiosks and mobile providers.

In the former case the agent community needs to clearly step up their work in this area. In the latter case there is now a large and burgeoning community of Trip Based partners who can enable this type of functionality independent of the seller. I realize that this is heresy for someone to advocate the possibility of servicing the customer in this way - but I think we must be realistic and accept that the user will make his own choices with regard as to where and how he interacts with his virtual persona on the trip.

And less the world thinks that this is not going to happen - lets consider the possibilities of how it can. The Ideaworks Group - Jay Sorensen recently produced an evaluation of the BA attitude to ancillaries. "Curiouser and Curiouser:
the Wonderland of Changes Wrought by BA". It included the now infamous BA Price Gouging calculator... showing how cheap it is to book on BA. OK - go and read it - its called the Value Calculator.

The combination of both these recent reports show that the airlines can make money. However the execution leaves a lot to be desired. It will be very interesting to see which airlines do become adept at selling ancillaries and maintaining the value of that service in the customers' eyes. Success or failure will mean billions of captured or lost revenue.


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