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Flourishing at Ancillary Retailing
At IBS Software, we are creating a series of blog posts to help airlines understand the parameters and think through the approach they need to adapt to move up the ancillary ladder and flourish at ancillary merchandising. This is the first in the series that gives an overview of key levers that the successful airlines get right in quest of achieving ancillary leadership. We will go deeper into each of the levers in subsequent blogs.
The term 'ancillary' comes from the Latin word ancillaris, meaning 'maidservant'. The most common meaning of the word – the way most of us are aware of – is about providing necessary support to the primary activities or operation of an organisation, system, etc.
In a business context – ancillary services/products refer to non-core services/products that are offered for revenues. In the travel industry, having multiple revenue streams that surround the core business is becoming quite common. Uber, the car hailing app went into meal delivery service through Uber Eats and generated at least US$1 billion in revenue this year, estimated to be 8% of the total revenues. Ryanair, a well-known low cost airline, generated nearly US$3 billion ancillary revenues in 2018 – nearly 32% of its total revenues.
To summarise the definition of ancillary revenues in airlines context, it is the non-fare revenue airlines derive from selling products and services to passengers, in addition to its core transportation from Point A to Point B.
Ancillaries revenue in Airlines in numbers
Today most of the airlines are probably working on selling ancillary products (like bags and seats, which are no-brainers) and upselling processes. But just selling ancillaries does not cut it, and airlines need to figure out the right way of selling ancillaries.
As a result of this, many airlines are focussed on getting the ancillary puzzle right by dedicating significant resources and attention towards it. The emphasis is justified given that it essentially drives the bottom line to an otherwise unforgiving industry with razor-thin margins.
Six levers for ancillaries revenue in airlines
1. Consolidated and integrated approach
'Ancillary' is a complex operational area involving coordination of people from Ancillary, IT and Distribution divisions to get it right. Airline must put a consolidated and integrated approach to create and execute their ancillary strategy.
The goal is to collaborate across divisions and come up with a high-level strategy document that everyone agrees to. Ideally among other matters, the strategy should identify ancillary products that are relevant to their customer base. This ensures that the ancillary strategy's sum is greater than the sum of its parts, and it does not alienate customers or create conflict with the sale of their core products.
Very few airlines have so far been able to create truly personalised ancillary offers. The rest have either just begun or are somewhere in the lower levers of personalisation journey creating customised offers only for a small subset of their customers.
In today's digital world, technology provides multiple ways to identify and offer the right ancillary to the right customer. Several surveys including IATA Global Passenger Survey 2019 indicate increasing appetite for personalised offers amongst air travellers.
To top this customer appetite, IATA has introduced a new XML-based data transmission standard that will make it easier for airlines to communicate with customers, travel agents, and aggregators – making it easier to offer personalisation.
This openness to personalised offerings, an ability to access more information about the customers, taken with the advances in analytics technology make it easier for airlines to offer meaningful personalisation, and airlines should make the best of it.
According to McKinsey's "CEO guide to customer experience":
"Increasingly, customers expect from all players the same kind of immediacy, personalization, and convenience that they receive from leading practitioners such as Google and Amazon."
The third important aspect airlines must consider is the channel or channels through which they want to offer the ancillaries. In a mobile fixated generation, the airline app and mobile website are as important a channel as the airline website, and must be leveraged to the hilt. One important consideration while looking at multiple channels is the consistency of how ancillaries are presented across those channels to ensure seamless experience.
For example, China Airlines has reimagined their app to be a "personal travel secretary," featuring innovative functionality like pre-ordering duty-free goods, pre-selecting their meal, and booking high speed rail tickets.
4. Breadth of ancillary offerings
Airlines will generally have many traveller personas, and a wider bouquet of offerings will cater to wider personas. So while airlines might want to have large ancillary choices, they must consider the additional value the choices offer to consumers. This means tailoring the offers to consumer demand and packaging offers together whenever logical – e.g. families might want car rental and business travellers might be more interested in Wi-Fi and lounge access.
Just like personas, the ancillaries offered vary at a different stage of sales funnel, and airlines must understand the full customer journey to offer the right ancillaries at the right sales stage.
Many airlines CEOs want their organisations to become OTAs. Ryanair's Chief Executive Michael O'Leary has been trying to transform Ryanair to become the Amazon of travel by offering hotel bookings, TripAdvisor style reviews, and even concert tickets.
Airlines are innovating with their product offerings and leaving no stone unturned to get more wallet share from the passenger. Lufthansa went a step further to integrate VR technology to show video of the cabin to passengers waiting at the gates in Newark and Frankfurt and offered the upsell – an upgrade to a premium economy seat.
While product innovation is always on the radar, innovation of product delivery is often missed. A few airlines have been trying out ancillary dynamic pricing and varying the price to match customer demand. Many airlines (Icelandair, Aeromexico, KLM, Lufthansa, Avianca, and TAP among others) are developing chatbots which could turn out into a successful channel.
6. Seamless integration of booking platform
On top of all these levers, airlines need to make sure that there are mechanisms that facilitate measurement and adaptation as required. This ensures that the airlines stay the course and any deviation is brought to their notice for correction.
To sum it up, airlines need to adapt fast and use these levers either holistically or individually depending on their ancillary maturity. Having looked at the levers at a higher level, the next set of posts are aimed at providing details for each of these to understand the transformation airlines need to go through to become an ancillary leader.
About the Author
Sagar Ashok Shahane is a Principal Consultant with 15 years of experience advising customers across multiple sectors including Airlines, Hospitality, Travel and Technology to grow and succeed. He has been providing customer with expert, objective counsel across a broad range of specialties, including strategy formulation, change and process management, market and industry analysis, and go-to-market formulation.