To Fee or not to Fee

Few businesses are more global and competitive than the airline business, and it is inevitable that best practices are  adopted very fast by different players. If we look at what happens in the US we find that Online Emission Fees has virtually disappeared from the airlines webs, as it penalizes his online positioning against the OTAs (online travel agencies) that do not charge it. However it has been replaced by a series of ancillarys (additional income as baggage charge, extra wide pitch, food on board, wifi, etc). As they depend on origen/destiny, class, nego fare, moment of the operation … it is everything but easy to know what am I going to finally pay till the end (of the trip!).

The play is going well, in a recent study of 50 airlines according to an Amadeus report dated July 2012, ancillarys revenues have increased by 66% in two years to the significant amount of 22,600 million USD. I have always believed that a figure by itself is not significant, we must give some references such as growth, income weight, weight on EBITDA, so that it can assess … if we take large airline “ancilators” Low Cost and Traditional airlines,  I allowed to (self-produced) the following graph:

The “traditional ones” are in the band (% of sales) from 7% in USA (I do not have data from the European ones, but probably they are in the range of 2-5%), but the Low Cost are in a percentage of revenue over 20% (20.5% Ryanair / Easyjet 20.8% / Jet2.com 27.1%, and the world record for Spirit 33.2%).

With respect to the weight on Net Income, the graph shows that it is very variable, but in the vast majority (including traditional airline) by far exceeds the benefit, so the income is critical. The market pushes, and the migration to the Low Cost model in this area (and others too) is unavoidable. Part of the success is in the “frequency of offering,” I remember on a recent trip in the US that at the time of issuing the boarding pass at the airport checkin machine, they offered me a lot of ancillarys  … preferred seats, advance boarding, etc. That means, we will be offered the WiFi in the purchase process, when we receive the itinerary, while we check in in the airport, on board, etc.

Spirit

I think it is worth to stop a little bit in Spirit, as they are the champion of ancillarys. They have maximum visibility directly in their web with a full detail of the ancillarys. And they say high and loud that their strategy is to have ultracompetitive pricing, and then the customer pays more if they “consume” more. The customer cannot get a surprise, becouse their communication and marketing strategy uses the ancillarys as a competitive advantage!  The idea is great.

It worths taking a look for what they are charging (click banner), and the increases applied in November 2012 (for the most common one carry-on bag, goes from 20 USD to 25 USD (+25%).

It seems they want to go to 35-40% of income … and no wonder, if you call the call center and you are travelling with a carry on bag and suitcase, you will get charged, 150 USD … but if the bag weighs over 18kg, there will be 50 USD more, and if it is more than 32kg, there will be 200 USD more …) come on,  I do think that soon we will see travel policies that limit luggage, or send it by messenger😉 … and I do not know if I’m joking or not …

Spirit are not amateurs, and their management ratios seem to be from another sector … Their estimate of 2012 year end figures gives closing sales of 1,374 M USD, with an EBITDA of 312 M USD, and a Net Income (after tax) of 140 M USD … more than 10% over sales, when the airline business is considered a good business when it is close to 5% of net profit (over sales). If we catch Lufthansa, IAG, and Delta (three good traditional companies), the Net Income in the first two is symbolic or negative in 2012, only Delta is saved with a good 4.06% more than in 2012. Forecasts for 2014 are: 2.14% / 2.61% and 7.69% respectively, except Delta, the rest are not exactly spectacular …

It is also true that in terms of revenue is not logical to compare Ancillary Income in Low Cost Companies vs traditional airlines. Businesses are more different than it looks at first glance: different path length (and therefore the LCC airlines do have more passengers per income, so they have more possibility of charging ancillarys), in fact in a comparative of Ancillary Income per traveler in the top 10 list, there are four traditional (Qantas, United, Alaska and Air Lingus), and Ryanair is not in the top10 list … but Spirit does the number 2! behind Qantas.

The future / present:

Emission Fees clearly tend to zero, and the rest of Fees to infinity. As legacy carriers extend the range of ancillarys and GDSs allow its management, we will go to a made to measure model regarding airline tickets, also in long-haul and business class.

In this new scenario the corporate clients faces several challenges, being some of them:

  • Expenditure control of the ancillarys,  not only at the time of issuing the ticket, but also in the checkin or later. Also a lack of vision on the real cost of a trip. Why should I care about the ATP (average ticket price) if I let out up to 30% of it? Two subjects that are not solved today: 1) reporting systems that analyze ancillarys generated in the booking process, and 2) What to do with the costs arising after the checkin? Should they be banned?
  • The loss in value of the corporate rate negotiations if surcharges and ancillarys are not within the range of the negos. One example has been the fuel surcharge, which has recently begun to be negotiable.
  • The ticket “to measure” future, where you can go in business but not take the food, or vice versa, for instance, means that travel policies must be updated with the challenge of not becoming unmanageable.

The GDSs (Amadeus, Sabre …) are challenged to standardize a new business, with the risk of not being able to connect with the content. For them it is a great opportunity, both in relation to the airline systems as against the brokerage channel. It is a challenge to the LCC, with which it has cost to get to have a reasonable content.

The OTAs (online travel agencies) are faced with great challenges, both to be able to provide a solution to manage and book ancillarys, and to integrate their own ancillarys … The challenge is greater than it seems, since many airlines have no special deflect interest in getting the OTAs within their scope, and therefore do not want to facilitate such integration.

Regarding offline travel agencies, they will have to learn to 1) live with a zero or close to zero Online Emission Fee (through OBT tools), 2) to provide solutions to its customers for managing ancillarys and 3) also generate their own ancillarys because it is logical that the remuneration of the supplier is going to be reduced with the increasing of the online adoption rate.

And the airlines have the opportunity to generate a high income, increase their direct sales (many “traditional airlines” only allow certain operations with ancillarys on their website), improving price positioning, and  be able to increase the segmentation of their client base with a “made to measure” ticket. For example within the business class there will be several levels, selecting VIP lounge, food, cabin … logically their higher risk is cannibalizing his premium product.

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