Added complications

With legacy carriers adopting ancillary charges, Gary Noakes discusses the pros and cons of unbundling

BUSINESS TRAVELLERS were long ago shown the error of their ways when attempting to pass off a massage or one drink too many on their hotel bills as a necessary expense. More legitimate extras sold by airlines, such as seat reservations, are now causing travel management companies (TMCs) and expense departments headaches, with the growing tendency of carriers to turn what used to be a given into an extra.

'Unbundling' has become a term familiar to all buyers and one that poses increasing challenges for them and for those auditing the expenses, given the lack of accountability it brings.

GROWING TREND

Although the budget airlines have been unbundling for a decade or more, mainline carriers have only recently started to adopt these practices, with fees for checked baggage and onboard meals being the most common.

Around three years ago the US legacy carriers, faced with red balance sheets, began examining what they could get away with not providing, or at least not providing in the headline price. HRG estimates that ancillary sales will account for 12 per cent of global airline earnings this year, a figure that will be in the US$37-US$60 billion range.

"You could say that means 12 per cent of a client's spend is not easily identifiable," says HRG's industry and fare distribution director Tony Berry. HRG's figure is a credible estimate, as consultancy IdeaWorks puts ancillary earnings from just 47 carriers last year at almost $22bn - an astonishing 96 per cent increase since 2008.

Although Ryanair has been the 'unbundler-in-chief' for some considerable time, the mainline carriers are catching up fast. According to IdeaWorks, last year Ryanair earned 22.1 per cent of its total revenue from ancillaries, making it the world's third best ancillary seller behind US carrier Spirit, which derived 22.6 per cent of revenue from ancillaries, and Allegiant, with a huge 29.2 per cent. EasyJet came in sixth with 19.2 per cent and, perhaps surprisingly, United Continental crept into the top 10 with 14.7 per cent.

Just how far the influence has spread was evident last year, when British Airways announced it would charge £60 per sector for Club World seat reservations made up to 24 hours before departure, a fee added to fares that are usually several thousand pounds to begin with. BA claims "fantastic" take-up for this offer, but it's a good bet that not many who have done so have been business travellers.

Reserving seats in business class may be an unnecessary luxury for most, but everyday extras, like checked baggage, are necessities. When taken to its extreme, unbundling can mean a passenger who has bought a ticket cannot actually board the aircraft unless they have paid the 'extra' to check in online.

THE EFFECT ON BUYERS

It is estimated by the Institute of Travel & Meetings (ITM) that ancillary charges have increased costs to buyers by around 2 per cent at a time when fuel surcharges have also been ramped up. Airlines are especially keen to use ancillary fees to keep base fares lower if they have to compete against rivals on routes that are over-supplied, which gives buyers less room to negotiate because the base fare suddenly becomes much lower.

The inability to keep tabs on expenditure and to tell whether the £200 claimed is for excess baggage or an onboard drinks party is another challenge for corporates. The problem is twofold: on the airline side, there seems no great hurry to bring transparency; and on the buyer side, systems are unable to identify what is a legitimate purchase and what is a spurious or, in extreme cases, a fraudulent one.

Each year, the problem grows larger, with more carriers unbundling. EasyJet, for example, whose ancillary revenue was in decline for the past three quarters, is putting a renewed impetus on sale of extras due to soaring fuel costs, as the airline itself admits. EasyJet's average revenue per seat is around £45, with £10.20 attributed to ancillary sales. In its interim statement in May, the carrier said its focus on the second half of 2011 was the "continued optimisation of fees and charges to partially offset increased fuel costs" - confirmation that there is more to come.

TRANSPARENCY

In the US there was something of a culture shock for consumers, and particularly business travellers, as the mainline carriers began to emulate the budget airline model so prevalent in Europe.

Despite this, the US-based Business Travel Coalition (BTC), which lobbies on behalf of corporate travel managers, believes ancillary charges can be a positive trend for travellers and airlines if they are transparent.

"If airlines came to the travel agency and managed travel community with coherent ancillary fee strategies that were in alignment with consumer interests, support would be fast and substantial," the BTC believes, adding: "Travel agencies are eager to sell these services and could power airline ancillary revenues forward much faster than airlines can alone."

However, the BTC says TMCs and corporate travel departments require the ability to instantaneously compare inclusive prices and that to delay responding to this "is a strategic mistake at the individual airline level".

Back in the UK, there is also a general wish for conformity. "From a commercial point of view I understand unbundling, but what airlines have not done is consider the impact for the buyers. There's no conformity and that creates difficulties for us," says David Moore, business travel director at Leamington Spa-based The Travel Management Group.

Global distribution systems (GDSs) now have the ability to display an airline's fees, but Moore says this only worked as a rough guide: "You need to get accurate information from the airline website. It's an extra process we're having to carry out. We can get competitive pricing reasonably effectively, but we can't get the data out of the GDS with total accuracy."

The situation is further complicated because although fee tariffs may appear to be standardised, they are far from so - travellers on the same tickets may be charged different rates if they want, for example, to reserve a seat, according to how many tier points they have accrued on their frequent flyer scheme.

The picture becomes even muddier once business travellers buy extras at the airport where, for example, last minute upgrades are offered at bargain rates.

"All this creates an element of leakage and non-visibility because it does not get tracked," says Moore. "There's danger of losing control of the budget from a purchasing perspective." Failure by airlines to break down ancillary costs is matched by credit card companies' lack of billing detail.

"They are only as good as the data from the vendor," says Wings Travel Management chief commercial officer Paul East. "It never says 'advance seating' or 'upgrade', so we are reliant on the traveller giving the reason."

East believes the spread of ancillary sales will continue, with more carriers charging for seat reservations on long-haul flights. "Some of that can be paid by TMCs, some can't." He estimates the current travel spend taken up by ancillaries at around 10 per cent and rising.

Wings Travel offers clients a cost-per-mile index, but East says the addition of ancillary sales meant this was now more difficult to calculate: "I can understand airlines saying you pay for what you use, but there has not been enough forethought in making life easier for the traveller and the corporate. It would be great if we could get standards across the industry."

There is no doubt there is a big lobby for change and accountability on the issue worldwide, but in the UK it may well be pressure on government spending that propels the quest for transparency that much faster. Key Travel arranges bookings for more than 1,500 charities, plus 350 academic and research organisations. Head of product, Simon Bennett, says the need to provide accurate spending reports had not yet filtered down into the public sector as much as the private sector.

"It's not something we are focusing on, but our sector is slightly behind the rest of the market and they are not yet requesting it," he says. However, he believes interest from central government - anxious to keep tabs on public finances - plus austerity measures generally will bring a new impetus.

"I imagine that with the cuts to government spending they are going to look more and more at their travel spend, so the issue will become more relevant to our sector," Bennett says.

TRACKING CHARGES

While it will be some time before all buyers have the ability to detail ancillary items fully for their clients, two chief methods are being proposed to allow extra fees to be tracked through the GDSs. The first is via optional service codes that airlines own and which are then loaded on to the GDSs. The codes can be used to distinguish ancillaries, but this system, created by ATPCO, has seen little take-up from carriers.

A similarly slow response from the industry has been seen towards electronic miscellaneous documents (EMDs). EMDs are the equivalent of electronic tickets for ancillaries, but again, few airlines are using them yet.

EMDs are the last stage of IATA's paperless ticketing campaign. They can be used for all added extras, including amendment fees and to issue refunds. IATA has mandated that EMDs must be adopted as the accounting mechanism for charges, including cancellations and amendments, by the end of 2012, something that is expected to speed their adoption to detail other charges as well. In the US, it recently became a legal requirement for airlines to detail ancillary charges on their websites, and a decision on whether to compel carriers to make the same data available on GDSs will be taken later in the year.

The challenge is not only to develop the technology but also to get airlines to put content on it. Sabre has a system that does incorporate ancillary fees into its GDS, known as Sabre Air Extras, but this is only offered to traditional retailers and it can only be expanded once all carriers share their data.

Sabre Travel Network's Shelley Terry, senior director, airline merchandising, says carriers had not been resistant but adds that some airlines were ahead of others.

In July, Air New Zealand becomes the first carrier to offer baggage fees via EMDs, but initially only for bookings in the US, Australia and New Zealand. Talks are underway with around 10 other carriers. "EMD is new technology for Air New Zealand, so they are starting with bag fees first, but they intend to put more on," says Terry, who adds that to do so, carriers have to update their distribution and accounting systems and individual country billing and settlement plans (BSPs).

Terry estimates it will take "at least the next 18 months" to get the rest of the world's 100 or so major airlines to follow suit, beginning with baggage fees and seat reservations.

"We've had the ability to display these things since last summer; from July there'll be the ability to buy with EMDs," Terry says.

Amadeus's Airline Ancillary Services system was developed to allow sales of extras via the GDS and the web and to fit with IATA's EMD standard. Launched less than a year ago, 16 carriers have signed up, although no major names have been revealed yet.

Cyril Tetaz, Amadeus's head of airline distribution marketing, is in no doubt of the need for systems that allow TMCs and agencies to exploit and track the sales of extras. He estimates that the world's airline ticket sales come to US$3.1bn, and that half of this comes via agencies, including TMCs. He firmly believes that the full-service carriers will head towards more unbundling.

"Only two years ago, full service airlines got 2-3 per cent of their income from ancillary sales. Now they are close to the bottom range of what the low cost carriers achieve," Tetaz says.

LEAKAGE

For all the technological efforts, there will still be expenditure that falls outside data capture, such as paying excess baggage charges at the airport. This will always be the remit of credit and debit card companies.

"It is very difficult to create compliance around purchases of ancillaries that are made en route," says HRG's Tony Berry. "I don't think we will ever get to a situation where all ancillary services can be booked in advance of travel."

This means reliance on expense management systems to combine the fare paid with the excess spend. US company Concur is part of a small working group with United Airlines and AirPlus aiming to resolve the issue on the expense management side.

"The holy grail would be for a universal code to show things like baggage fees next to the airline's billing data," says Concur's senior director of development, Ellen Trotochaud. "The problem is there is not a standard. It can be done - airlines are willing to make changes - but there are so many stakeholders. We still have to get credit card companies to agree their specifications and the processor as well."

Meanwhile, Concur's answer is to capture ancillary sales by flagging any airline transactions that are under a certain amount - for example, US$100. This is then entered into an expense report and the traveller is prompted to pick one of several categories of spend, such as baggage fees or meals. Its pitfall, of course, is that it relies on the honesty of the purchaser.

For Trotochaud, the unbundling genie is well and truly out of the bottle and something that will just have to be tackled. "It's been a great success for airlines. There's no point in debating whether it should be here or not - it's here to stay."

Her final comment is indeed food for thought for anyone hoping for a speedy resolution: "I really don't see a solution very soon because there are so many stakeholders involved. It took 13 years to go from paper to e-ticketing. It's going to be a long road."