In 2023, the airline industry is projected to earn almost $117.9 billion in ancillary revenues, compared to $102.8 billion for 2022 and a whopping 7% above the previous $109.5 billion record in 2019. As reported by Jay Sorenson in the recently released 2023 IdeaWorksCompany Ancillary Revenue Report, most of the industry’s profit comes not from the core product, flights; but from selling complementary services to customers along the journey.
Services like picking a window seat, alcohol on board, checking a bag, trip insurance, and buying Wifi all cost extra – and those costs can add up. Many of these complementary services are provided by third-party partners which specialize in that specific area.
By promoting the right service at the right moment, airlines capture a massive amount of additional value (known as “ancillary revenue”), while making the flight experience more enjoyable for their passengers.
In short – the airline industry’s nearly $110 billion in extra revenue – and let’s face it, the survival of the industry itself – depends on managing its partnership strategy properly.
In this guide, we will navigate the intricate landscape of airline ancillaries, dissecting the three distinct categories: attached products, partnerships, and loyalty programs. We'll explore the products associated with them and their profound implications for both travelers and airlines.
How much do the airlines actually make on extras?
Check out this historical chart showing ancillary revenue surpassing pre-pandemic levels in 2019 from the report. Sorenson even mentions that Jozsef Varardi, CEO of Wizz Air, a fast growing European low-cost-carrier (LCC), admitted to Aerotime in an executive interview that ancillary revenue "tends to be a lot more resilient, as a revenue stream – from a business perspective – than ticket revenues," which are "subject to market conditions."
How? As travel increases, so do ancillary revenues, but when travel goes down, credit card programs may continue to generate revenue. Sorenson also mentions how we may have extra crowd-aversion after the pandemic, and "comfort" extras are suddenly becoming necessities for some people.
It's not just LCCs
When we think of low-cost carriers, we tend to think of the nickle-and-diming strategy of charging for basically anything more comfortable than standing room only. And yes, they're the ones who lead in ancillary revenue per passenger, but the big airlines still dominate the total ancillary revenue numbers in 2022, bolstered by frequent flyer programs.
Types of ancillary revenue in the airline industry
- Attached products: Attached Products refer to additional services tied directly to the flight experience, such as checked bags, seat selection, and onboard amenities. These products are sold by the airline to generate revenue beyond base fares.
- Partnerships: Partnerships involve the airline collaborating with outside companies to provide vacation packages, travel insurance, airport parking, and other offerings beneficial to travelers. The airline earns commission or revenue share from these affiliate partner products.
- Loyalty: Loyalty encompasses frequent flyer programs, co-branded credit cards, and paid tiers that incentivize customer dedication to an airline. Loyalty memberships and promotions allow airlines to boost non-ticket revenue through miles purchases, accelerated earning, and exclusive rewards.
Let's go through examples of each.
There's history showing that all the way back to 1981, PeopleExpress, a former American low-cost airline, introduced the concept of charging travelers $3 for checked bags. Fast forward to 2010, and most airlines had embraced checked baggage fees.
However, it was Ryanair, the European low-cost carrier, that propelled baggage fees into the mainstream in 2006, offering travelers the option to pay for checked bags at $10 if purchased online or $20 at the airport.
By 2008, even full-service carriers had shifted their focus towards unbundling, and charging for checked bags became the norm. In the 2010s, carry-on bags joined the ranks of ancillaries. Spirit Airlines led the way in 2010, followed by Allegiant Airlines and Frontier Airlines in the years that followed.
Today, there's a bag fee for just about anything:
- Carry-on bags
- Checked bags
- Overweight bags
- Oversized bags
- Sporting equipment and baby carriers
Beyond these essentials, there are additional services related exclusively to bags, including priority bag drop and return, lost bag insurance, valuable baggage insurance, and the luxurious hands-free bag services. To some they're obvious upcharges, to others, they're ways to customize the traveler experience.
Sign me up for "free checked bag at the gate".
Seat selection options are based on the Seat Zone or Seat Group a traveler can access, determined by the fare class they've chosen. While many airlines have introduced branded seat zones, the most common seat zones encompass:
- Lie-flat seats
- Business class seats
- First class seats
- Extra legroom seats
- Front-of-aircraft seats
- Economy seats
- Rapidly growing Premium Economy options
Travelers also have access to additional services related to seat selection, such as Neighbor-free seats for oversized passengers, Upgrade auctions for bidding on seat and cabin upgrades, and differentiated pricing for window, middle, and aisle seats.
Family seating policies can pose challenges for airlines, requiring children aged 15 or younger to be seated with an adult on their reservation. Random seat assignment algorithms are often not configured to follow these rules, leading to potential separations that require gate agents' intervention. Moreover, premium seat zones like First Class and Extra Legroom offer limited availability, allowing airlines to optimize revenue through traditional revenue management techniques.
Changes and cancellations
Changes and cancellations related ancillaries have witnessed significant transformations during the pandemic, with airlines offering travelers greater flexibility during uncertain times.
During normal travel periods, travelers can make three main types of changes to their tickets:
- Flight modifications: Changing the flight date/time or origin/destination (fare differences may apply)
- Flight cancellation: Cancelling a flight without rescheduling
- Name change: Changing the name of the traveler on the reservation
On the same day of travel, additional parameters come into play, including same day changes, same day standby, and airline trip protection services. Travelers can purchase flexible and refundable options to avoid potential change fees.
Booking ancillaries have emerged as a significant aspect of fare distribution strategies, allowing airlines to encourage travelers to use cost-effective booking channels.
Booking charges can be classified as call center fees, airport or office agent booking fees, web booking fees, award redemption fees, and group booking fees. In addition to these charges, payment fees, such as payment method fees and deferred payment fees, are sometimes applied.
Priority services offer travelers expedited access and convenience, with options like priority boarding, priority security, priority bag drop, priority check-in, and priority bag return.
Travelers can also access various airport-related services, including lounge access, agent check-in fees, auto check-in, early check-in, paper invoice/itinerary reprints, and personal assistance at the airport.
Wait, there's more
If there's an opportunity to charge extra, the airlines probably found already. Other on-time arrival guarantees, unaccompanied minor services, infant charges, and pending passenger services. Furthermore, vacation packaging, also known as dynamic packaging, enables travelers to bundle various services like hotel reservations, car rentals, transportation, airport parking, cruises, and event tickets.
Frequent flyer and credit cards
Frequent Flyer Programs allow travelers to earn miles based on their trips, and co-branded credit cards provide opportunities to earn miles through credit card purchases. Travelers can also purchase miles or enroll in miles accelerator programs to redeem for flights or attain higher loyalty status. "Earn and burn" miles partnerships and paid loyalty programs add depth and flexibility to these programs.
80% or more of carrier’s ancillary revenue is produced by its frequent flyer program
According to the Ancillary Yearbook report, for the five largest carriers of Alaska, American, Delta, Southwest, and United, more than 90% of their frequent flyer revenue was a result of co-branded credit card programs – $22.6 billion in 2022.
3rd party partnerships
Completing the ancillary landscape are partnerships that extend to travel insurance, in-flight entertainment, wi-fi access, and food and beverage services.
At the end of the day, In essence, ancillaries offer a multitude of opportunities for airlines to optimize per-passenger revenue while providing travelers with tailored and flexible journeys. Stay tuned for more ancillary-related content, including Key Performance Indicators (KPIs), bundling strategies, and dynamic pricing insights.
This sparked a question – why aren’t other industries outside airlines actively doing this?
Every company with customers theoretically has an opportunity to promote a complementary offer at the right moment in their customer journey. Why aren’t more businesses unlocking this entire world of partnership revenue?
Turns out, it’s much harder to do than it seems:
- Someone at the company has to take charge and design a “partnerships” initiative.
- They have to go out and recruit new partners, figuring out who the best ones are and whether they are even open to the idea of partnering up.
- Once they find a partner they would need to run a thorough negotiation process to fully outline the terms of the partnership and economic value of exchange.
- Once a partnership is established, they would have to figure out ways to distribute this partnership offer to their own customers at the right “buying moment” and in a tasteful way.
- Then they need to track the performance of each partnership offer over time. Are they clicking and buying this complementary product? Is this even a good partner for our customers?
- They have to account for partner revenues and attribution of purchases, figuring out how to do book-keeping, accounting, and collection of partner revenues.
- Finally, they would have to continuously manage this partnership to make sure it's working smoothly, and look for additional opportunities to create value for each other.
- And that’s just for one new partner. Now imagine doing this for a dozen or even 20+ partnerships, which your customers would benefit from. What a nightmare.
All in – a company would have to create a new department and hire multiple FTEs just to kick off this process to begin with. This requires a ton of planning, budgeting, recruitment, strategy, and ultimately a brave group of people to come together and “go for it”.
The problem is so real that most companies never even start. They keep this as an aspirational idea on their “dream list”, but never actually get around to executing it in a meaningful way.
Perks platforms are making ancillary revenue accessible to nonairline industries. What if every business could tap into the ability to offer any perk or extra comfort to customers, by outsourcing the program to a launch partner (ahem - like Paylode - ahem)?
Claim your free consultation with a Paylode customer engagement expert and let's see how we can get the power of ancillary partnerships into your revenue streams.