13 February 2010

Ancillary Revenue’s Achilles Heel

In a Beat Article last week – TRX reported that less than 1 per cent of transactions that they process had ancillary revenue.

The statistics are sound – perhaps. Why do I say that? Because they are analyzing information that shows ONLY what it can show. And therefore this is where the Achilles heel of Ancillary Revenue floats to the top. The problem is that the agency tickets cannot accommodate (except in very rare circumstances) Ancillary Revenue items. So the total possibility of fulfilling Ancillary Revenues via the agency channel is almost zero. So the study shows what we already know. IE that you cannot fulfill Ancillary Revenue in the agency channel.

The airlines – particularly US legacy based ones – need to move the process of Ancillary Revenue away from fulfillment just from the airline’s own fulfillment process into the sales channel that constitutes the majority of sales. The airlines need to expand their AR. This is obvious. But the constraint is that the largest tool for selling Airlines’ products – the GDSs – cannot accommodate the sales process. Indeed the current generation of tools will not support this. For proof – I turn to Travelport’s latest Product Advisory. For this I am indebted to Professor Robert one of our regular contributors to the Blog. In PA 917 (Version 01) Airline Additional Services Display Functions in Apollo™ and Galileo™ on page 2 Travelport clearly state’s that the Galileo Desktop will not support Ancillary Revenue.

The initial release of Airline Optional and Additional Services will only be accessible on the Apollo and
Galileo systems via Terminal Emulation (TE). A separate and subsequent will be sent relative to release
to the Worldspan Terminal Emulation (TE) environment. Merchandising capabilities for Galileo Desktop
(Viewpoint) will not be developed. Travelport’s Universal Desktop will include enhanced merchandising
functionality, including access to expanded content, product descriptions, itinerary comparisons, and upsell

Click on this link – page 2


Thus at the very moment the airlines need Ancillary Revenue to improve their bottom lines – one of the largest channels for this potential revenue is blocked to them.

The airlines clearly understand this and are indeed perplexed by the legacy GDSs reluctance to adopt AR. However this exposes the fundamental issue – the true Achilles heel which is that the legacy GDS process does not support AR. So we are clear – it is not that it cannot be done. Already ARC supports the processes. Airlines are able and willing to support the infrastructure that will enable AR sales via the agency channel. The clear proposition is the Airlines need the Agency Channel. The Agency channel has diverged enough from the GDS dependency to enable its own solutions for service of its customers and their partners. So Troy can be saved. What do you think?



Jay Campbell said...

Sorry, Professor, but the whole premise of your post is wrong. As you will see if you check The Beat's article again, TRX's research did not cover "transactions that they process" with their agency technology.

It was their data consolidator and reporting service at play, not transaction processing. This means the chunk of data they examined comes from a portion of their corporate clients' card charges, TMC transactions and expense management feeds. Not only does this mean it's a different set than transaction processing (ie heavily corporate vs. more leisure) but also it means they in fact are capturing things like bag fees paid at the airport on plastic by the travelers.

Now, does that 1 percent seem like a very low number? It does, but we should keep in mind that bag fees represent the largest portion of the opportunity these days and most very frequent travelers are not paying for bags. As you note, if the airlines, GDSs and travel agencies can get their acts together on offering optional services, the figure is sure to grow.

Thanks for the opportunity to clarify, and for the tip on the Travelport document.

Professor Sabena said...

While I will take a mea culpa on the issue of the transaction review vs ticket review, I will still stick to my guns on the overall issue behind the article. It remains critical that the whole process for AR needs to go to the agency as a channel and not rest with the airline alone. I will further clarify that the lack of agency fulfillment is forcing other behavior such as taking the bags to the gate where no charge is levied.

If there is death by a thousand cuts lets just make sure we understand that many FFs dont pay charges because they are exempt. Trip lengths have become shorter therefore the need for the bags are less. Other charges may not appear on the corp card because corp's dont like to pay for them. In Europe certain countries now do not permit more than one bag in the cabin - not to mention certain airlines like easyJet and Ryanair. Finally for ghost card holders the charges would not appear as the traveler doesn't have a physical charge card on which to place the charge.

What was not clear was the time period when the survey was taken and indeed on which type of clients.

In general therefore I would argue that the percentage of these transactions does not have to be great to make a dent on the bottom line of an airline. But as we have seen from American Airlines recent standby charge fee imposition - there will be a way for these numbers to go up. As long as there is no agency fulfillment then the airline stands to lose out as does the agency. Therefore once this is sorted out the agency and the airline will both be able to share in the revenue stream even if the hapless customer - both corporate and leisure - is the one footing the bill.

One final comment. It would be VERY interesting if TRX was to tell us how much of the corp agency tickets have a fee applied and what is the amount in real and percentage terms. Because I would bet a large drink that the total amount of fees that are a percentage of the Corporation's travel budget is a number that has increased over the years. Further with the reduction in ticket cost of corporate based fares the percentage of total fees has increased significantly.


Roger said...

I agree with you Professor, and would add that ancillary revenue can cover quite a number of things. FFs may be exempt from bag fees, but large airlines earn up to $1billion a year in loyalty-based ancillary revenues, mostly coming from co-brand cards.

As I tried to instruct travel agents at a recent ARC webinar and at the Business Travel Show in London last week, tremendous opportunities exist for cross-selling merchandise post booking/pre-departure.

Dynamic packaging is an expensive process and it has only shown that the average customer will buy limited extra items such as hotel or car at time of booking. Pre-selling food is complex and costly and the jury is still out on any success there. However, using existing data to push relevant up-sell and cross-sell offers often only require basic analytics and updating email campaigns.