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Ancillary Revenues soaring Opportunities in Airline Operations


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With squeezed profit margins, rising fuel prices, high input costs, changing customer expectations and uncertain economic climate, airlines today rely heavily on additional service revenues to stay ahead. Our experts have listed the steps that an airline can take to increase ancillary revenues and has proposed a holistic approach to leverage technology in order to improve competitiveness. Our approach also gives technology partner tips for success.

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Ancillary Revenues soaring Opportunities in Airline Operations

  1. 1. Ancillary revenues: Soaring opportunities in Airline operations Ungroup, Augment or Extend? Anil Batra Vice President NIIT Technologies Vinay Purushottam Bapat Manager Business Development (Travel Transportation & Logistics) NIIT Technologies White Paper
  2. 2. CONTENTS Overview 3 Ancillary Revenues – A Ray Of Hope 3 Steps Taken By Airlines To Increase Ancillary Revenues 3 Redefining The Future 4 How Technology Can Help 5 Leveraging Technology To Improve Competitiveness 5 Conclusion 6
  3. 3. TRANSPORTATION TRAVEL CARGO PACKAGING TRANSPORTATION TOUR GUIDE TRAVEL TRAVEL TRANSPORTATION CARGO CARGO LOGISTICS TRAVEL JOURNEY GUIDE TRANSPORTATION CARGO JOURNEY CARGO GUIDE LOGISTICS TRAVEL Overview In recent times, the airline industry has seldom had the luxury of enjoying a clear and profitable environment. The $22.6 billion,is the ancillary revenue 50 airlines around the world reported making in 2011, a 66-percent jump from the $13.5 billion that the 47 airlines that reported such income made in 2009. industry continues to witness challenges such as rising fuel prices, high input costs, changing customer expectations # Annual Amadeus Review of Ancillary Revenue given the uncertain economic climate, whichnegatively Results, 2012 affectprofitability. New business models adopted by emerging low cost carriers have also pushed the margins of legacy carriers down to rock-bottom levels. Airline industry group IATA recently warned that global While ancillary services were primarily restricted to low cost airlines earlier, recent research shows that this trend is now prevalent among large airline operators too. The report titled Amadeus profits would be reduced by a factor of 50 percent due to Review of Ancillary Revenue Results for 2011clearly exhibits the rapidly rising oil prices and the Eurozone crisis. In order to rising potential of ancillary services. counter these challenges, several airlines resorted to cost cutting measures such as reducing flying routes and lowering service frequency. Despite the challenges, a few operators have shown it is Steps taken by airlines to increase Ancillary Revenues: possible to not only survive but also make profits. In a Various airlines have, at different points in time, explored multiple cloudy scenario, airline operators are seeing a silver lining of measures to increase ancillary revenues. The trend was led by hope in the form of ancillary services. These are the low cost airline (LCA) sector,which had the advantage of not opportunities that an airline can explore to generate revenue being shackled by the legacy baggage. The key strategy followed in addition to its core business of selling flight tickets. In fact by each of these airlines’ was to lower the cost of booking a seat it shows a future promise to innovate and reposition in the and make flying an attractive option for travelers from a cost evolving airline landscape. perspective, while generating additional income through peripheral services. Ancillary Revenues – a Ray of Hope To truly understand the potential of ancillary revenues – take a look at the following statistics. In 2011 airline companies, worldwide, earned $32.5 billion as ancillary revenues, a growth of over 66 percent in less than two years. This was revealed by a research The ancillary revenue strategy can be broken down into three key components: product ungrouping, product augmentation and product extension. It could include anything from availing airport lounges, car rentals, hotel bookings or visiting theme parks or concerts. It could also mean providing the customer services such as foreign currency exchange and travel insurance. conducted by leading airline ancillary revenues consultancy IdeaWorksCompany, and Amadeus, a leading travel technology partner and transaction processor for the travel and tourism industry. 3
  4. 4. ADOPTED PRODUCT APPROACH with various vendors and offer it as exclusive products to its customers. Airlines have even linked frequent flyer programs with UNGROUPING AUGMENTATION EXTENSION the product extension services, and a few also offer credit card services that provide users access to various premium services. LOYALTY-LED VALUE LEGACY Advertising in inflight magazines and entertainment devices is another option that is now gaining prominence as an ancillary revenue generator. • Premium Liquor • Frequent Flier Benefit • F&b TYPE OF CARRIER • Baggage Fees • Gourment Meals • Insurance • Inflight Entertainment • Airport Transfers • Hotel Tie Ups • WI FI Access • Extended Entertainment • Chauffer Transport • Seat Preference • Airport Lounge • Advertising Redefining the Future • Early Boarding Benefits • Select Check In • Event Tickets Some airlines are truly pushing the envelope in offering services • Guided City Tours Car Rentals that clearly offer value to the customer, and the customer is willing to pay a ‘premium’. For example, Vueling Airlines offers customers LOW COST the choice of purchasing an extra large seat for a premium. FUNCTIONAL-LED VALUE IN FLIGHT SERVICE EXPERIENCE FLIGHT & BEYOND Below, we will look at what each of these components mean for the industry. Product Ungrouping: Legacy carriersoffered services such asbaggage, food and beverage, blankets, and even inflight entertainment as itscore product – airline transportation. Airlines Amadeus Worldwide Estimate of Ancillary Revenue 2012 Ancillary Revenue 2011 Ancillary Revenue Traditional Airlines $ 12.788 billion $ 10.933 billion 17.0% US Major Airlines $ 12.399 billion $ 12.496 billion -0.8% Ancillary Revenue Champs $ 5.555 billion $ 4.256 billion 30.5% Low Cost Carriers $ 5.376 billion $ 4.765 billion 12.8% Worldwide Totals $ 36.1 billion $ 32.5 billion 11.3% Airline Category Increase Source: Ancillary revenue statistics applied by ideaWorksCompany to individual airline revenue results for the year indicated from Air Transport World, Airline Business and at airline websites. even differentiated itself on the basis of the inflight experience it offered its customers. Low cost service providers turned this idea Similarly, RyanAir, EasyJet and Allegiant Airlines offer passengers the on its head. They unbundled these services and began offering it choice or priority boarding for a premium. Another example is to its passengers as a la carte services. The main attraction was AirAsia’s Red Carpet service which gives passengers fast-track the low cost of the seat. The passengers were offered the option of security checks, access to lounges, and early boarding for a buying all other services mentioned above as separate products. pre-defined fee. Australian airline operator, Qantas, sells a unique technology called ‘Q Bag Tag’, which is a permanent baggage tag Product Augmentation: Many airlines offered theirbusiness class with wireless RFID technology that allows easy self-checking of bags. and first class customers the option of avoiding the long queues at busy airports and boarding the flight early, selecting seating Other airline operators are pushing in-flight connectivity as a key preference, premium booze, gourmet meals, wider entertainment ancillary service. A case in point is Singapore Airlines, which has options, airport lounges, and even better service expectation. installed Wi-Fi provided by OnAir on its A340-500 aircraft used These services are now offered as premium a la carte services to between Singapore and Newark and Los Angeles. those customers willing to pay a little extra. Market analysis reveals that this strategy has been well accepted by customer most of However, the biggest potential lies in the ability of the airline whom are even willing to pay a premium for such services. operator to offer a bundled package to a traveler. For example, Product Extension: This refers mainly to commission-based services such as insurance, hotel accommodation, tickets to exclusive plays and events, chauffeur driven transport, car rentals, and guided city tours. In order to facilitate this, airlines have tied up a bundled service of a hotel, restaurant, taxi and entertainment that can be availed by a passenger has great value. The customer will find value because customers are typically anxious to book multiple tickets from different operators. Airlines can bundle other services and earn a higher percentage of revenues from ancillary services. 4
  5. 5. How Technology Can Help In an era where customers book tickets online, it makes sense to Leveraging Technology to Improve Competitiveness offer them the option of customizing their travel plans. Even as If a passenger wants early boarding passes or wireless Internet airfares are dropping, personalized services can shape the future access or priority check-in, the airline needs to invest in the of the industry, as they offer customers the ability to pick and required technology infrastructure to make this happen. choose customers based on their convenience and price. Take the Fortunately, for airline operators, the technology is available with case of a technology called ‘Dynamic Packaging’ which is now existing service providers and product companies to make this being used by a host of major airline operators to boost their ancillary revenues. Dynamic Packaging allows airline operators to tap into a full ecosystem of suppliers (hotels, car, and entertainment) into a single reservation. If a customer travels from happen. They do not need to reinvent the wheel to develop such solutions. These solutions can be seamlessly integrated with existing systems of airlines. say India to London, and books a hotel and a car through the In order to succeed, airlines have to position themselves as a airline portal, the airline earns commissions from the hotel and the retailer. If they take an approach like Amazon, they can play a big car agent. Over a period of time, as the hotel and car bookings role in fulfilling many of the needs in different segments where rise, the airline has an opportunity to generate significant amount they do not operate. By leveraging technology, airline operators of revenues. Technology to make this happen is crucial, as the airline portal has to dynamically tap into separate inventory management systems, such as a hotel’s inventory system or a ticket from a popular show. can offer the right service at the right time and improve adoption of their ancillary services. For example, just as Amazon recommends certain products, depending on the product or service you buy, airline operators too can do the same. This is a win-win situation for both consumers and airline operators as the consumer uses only one portal to make all the bookings, and Ancillary Revenue: Technology partner tips for Success pays a consolidated amount for all the bookings. This is a huge • Partner with proven vendors with domain understanding benefit for customers as they do not have to manually visit multiple • Ability to understand and integrate the distribution channels websites and travel agencies to plan trips and vacations. The customer has more flexibility in customizing his or her package according to specific needs, than being forced to choose from • Ensure seamless integration of your front-end operations with your backend systems pre-defined packages. • Customer experience understanding for user interface flexibility and configuration For the airline operator, it is an opportunity to tap into an additional • Understanding of new generation technology and enabling faster speed-to-market source of revenue, without incurring additional costs. It also gives them an opportunity to broaden their scope of offerings, and giving more choice to the end customer. • Experience in implementation of payment gateway interfaces to support e-commerce transactions • Including customer feedback mechanism on each new service offered • Alignment through understanding the biz positioning 5
  6. 6. Consider a person who has booked a round trip for the same day. In For example, if a passenger is sitting in the lounge, he or she can such cases, an intra-city taxi option is a better option to be pre-order a customized meal before he or she boards the airline. recommended than a hotel stay. This option can only be provided if Technology can enable this differentiation and help in providing the the analytics throws up automated recommendations for the airline operator the right context. Leveraged intelligently, technology passenger to make a choice. can significantly enhance the ability of an airline to cross-sell and up-sell products and services. In the period that the user travels, The airline websites needs to be integrated with the enterprise there is a huge opportunity for the airline to link the customer with backend systems and also third party vendors to provide customers different brands – which ultimately, not only generate revenues for a seamless experience irrespective of the service they opt for. The the airline but also help in improving customer satisfaction. website of a typical low cost carrier resembles that of an e-commerce vendor than a pure airline player. An IT service vendor can enable a legacy airline carrier to attain that state. Conclusion Similarly, if Wi-Fi is enabled within the aircraft or if passengers are given In an era of rising fuel prices and intense competition, airlines have the ability to book hotels or resorts using the in-flight entertainment to reinvent themselves as retailers. Using technology, they can system, then it opens up new opportunities for the airline. ensure that they not only offer the customer a richer experience, but also position themselves as providers of value. By doing so, they Given the huge popularity of smartphones, airlines can also consider can go beyond the traditional positioning of just being flight creating mobile apps. These mobile apps can be used by providers. In the future, the ability to customize a travel experience passengers to avail and book ancillary services on the go. will only be limited by imagination and the sky! 6
  7. 7. About NIIT Technologies NIIT Technologies is a leading IT solutions organization, servicing customers in North America, Europe, Asia and Australia. It offers services in Application Development and Maintenance, Enterprise Solutions including Managed Services and Business Process Outsourcing to organisations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, and Government sectors. With employees over 7,000 professionals, NIIT Technologies follows global standards of software development processes. Over the years the Company has forged extremely rewarding relationships with global majors, a testimony to mutual commitment and its ability to retain marquee clients, drawing repeat business from them. NIIT Technologies has been able to scale its interactions with marquee clients in the BFSI sector, the Travel Transport & Logistics and Manufacturing & Distribution, into extremely meaningful, multi-year "collaborations. NIIT Technologies follows global standards of development, which include ISO 9001:2000 Certification, assessment at Level 5 for SEI-CMMi version 1.2 and ISO 27001 information security management certification. Its data centre operations are assessed at the international India ISO 20000IT management standards. NIIT Technologies Ltd. Corporate Heights (Tapasya) Plot No. 5, EFGH, Sector 126 Noida-Greater Noida Expressway Noida – 201301, U.P., India Ph: + 91 120 7119100 Fax: + 91 120 7119150 Americas NIIT Technologies Inc., 1050 Crown Pointe Parkway 5th Floor, Atlanta, GA 30338, USA Ph: +1 770 551 9494 Toll Free: +1 888 454 NIIT Fax: +1 770 551 9229 Europe NIIT Technologies Limited 2nd Floor, 47 Mark Lane London - EC3R 7QQ, U.K. Ph: +44 20 70020700 Fax: +44 20 70020701 Singapore NIIT Technologies Pte. Limited 31 Kaki Bukit Road 3 #05-13 Techlink Singapore 417818 Ph: +65 68488300 Fax: +65 68488322 Write to us at D_31_300113 A leading IT solutions organization | 21 locations and 16 countries | 8000 professionals | Level 5 of SEI-CMMi, ver1.2 ISO 27001 certified | Level 5 of People CMM Framework