Chris Staab (CEO of Airline Information)

Could you please present Airline Information to our readers?
Airline Information (www.airlineinformation.org) is an established innovator in aviation-related conferences, consulting and publishing. We also provide complete business development services for airline industry suppliers, particularly those offering ancillary revenue products and services. Since our inception in 2004, ancillary revenue has been one of our main areas of focus - we recently organised the first event in the airline industry dedicated exclusively to ancillary revenues - «Ancillary Revenue Airline Conference» and have published, along with our partner, IdeaWorks, the first and only «Guide to Airline Ancillary Revenue.»

How do you analyze current situation of ancillary revenues for European low-cost carriers?
The ancillary revenue movement initially started with Ryanair; today, European LCCs are viewed by the rest of the world’s airlines as the leaders in field – and rightly so I might add, especially if we compare the current European LCC market with that of the US. The reality is that competition in the airline industry in Europe is undoubtedly tough, with many carriers serving most major routes, putting downward pressure on fares. As a result, this has forced ancillary revenue to be a key revenue component for LCCs in Europe. This trend is only likely to increase, since European LCCs need the additional revenues to remain in business and compete, while many companies are hungry to partner with LCCs to utilize this very effective channel to market their own products and services.

How do you evaluate the part of ancillary revenues in LCCs?
Generating ancillary revenue is a key component to the financial success of LCCs – it is engrained in their business model. Ryanair further completed the LCC model by adding the element of using a captive airline audience to generate additional sales to the original LCC focus of keeping costs low and reducing unnecessary overheads (which was pioneered by Southwest Airlines). Both maximising cost-savings and maximising incremental revenues are equally important for the long-term profitability of an airline, particularly an LCC.

How do you believe it will evolve?
I do believe that the term «Ancillary Revenue» will eventually evolve to become simply «Revenue.» Rather than being a distinct phenomenon, I believe that airlines and their customers will simply view ancillary charges as an integral part of the business. This is already largely true for European LCCs and their customers, and is slowly becoming a reality for all airlines and their customers around the world.

By always looking for more ancillary revenues to compensate ticket prices, there could be an imbalance. Could it be a danger for LCCs if they don’t manage this issue well enough?
There is little danger for LCCs in offering optional value-added services to customers, such as tours and travel insurance, in fact, it’s quite the contrary. These services offer the airline a greater opportunity to fully engage the customer, by meeting his or her additional needs. Adding new «a-la-carte» charges, such as charging for seat assignment, baggage or food, must be effectively managed by any airline to ensure that the customer feels as if he is receiving value for the «de-bundled» service for which he is now being charged. European LCCs are doing a fairly good job at managing a-la-carte charges and customer expectations about such charges. I see more problems on the horizon for legacy airlines, who have far less experience in this area generally.

What could be the next generation of ancillary revenues for the European LCCs?
I believe that the next big source of ancillary revenue for European LCCs will be from loyalty programs. Frequent Flyer Programs (or FFPs) are a huge source of revenue for many airlines, particularly for North American legacy airlines, which earn hundreds of millions of dollars each year from their FFPs. They do so by selling miles, typically at a rate of 1 to 2 U.S. cents per mile, to partners, including credit card banks for miles earned by bank customers through purchases made with airline co-branded credit cards. Air Berlin established an FFP several years ago and several European LCCs are currently in the process of launching their own programs. I would, however, caution European LCCs launching FFPs to look at offering viable means of alternative redemption for their miles from the outset of their programs. While a loyalty program can be very lucrative in the short-term through selling miles to banks, this revenue stream is not fully sustainable in the long-term when few non-flight redemption opportunities are available to offset miles earned from credit cards and other non-flight sources.

Recently, the consumer watchdog group Holiday Which? released a report criticizing low-cost carriers for levying an increasing number of charges on consumers and requiring travelers to jump through numerous hoops to avoid any additional fees (read Air Scoop February 2008). By always looking after “extra revenues”, could LCCs lose at mid-term some customers that mostly see “hidden charges”?
These is certainly a danger of this happening with those a-la-carte charges which force customers to pay for items that used to be included with the fare. However, I believe that legacy airlines are more likely to lose customers mid-term due to adding and increasing «hidden charges,» rather than the LCCs. I say this for two reasons. Firstly, the very low fares offered by LCCs make ancillary charges more acceptable to their customers. While legacy airlines often copy LCCs by adding new ancillary charges, many do so while still charging extremely high fares, making their ancillary charges seem more egregious than ones charged by LCCs.  Secondly, customers accept ancillary charges as part of the brand promise and an LCC’s raison d’etre, while these same customers may feel that ancillary charges betray the brand promise of legacy airlines. Therefore, regardless of the fare paid, the customers of legacy airlines are more likely to reject ancillary charges. This being said, long-term I see all airline customers, including those of both legacy airlines and LCCs, coming to accept more charges overall. When Yield Management was first implemented by airlines, many passengers could not accept that the person in the seat sitting next to him was paying a much higher or a much lower fare. Today, we have all come to accept differential pricing of seats as normal and the same will eventually be true of ancillary charges.

What is your opinion on the analysis of ABN Amro, co-authored by Andrew Lobbenberg, published in July 2007? In the report, ABN argues that ancillary revenues can be divided into ‘genuine’ ancillaries and ‘hidden fares’. It says: ‘Genuine ancillaries are those that earn revenue from offering the customer a useful service or product related to air travel, and hidden fare increases are new charges introduced for something which was previously free.
ABN Amro’s assessment of ancillary charges is largely correct, but is incomplete. There are three distinct sources of ancillary revenue for airlines, which we have identified: 1) commission-based services, 2) frequent flyer revenues and 3) a-la-carte pricing. Commission-based services include the «useful» additional services referenced by the ABN Amro report. Examples are travel insurance, hotel packages and tours sold via the website. I would expand commission-based services to also include various other commission-earning activities, which may not be particularly «useful» for the passenger, including fees earned from advertising in onboard entertainment, inflight magazines and even on the metal of airplanes.

A second principal source of ancillary revenue not covered by ABN Amro’s report is frequent flyer revenue. As I just referenced, airlines earn huge amounts of cash selling frequent flyer miles to credit card companies, banks, hotels and other partners.

Thirdly, the «a-la carte» pricing encompasses the «hidden fees» referenced by ABN Amro and essentially means «de-bundling» the fare and charging for its separate components that were traditionally included within the fare. Charging for baggage and seat assignment are clear examples of a-la-carte pricing. Many believe that de-bundling existing services is not actually ancillary revenue, but rather constitutes a surcharge. However, this argument ignores the fact that a-la-carte pricing is a key source of revenue for airlines. The challenge that airlines face in effectively implementing a-la-carte pricing features is to do so in such a way that consumers do not view them as «hidden fares,» but rather as added value. For example, Ryanair implemented charging for baggage by promoting that in conjunction a decrease across the board of its fares. Whether this across the board fare decrease actually occurred with yield management is unclear, but the customer felt that he received value (and therefore compensation) in the form of a fare decrease, which was well communicated by Ryanair. The result was that the customer readily accepted paying for baggage.

However, before implementing any a-la-carte change or charge, an airline manager must ask: «How can I add this charge, while at the same time increasing my customers’ perception of receiving value from the service to be charged.» Onboard pay-for-food programs with food products designed by celebrity chefs accomplish this very well.