Airlines are coveting more ancillary revenue. Agencies are not. Find out why and if they are doing so at their own peril
Asia is the biggest and fastest growing region for travel where demand is expected to further accelerate over the next two decades due to a growing middle class and urbanisation.
In 2033, approximately 48 per cent of global traffic will be to, from or within the region. At the same time, low-cost carrier market share is expected to grow from 15 per cent currently to 24 per cent in 2033.
In a competitive Asian landscape where price wars are a norm, low-cost carriers are ancillary revenue champs. According to Ideaworks, ancillary revenue formed 20 per cent of total revenue of Asian low-cost carriers in 2014. In comparison, it formed less than 11 per cent of Asian full-service carriers.
Ancillary revenue for AirAsia Malaysia made up RM47 (US$12.54) per passenger in 1Q15, of which 56 per cent were from bags, 11 per cent from cargo, 10 per cent from assigned seats, five per cent from connecting fees, nine per cent from AirAsia insurance and a further nine per cent from F&B, according to CAPA-Centre for Aviation.
In 2014, the compound annual growth rate (CAGR) of ancillary revenue of Jeju Air, the largest low-cost carrier in South Korea, stood at 104 per cent. In comparison, CAGR of revenue overall was 34 per cent and passenger numbers 26 per cent over the period, explained Ken Choi, CEO, Jeju Air. The airline practices unbundling of air fare, baggage seat, seat allocation and priority boarding to maximise ancillary revenue.
The idea of increasing revenue opportunities by widening ancillary sale distribution channels is part of the strategy of some full-fledged airlines going forward, TTG Asia learnt on the sidelines of Travelport Live conference in June.
Malaysia Airlines is understood to start distributing seat selection and extra baggage through the GDS once its system provider, SITA, enables this as an add-on function.
China Airlines will start loading its Family Couch seats on economy class on the Boeing B777-300ER aircraft through the GDS after it migrates its system to Altéa, Amadeus’ airline passenger service system, next year. Family Couch seats, where a set of three seats can be turned into a sofa bed on longhaul flights, can currently be purchased through the airline’s reservation system and is set to become the airline’s first ancillary product.
Thailand’s Jet Asia Airways is also looking at earning ancillary sales revenue through distribution of extra baggage allowance, enhanced meals and preferred seating on the GDS in the near future.
But senior analyst of CAPA-Centre for Aviation, Will Horton, warned: “Airlines selling ancillary revenue should ensure it is relevant to consumers to be effective.”
“Most of the Asia-Pacific full service airline ancillaries are in either the neutral or friendly categories.”
The neutral category includes items such as travel insurance, hotel and car hire. The passenger makes a decision to purchase these items because he needs it. Friendly categories includes items such as enhanced meals, seat upgrades and special allocations. The choice to purchase these items stem from passengers getting something sweet in return.
However, Horton believed the real money is in the ugly – where passengers perceive they are getting the same after paying more. Ancillary revenue from cancellation and rebooking fees fall into this segment.
While airlines earn money from selling ancillaries through their various distribution channels which include the GDS, many fail to incentivise travel agency staff with a commission, thus the lack of motivation for consultants to put in the extra effort.
An exception is Air New Zealand which gives a commission to travel professionals to sell ancillaries. “That’s an incentive for us. Being our national carrier, we sell the airline a lot,” said Adrian Turner, general manager of Harvey World Travel in Auckland.
Agencies by and large agreed that it is easier to sell bundled ancillaries on different fare classes as passengers and agency staff know exactly what they are getting for the price they pay. This is the normal practice of full-service carriers.
Elizabeth Rooney, manager-corporate, Executive Business Travel based in Victoria, Australia, said: “If a client wants extra baggage allowance and meal on a low-cost carrier, we will add them in although we don’t earn any money from the airline. However, we focus more on selling hotels and car rentals as the commissions are better. The majority of our clients fly full-service with all-inclusive fares and we look at the bigger picture of cross-selling hotels in the right location and with the right facilities. This will make or break a holiday.”
Russell Brown, managing director of Travel Associates, Australia, said: “We only sell ancillaries when we need to. We don’t actively push unbundled ancillaries because you need the customer to be in front of you to ask him what he wants.”
From travel commerce provider Travelport’s perspective, Damian Hickey, the company’s head of airline travel commerce said: “We don’t want to get into the discussion of commissions between agencies and airlines as we cannot solve it. Customers will just go elsewhere if agencies choose not to sell ancillaries to them. We have developed Travelport Merchandising Platform to make it as easy as possible for agencies to integrate ancillaries into the workflow, thus saving them time.”
This article was first published in TTG Asia, July 17, 2015 issue, on page 4. To read more, please view our digital edition or click here to subscribe.
