Ancillaries, fees ... whatever you call them, what is a lucrative revenue source for airlines is a reporting headache for travel buyers. Can the technology companies help? Martin Cowen finds out
AROUND THE GLOBE, airlines are charging customers for bags, in-flight catering, seat assignment and priority boarding to name but a few. The business travel community is slowly coming to terms with the technical, commercial and cultural fallout from the mass unbundling of air fares by many carriers.
‘Industry standards’ for the sale of ancillaries are not only a technical, but a service imperative. Shelly Terry, senior director of airline merchandising at Sabre Travel, explains that “agents need standards to deliver, airlines need standards so they can generate revenues, and corporations need standards so they can monitor their travellers’ spend and negotiate with suppliers.”
The Airline Tariff Publishing Company (ATPCO) is owned by various airlines and collects and distributes air fare data for more than 460 airlines, representing 97 per cent of the world’s scheduled commercial air traffic. Data is then sent on to customers, including the global distribution systems (GDSs) and other reservations systems.
Its Optional Services product incorporates standards for ancillary products. Launched in 2008, it drives the distribution, sale and merchandising of ancillaries and, at the last count, is used by more than 260 carriers.
The ATPCO standards are not, however, used for fulfilment.
This responsibility passes to the International Air Transport Association (IATA) and its product is known as EMD – electronic miscellaneous document. EMD allows airlines to sell and track the use of all ancillary services, to accept payment, and to issue relevant documents to travellers. Importantly, an EMD will integrate miscellaneous charges automatically into invoices, reports and back-office accounting systems. IATA uses the ATPCO standards as part of its drive towards eliminating paper tickets from the airline industry by the end of 2013.
Sabre’s Terry continues: “Standards are well-defined and are constantly being enhanced as airlines look at new options for selling ancillaries. The challenge now is to manage the process of utilising the standards. Changing platforms to integrate the standards is ongoing, and we are confident all airlines will buy in as they look to drive more revenues through ancillaries.”
Travel management companies (TMCs) are also interested in the widespread adoption of standards. Nigel Turner, director of programme management for Carlson Wagonlit Travel, says: “We’re finding it is relatively easy if the ancillaries are sold as part of the fare, but the difficulty we have is when the product is purchased separately.”
So, for example, a traveller arriving early might decide to buy lounge access at the airport, an upgrade or an assigned seat.
working it all out
The hard upsell of ancillaries adopted by many airlines at the online check-in desk shows how easily products can be purchased separately.
Matthew Talbot, VP marketing Americas for Airplus International, says that even for a corporate card provider, quantifying the spend is tricky. “If we see a US$20 fee from, say, American that is charged at the same time as the return leg, we can assume that it is for an additional bag.
But it can be difficult to be precise,” he says. “Standards are great, but issues around the point of purchase are sometimes lost.” He added that Airplus “data-mines” credit card information to try to identify charges, but this is effectively a manual process.
HRG has been calling for the adoption of standards for a number of years, according to director Tony Berry. His argument is that HRG needs standards in order to make sure “the tool our agents use and the technology we provide to corporates are fit for purpose”. He also expresses concerns about ancillary services bought outside the fare transaction.
However, the “complex but manageable” current state of play is an opportunity for TMCs who blend data from various sources to give clients the full picture.
Berry also pointed out that standards were limited, as some airlines choose not to distribute through the GDSs. The kiosk upsell referred to by Talbot would also not fall under the standards in the same way as if purchased with the ticket.
The amount of money airlines make from ancillary revenue is growing every quarter. Amadeus recently issued a report, in conjunction with Ideaworks, which showed that globally, airlines will have raised US$32.5 billion of revenue from ancillary sales in 2011, an astounding increase of 43.8 per cent on 2010.
Major US carriers will net US$12.5bn (2010: US$6.7bn); traditional non-US carriers US$10.9bn (2010: US$8.5bn) and low-costs US$4.8bn (US$3.6bn). Back at Sabre, Terry thinks ancillaries are effectively keeping the US airlines in the black, or at least making the red ink on their accounts more palatable. “They’ve achieved this despite the scrappy collection of fees,” she said, “but now we are hoping that they will have a stronger strategy in place around merchandising their ancillary fees.”
Turner reveals some headline figures from internal CWT research about how ancillary charges can add up, identifying a difference between domestic and long-haul. “We looked at London to Manchester,” he says, “and in some cases the total fare, once ancillaries had been factored in, was 850 per cent more than the base fare.
For long-haul we looked at London- Dubai and/or New York and found the average was only a 20 per cent increase for economy and 12 per cent for business.”
policy predicaments
A recurring difficulty for all business travel stakeholders is how to deal with travellers who book outside policy, and ancillaries are compounding what is already a difficult cultural issue. HRG’s Berry explained that “12 per cent of the corporations’ total spend with airlines is not accounted for”, and the challenge that HRG and other TMCs have is collecting the relevant data.
“For the ancillaries purchased en route, we are reliant on the traveller filing their expense claims, so we are unlikely to ever get to the stage where every ancillary purchase connects into the management information systems,” Berry says.
“And without full transparency, it is difficult for corporates to use ancillary data from travellers as part of the negotiations.”
The standards should also allow corporations to build rules into their online booking tools, but when travellers are bypassing policy on preferred suppliers, then making them commit to not taking advantage of a free upgrade is tough.
Berry adds that “many corporations also don’t want to have stringent policies if this gets in the way of productivity”. Priority boarding may not be relevant at the time of purchase, but if the flight is late or the meeting brought forward, buying this service at the airport could be important for the traveller. One way round this is for corporations to negotiate ‘fare families’ with their preferred carrier. A fare family, when considering ancillary revenues, could include elements such as in-flight wifi, meals, lounge access and assigned seats. Bundled prices would then be booked.
Sabre’s Terry worked in the corporate arena before, so still has contacts and connections there. She says: “Anecdotally, there are some corporations which are saying to airlines: ‘Listen, we spend tens of millions of dollars with you every year, so why are you making us pay US$20 for an extra bag?’” She adds that corporate buyers are asking for more sophisticated targeting of products specific to their travellers’ needs. “Everyone is looking at 2013 for this, as most preferred supplier agreements for this year have been signed off,” she says.
Again, widespread adoption of standards would help.
However, Airplus’s Talbot thinks that some carriers are “dragging their heels”, quickly adding this is a personal opinion rather than the official party line. “We are vocal in pushing our corporate customers to complain to their preferred carrier to start using standards and pressure them into becoming more transparent,” he says.
“The difficulty is most travel managers don’t know what they don’t know, as it were, and they have a whole bunch of other things to worry about. Until the data about ancillary spend becomes widely available, corporations have little to work on when they are negotiating with preferred suppliers.”
here to stay
HOTELS ARE also interested in ancillary revenues, and the technology issues are no less complicated than for air. Niklas Andreen is Travelport’s group vice-president of hospitality and partner marketing. He is looking at the ancillaries issue as part of his hotel-focused brief .
Hotels, says Andreen, can add value through ancillaries to agents, buyers and guests more effectively than airlines. “Historically, airlines had a product – the flight – which had an all-in price that has been broken down in order to adopt menu pricing. Hotels have always started with the room and then priced the room according to the ancillaries.”
The demands of business and leisure guests differs greatly.
Both might like breakfast included in the rate, while road warriors would be more interested in free wi-fi, business centre access and private transfers than holidaymakers, who might be looking for spa treatments, excursions or an evening meal included in the room rate.
In terms of the technology, Andreen says the big chains are likely to lead the way, as they have the technology resources and budgets to invest. Smaller properties can achieve a similar reach through representation companies, provided they can absorb the costs.
Travelport recently announced a deal with Hilton, which Andreen claims puts the processes in place for hotels to offer menu-pricing as an option to buyers and agents. Hilton and Travelport are working on an XML feed that allows Hilton to get its products into the Travelport GDS without having to go via a switch company. Any developments are then worked out between the two.
The role of the GDSs is to make bookings easier for TMCs, but in the austerity-led environment of 2012 the need for management information, fed back to the procurement and finance teams who can analyse the spend, is as important. “Hotel suppliers need to have new systems in place so that all information about the room can be fed back into the back-office so the management information can be pulled out, and that’s where we are heading with the Hilton deal,” says Andreen.
He is confident that the concept of merchandising ancillary revenues to add value to the guest, agent and supplier “is built into the hotel industry’s DNA”, and that once the technology has caught up, there is another potential win-win situation. “Hotels will be able to merchandise the same room in a number of different ways,” he says, “so a business guest will get breakfast and wi-fi, whereas a leisure guest can have roses and champagne on arrival. In the long-term, ancillary revenue potential for hotels is more exciting than air.”