Strategies for airlines to improve ancillary sales

Importance of ancillary sales for the airline industry

Ancillary sales have evolved as a crucial revenue stream for airlines, fundamentally enhancing their profitability and mitigate financial risks. In the competitive landscape of the industry, where fuel prices are unpredictable, relying solely on ticket sales for revenue is not sufficient. As per our industry research, airlines whose passengers spend at least $20 on ancillaries generate 8.2% ROIC on average, which is more than 5 p.p. higher than it is for airlines whose passengers spend less than $5 on ancillaries.

This article explores the commercial impact and the competitive advantages of investing in the ancillary sales and strategies utilized by airlines for improving their ancillary revenues.

The emergence of paid ancillary services began in the 1990s, gaining momentum with the rise of low-cost carriers (LCC’s) in the mid-2000s. This shift has led to a substantial increase in global ancillary revenues, soaring from $42.6 billion in 2013 to $118 billion in 2023 (20% jump from 2022). Thus, airlines have benefited from more stable income streams while offering consumers lower base fares. Today, some airlines derive over 50% of their revenue from ancillary sales (e.g. Spirit, Frontier). Regardless of an airline's business model or market conditions, enhancing ancillary revenue is essential for reducing reliance on load factors and improving profit margins.

Across airline categories, per passenger revenues have increased significantly more for ancillaries compared to all other revenues.

Data from top ten airlines having highest ancillary revenue shows an average of 21% revenue increase from 2022 to 2023, which indicates a positive trend of ancillary sales globally. Out of these, only Southwest has indicated a reduction in revenue guidance, largely due to increased labour costs. As a result, Southwest Airlines has decided to make changes to their open seat policy – hopefully improving the ancillary revenue in the coming quarters.

Types of Airline Ancillaries

All ancillary revenues can be divided into following categories –

• Fare or Product Bundles – Airlines bundle base product and services (like extra baggage, extra legroom seats, lounge access etc.) to generate upselling opportunities. Airlines may allocate a portion of the price associated with a fare bundle or product bundle as ancillary revenue.
• A la carte products – Includes products that can be added directly to a fare to improve the travel experience. This comprises baggage, seat selection, flight modifications, booking charges and priority products, etc.
• Commission-based products – Includes charges on products and services not directly connected to air transport, comprising of airport pick-up and drop facilities, hotel reservations, cab reservations, etc. It can also involve sale of duty-free consumer products aboard the aircraft.
• Frequent Flyer/Loyalty Programs - Airlines may present customers with rewards for frequent reservations that allow them to earn loyalty bonuses. Co-branded credit cards and mile accelerator programs reward customers based on the frequency of their trips.
• Advertising sold by the airline – Includes any advertising initiative linked to passenger travel. For example, revenue generated from an inflight magazine, advertising messages sold in or on aircraft, loading bridges, gate areas etc.

Key Strategies to Improve Ancillary Sales

For LCCs, the ancillary revenue model stimulates passenger numbers with low fares while generating higher unit revenues per passenger by selling additional products and services. Focusing on ancillary sales allows airlines to enhance the customer experience through personalized services, leading to increased customer satisfaction and fostering loyalty. Additionally, ancillary sales typically yield higher profit margins compared to traditional ticket sales, as they often involve low-cost services with high perceived value. Leveraging data analytics, airlines can identify trends and preferences, enabling them to tailor their ancillary offerings more effectively.

To maximize ancillary sales, airlines must implement six strategies:

• Personalized Offers:
  
  
  • Data-Driven Insights: Utilize customer data to understand preferences and purchasing behaviour. Tailor ancillary offers based on individual passenger profiles, travel history, and preferences.
  • Dynamic Pricing: Implement dynamic pricing models that adjust prices based on demand, booking time, and customer segments.
    
    
• Enhanced Digital Experience:
  
  
  • User-Friendly Interfaces: Ensure that websites and mobile apps are intuitive and easy to navigate, making it simple for customers to add ancillaries during the booking process.
  • Post-Booking Opportunities: Offer ancillaries at multiple touchpoints, including post-booking emails, check-in reminders, and in-flight prompts.
     
• Bundling and Packaging:
  
  
  • Value Bundles: Create attractive bundles that combine multiple ancillary services at a discounted rate. This encourages passengers to purchase more services at once.
  • Subscription Models: Introduce subscription-based services for frequent travellers, offering benefits like unlimited Wi-Fi, priority boarding, and more.
     
• Innovative Ancillary Products:
  
  
  • New Offerings: Continuously innovate and expand the range of ancillary products. Consider services like in-flight entertainment subscriptions, lounge access, and including sustainable aviation fuels.
  • Customer Feedback: Regularly gather and analyse customer feedback to refine and introduce new ancillary services that meet evolving passenger needs.
     
• Partnerships:
  
  
  • Commission-based - Collaborate with third-party providers to expand the range of ancillary services offered. These partnerships can include car rentals, other modes of transport, hotels etc. where airlines will only earn commission on revenue earned by partners.
  • Tour packages – Combined flight and other means of travel to sell tour packages. This has higher risk, but also higher gains.
     
• Frontline Employee Engagement:
  
  
  • Training and Incentives: Equip frontline staff with the skills and incentives to upsell ancillary services effectively. Their direct interaction with passengers provides a valuable opportunity to boost sales.
  • Consistent Execution: Ensure consistent application of policies and procedures related to ancillary sales across all touchpoints.

Limitations of Over-Pushing Ancillary Sales

While ancillary sales are beneficial, they may come with certain limitations, especially in case of the FSCs (Full-Service Carrier)/Traditional airlines. Excessive fees can create customer dissatisfaction and a perception of nickel-and-diming. Managing a broad range of ancillary services increases operational complexity, requiring significant investment in technology and training. Regulatory constraints in different countries may also restrict the implementation of certain charges. Additionally, an over-reliance on ancillary sales risks market saturation, making customers resistant to additional fees.

How Cognizant can help: Strategic Solutions for Increasing Ancillary Sales in Airlines

At Cognizant, we leverage innovative technology and industry consulting experience to support the airlines in enhancing ancillary sales revenue. The future of aviation lies in the strategic integration of digital tools and data-driven processes to unlock the potential of personalization and provide an enhanced customer experience.

Strategies Various strategies are employed to enhance the sales of ancillary services by LCC (Low-Cost carriers) and ULCC (Ultra Low-Cost carriers). These strategies include, but are not limited to: 

• Integrating the selection of amenities with fare selection and passenger information. Many airlines still adhere to the conventional process of fare selection, gathering passenger details, choosing ancillaries, and payment, which may be losing them crucial revenue since the amenities are not linked to passenger selection.
• Option to add individual ancillary options on dedicated pages to focus customer attention (e.g. separate pages for meals, special baggage, etc.)
• Utilizing step-pricing for multiple purchases of the same ancillary service, commonly seen with baggage options.
• Promoting ancillaries in a personalized manner, such as highlighting options for bike transport for frequent travellers. 

Platforms: Developing a platform tailored to a specific industry presents significant challenges, particularly when the demand is not exceptionally high and the airlines are supported by travel solution providers such as Amadeus, Travelport, and Sabre. Nevertheless, Cognizant is striving to create a platform leveraging Neuro, which offers both flexibility and scalability. Experience innovative technologies, re-engineer real-world scenarios and outcomes and explore the “art of the possible” through design-thinking virtual journeys in the Neuro Business Processes co-innovation lab. Our intelligent process automation experts and innovative technology partners enable our clients to visualize and experience changes before they happen.

Neuro® puts AI at the centre of your business to enable innovation and growth, enabling new levels of human-machine collaboration that fundamentally transform your business, yielding unprecedented productivity, efficiency, and resiliency.