Ancillaries. We all know what those are — the extra charges that travellers incur on their credit card after booking for things like seat selection. Right?
Err — yes but only a small, and getting smaller, part of the picture according to latest research from the doyen of ancillary revenue analysis, Ideaworks.
It's always been clear that the low-cost carriers have benefited more from ancillaries in terms of percentage of total revenue than have the traditional, network carriers.
As the report says, "Low cost carriers rely upon a la carte activity by aggressively seeking revenue from checked bags, assigned seats, and extra leg room seating."
However, the latest numbers from Ideaworks show the importance of this revenue from sources other than a checked bag.
The report also makes quite another strong point, namely that ancillaries are not going away but growing for the very simple reason that they fulfil the needs of two sets of airlines' customers, namely customers and investors.
And this explains why things are getting interesting.
All consumers, including travel buyers, are painfully aware that what is an 'extra' on one airline or class of travel is included in the fare in another. This has historically made it difficult to make price comparisons. It is even more difficult that some leading North American and European carriers — Air France KLM, Lufthansa and British Airways — have introduced branded fares. The study separates out elements that are included in some of these but might otherwise be charged for as ancillaries in order to make comparisons. It reports that network carriers who do have branded fares are finding that many are looking at the 'basic' and then opting for the higher fare package which includes items that are either excluded or charged for as an extra in basic packages.
In other words, the same principles of revenue management that carriers use for fares are being used in 'selling' ancillaries to maximise revenue from those 'extras'.
Most significant of all in the study is the discovery of how much ancillary revenue for traditional carriers is attributable to frequent flyer programmes. "These billion-dollar amounts are generated by the sale of miles or points to banks that issue a carrier's co-branded credit card."
In other words banks and issuers such as American Express pay carriers a lot of money for those points that support those co-branded cards.
According to Ideaworks, British Airways made $539 million (or 54% of all its ancillary revenue) in such income from its frequent flyer points in 2016.
And therein lies the irony. Ancillaries were the invention of the LCCs which enabled them to charge low fares and still get enough revenue to satisfy their business models. If the new, big source of revenue is frequent flyer points, the very carriers such as Ryanair and easyJet that invented the idea of ancillaries are exactly those that will be missing out from this new, lucrative — and rapidly growing — source.