Ancillary Revenue and Unbundling are Not Always Dirty Words

If you fly, you probably cringe every time you hear the words “ancillary revenue.” You likely associate those words with airlines charging for something that used to be included in the price of the ticket, and that doesn’t make you happy, right? But there’s more to ancillary revenue, which really is just anything that you pay for beyond the price of the ticket. At the Phoenix Symposium, a panel got together to discuss this in-depth.

Dennis Cary, the man in charge of the ancillary revenue plan at United, started off by saying that for United, “it’s unbundling, offering new travel services, and protecting and enhancing benefits for frequent fliers.” In other words, yes you’ll pay for what you used to get for free (unbundling), but they also want to add other things you’ll pay for as well (new travel services) unless you’re an elite traveler (protecting and enhancing benefits for frequent fliers).

Louis Saint-Cyr from Hawaiian had a similar thought, but he smartly emphasized the importance of Ancillary Revenuethe airline’s brand. Hawaiian will continue to offer free meals because it fits with their brand, but he added, “we made the free meals better and started selling premium meals. On my flight out here we sold out of premium meals. It is a hit, people love it.” It’s those types of enhanced services that make money for the airlines and make customers happy. But what about charging for things that were free? When is the breaking point?

Louis initially said there wasn’t one, because airlines would just keep experimenting and then reverse course if necessary, but then he himself reversed course. “In terms of an airline, when you diverge so much from the expectations of your customer relative to your brand, you’re done. There are things we aren’t going to touch. When you come to Hawai’i, Hawai’i itself is a brand and Hawaiian is part of that brand. You’re not going to put someone in the back of an airplane and not give them anything . . . here’s a glass of water, we’ll see you in 5 hours.”

Greg Schulze of Expedia tried to change the tune a little bit by talking about future opportunities to make money outside of the basic flying experience. “If you’re not making money throughout the life cycle, you’re really missing the opportunity. I think there’s opportunity to make revenue in places that don’t anger the customer.” A novel approach indeed, and one that Gordon Whitten of Sojern kept emphasizing. His company currently puts those contextual ads on your boarding passes you print at home, but they have many more initiatives involving targeted advertising to fliers, most of which won’t drain your printer cartridge.

Dennis didn’t really pursue that line of discussion and instead brought it back to the core product. “When we can create products and services around the core travel experience that add comfort, convenience, and more, that’s how we can create a different financial outcome for the company.” Louis however, agreed with Greg and said that he thought the big money was outside the cabin.

My favorite topic of the day was when they began discussing when airlines would finally get to the point where people could arrange this at the time of booking and wouldn’t have to keep whipping out credit cards for everything as they go.

Louis liked that plan. “I love that idea. What we’re trying to do is migrate toward the website. If I was able to eliminate all transactions on the airplane and do it on the web, that is absolutely doable. It’s just a question of getting there in the next 12 months.” That seems a bit extreme to me. You’ll always have people who want to buy on the plane, so you need to offer these options at multiple stages, but at least he’s on the right track.

Dennis agreed as well. “Go check out united.com/traveloptions and the direction you’re going is the exact analogy that I’ve been using with my team over the last couple years.”

But all this talk about airline websites ignored one very important thing. Greg shot back with a warning. “The great majority of customers who are impacted by baggage fees [leisure travelers] are going to sites like TripAdvisor, the TripAdvisor metasearch site, by far the most popular feature of that is the fee estimator. Airlines need to remember that not everybody is a 1K [United’s top elite status tier] and not everybody shops on united.com.” Good point, but the discussion never touched on when online travel agents would be able to handle that type of transaction. My guess is that it’s a long ways away.

In the end, there wasn’t much talk about including everything in the price of the ticket as it used to be. But it is clear that airlines will continue to try new ideas and reverse course on others as they search for what people are willing to pay for and what they aren’t.


5 Responses to Ancillary Revenue and Unbundling are Not Always Dirty Words

  1. Martin says:

    The opening line on ancillary revenue touches on something that has surprised me for some time – everyone uses the term, but there doesn’t seem to be a clear definition of what is in and what is out. Because it is only used in commentary to the accounts and doesn’t seem to appear in the financial statements themselves, I have never seen an official definition.
    At an upcoming industry conference in Miami in May, the organizers sent out an email that was a a good start at trying to ensure everyone speaking is using a similar definition:
    For this conference ancillary revenue is defined as: “Revenue other than through the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience” and a-la-carte revenue is defined as: “Revenue generated from selling products or services separately, which have traditionally been included in the price of the airline ticket.”
    But there are still questions around how much advertising can be called ancillary revenue – if you charge for ads printed on the boarding pass is this ancillary revenue – what about painting the entire plane with a sponsor’s logo? If someone has an industry definition endorsed by accounting standards I would love to see it, as without this, the comparisons between airlines on who is better at “ancillary revenue” becomes a little bit murky.

  2. PJ Fiske says:

    Great post! As a former airline employee, I take issue with the overused term of “unbundling”. Many legacy airlines have shot themselves in the foot becasue they started out with brands/’levels of service that became embedded with the traveling public over time, and then have destroyed them.
    For example, United’s “Fly the Friendly Skies was not just another tag line, it was an ambience, a way of doing business, of treating customers and employees such that the flying public wanted to fly UAL and employees wanted to do a good job because they were taken care of. At American, the airline had built up a brand of “Doing What We Do Best”, often educating the traveling public through their advertising, that running an airline is a serious, complicated business, but allowing the public to experience that inside glimpse of trust at a major airline. Using these two carriers as an example, both were known over the years for superior inflight service in all cabins. As we know,there was a time when this was even promoted.
    However, post deregulation,Gulf War and 911, airlines have found a convenient excuse to cut the bottom line which should have been paid attention to in the first place. And, it could have been done in a different way, not at the airline employees and customers’ expense. Here’s an analogy: People go to Disneyland because they know a great experience awaits them – from beginning to end – a magical, inclusive, ambient and sometimes interactive product that is only Disney. People are willing to pay for this experience because it is worth it. Customers are taken care of and feel valued. Disney employees will tell you for the most part, they are part of and inlcuded in the planning, execution and delivery of the product and are taken care of and supported. One does not need an MBA to know this is a recipe for success.
    Airlines need to go back to the basics. Some times to be successful, ya have to spend money to make money. Creating a good product, delivering it well, treating employees and customers right in a direct, open and honest manner and giving both employees and customers the tools to accomplish their quest are basic “right thing to do’s”.
    Louis Saint-Cyr from Hawaiian has a great point: “You’re not going to put someone in the back of an airplane and not give them anything”. I also agree with Schulze on the concept of making revenue in places that don’t anger the customer. If I am a frequent flyer who is pissed off at my airline, why would I go out of my way to pay for something they are offering?
    How wonderful it is when employees and customers are on the same level playing field. Both win the game.
    After 22 years as a Flight Attendant with NWA (now Delta), my greatest moments on the airplane were when we were able to thrill a customer during the months or years that we provided the basics on flights : a clean and fesh smelling airplane, pillows and blankets, a good meal, safe on time travel, arriving with luggage and a great ambience. Even on the days we had little to work with, many of us still pulled it up by the bootstraps and attempted to do the right thing, even when we thought management wasn’t.
    It gives me hope for the industry to see carriers like Delta and Continental, who haven’t stripped away the customer experience and, for the most part are still managing to treat their people well. They are adding to it or preserving it. And airlines like Southwest (and Delta), where taking care of employees and cutomers is in bred in the culture. “Unbundling” sounds so negative. How about “re-invention”? And getting back to the basics of doing the right thing……

  3. CF says:

    Martin – I don’t know of a standardized definition, but it would certainly be helpful, wouldn’t it?

    PJ – Thanks for taking the time to write that comment. I think the biggest problem the airlines have faced in this regard was deregulation. The world of regulation was completely different than the one after, yet the airlines have been incredibly slow to adapt to that. Throughout the change, employees and customers have all suffered. If they had just “ripped the bandage off” in the early 80s instead of letting it drag on, then people would have cried at the time but it wouldn’t have been so drawn out. Of course, that’s easy for me to say sitting here and not having to actually do it.

  4. Artemis says:

    A longtime customers’ opinion:
    I am now retired and fly frequently for leisure. I was flying on business when United, American, Delta and NWA created their frequent flier programs and have witness first hand the changes in the amenities and comforts. I give highest marks to Hawaiian, whose service reminds me of the old days. United used to brand it’s trips to Hawaii with special attendant uniforms and menus. Now it’s like flying to New York.
    Being a diabetic, I require food on the airline during a 5 hour flight. Whether I bring it aboard or buy it, I need to have it. I would heartily endorse buying the food at the time of booking. It is never a last minute decision for me. I also use the airline website, never the travel bundlers for airline flights.
    “What might have been” never was and we must deal with the flying situation as it is. Anything that adds speed and comfort is welcome. Printing the boarding pass at home or in a hotel is a blessing, advertising or no. I’ve had to change reservations on cancelled tickets multiple times in the last year and have found the airlines’ reservations services topnotch and very accommodating. So some things have improved over the past.

  5. Trevor says:

    Work through a booking on Air Canada’s website. After you get the reservation set, and before you get to the payment, they flog the on-board meals, seat selection charges, etc. to round out the total fare package. This has been going on for almost a year now to my knowledge. Of course they may be filing for bankruptcy (again!!) in the next few months but that’s another story.

Join the Conversation