Ancillary Revenue Management in the Airline Industry
Introduction
There is a stiff competition between the network airlines and the low-cost carriers (LCCs) in the airline aviation industry. For a long time, the traditional network airlines have been struggling to cope up with the many economic uncertainties in the industry, especially the rising cost of jet fuels and increasing operating costs. Consequently, to survive in the industry, they have been forced to come up with new ways of generating revenue. Like LCCs, the network carriers are now considering unbundling their services to produce additional income. Network airlines are also adopting the trend of selling chargeable services, which are also known as ancillary services, to keep the airfare low. Therefore, network airlines are increasingly using ancillary revenue management strategies to have a competitive advantage in the industry. However, the traditional airlines find it relatively hard to effective manage ancillary revenue because they operate in different business models compared to the LCCs. The report focuses on the ancillary revenue strategies that are used by the network airlines to counter the increasing threats from the low-cost airlines. It also looks at the cost-benefit analysis of the ancillary revenue strategy. Also, the report analyzes how the Virgin Atlantic and EasyJet are utilizing third-party publicizing to maximize supplementary revenue.
Ancillary Approaches Used by Network Airlines
According to Hao, (2014, p.11), ancillary revenue refers to income earned outside the direct sales of airline tickets to customers or indirectly as part of the traveling experience of the airline. Therefore, ancillary income in the airline industry can be defined as the revenues that are not earned from the services of transporting travelers from one destination to another by various aviation companies. The four main categories of ancillary revenue include a la carte features, airline sold advertising, commission-based commodities, and airline sold advertising (Okura, 2015, p. 5). Even though the concept of ancillary revenue has been used for an extended period, it was initially associated with LCCs, especially Ryanair Company. Hvass (2008, p.31) has confidence that ancillary revenues can provide significant relief to various airline firms from the different economic uncertainties that dominate the current airline marketplace.
There is no significant difference between the ancillary strategies practiced by network airline and LCC because the former majorly relies on the strategies used by the latter (Okura, 2015, p. 5). The strategies can broadly be grouped into three categories that include product ungrouping, product augmentation, and product extension. To gain a competitive advantage in the marketing, both network airlines and LCCs are now offering some ancillary services such as car rental, car bookings and airport lounges (Cafferty, 2011, p.6). They are now going as far as offering foreign currency exchange and travel insurance services to their customer.
Under the product ungrouping strategies, the legacy carriers are now providing ancillary services like baggage fees, in-flight entertainments, accessibility to Wi-Fi, seat preference, and early boarding opportunities (Rautanen, 2012, p.3). Initially, network airlines were offering the above services as their core products. However, the low-cost airline companies forced legacy aviation firms to abandon the tradition, and they started unbundling their services to offer them an al carte services. Like their LCC counterparts, the network airlines are now focusing on the low-cost of the seat while they are using an al carte services to generate more revenue (Cafferty, 201, p. 8). The passengers using network airlines are now buying the above services as separate products.
Augmentation is another product approach that is now used by network airlines to reduce the threat they experience from LLCs in the aviation industry. The common ancillary services offered under this strategy include premium beverages and gourmet meals, airport lounge, select check in and airport transfers (Kee, 2015, p.17). Network airlines are now offering the above services to its customers who are willing to pay extra cash (Rosenstein, 2013, p.54). They have realized that there are clients who are even ready to pay a premium for the services. Therefore, the ancillary strategy is used by network airlines to increase their ancillary revenues, which help them to lower the cost of traveling that match the ones offered by LCCs (Myre, 2015, p.6).
The last main category that network airlines currently use is product extension that includes ancillary services like advertising, event tickets, insurance, event tickets, and frequent fliers’ benefits. Legacy airlines are now working with various vendors to provide exclusive products and services to their passengers. Also, they are now offering credit card services that enable their customer to access premium services. The extension products have helped network airline companies to generate more ancillary revenue that has allowed them to compete fairly with LCCs (Gökşen, 2011, p.15-16).
Some cases show that airline companies are using ancillary services to gain more revenue and to outperform their competitors in the market (Belobaba, Odoni, and Barnhart, 2015, p. 100). For instance, Vueling Airlines is now offering its customers the choice of an extra-large seat for premium whiles other companies such as Allegiant Airlines is now giving its customers opportunity of choice boarding for a premium. Qantas, one of the Australian airline companies, a unique technology, is known as “Q Bag Tag,” a permanent baggage tag that uses a wireless technology that enables customers to check their bags easily (McAfee and Te Velde, 2006, p.4). Some of the network airline like AirAsia is now offering red carpet services that give travelers an opportunity to fast-track security checks, have access various lounges, and early boarding of its planes for a given fee. Moreover, Singapore Airlines has also installed Wi-Fi in its aircraft. The above cases both LCCs and network airlines are using various ancillary services to generate additional revenue (Cento, A., 2008, p. 5-7).
Other network companies like Virgin Atlantic have also adopted the use of ancillary service to increase their revenues (Mumbower, 2013, p.12). Virgin’s primary ancillary strategy is to provide end-to-end services to its all its customers through the provision of various ancillary services. For instance, it allows its upper-class passengers to access office area by paying extra cash. The Virgin also has in-flight bars and spa areas, and it offers personalized meals to its passengers. Virgin also maximizes its ancillary revenue by allowing its customers to book Virgin sponsored vehicles for airport transfers. Therefore, the primary aim of the additional services offered by Virgin Atlantic is to increase its ancillary revenue and to counter stiff competition emanating from low-cost airlines like Ryanair (Waguespack and Curtis, 2015, p.211).
Furthermore, network airlines are now having an advantage over low-cost airlines because they are now using global distribution system (GDS) to sell their al carte items to their customers (Holloway, 2008, p. 7-12). Legacy companies like Korean Air, United, and Virgin Atlantic are now relying on travel agencies corporate travel planners to offer quality ancillary services that can generate more revenue. The strategy is paying off for network airlines because the sale of fare bundles is more efficient through the use of GDS.
Benefits and Risks of Ancillary Revenue Strategies
One of the main advantages of ancillary revenue strategies is that it helps network airlines to reduce the level of airfare, as they will be able to generate profits from ancillary services that they offer (Reals, 2008, p.2). The low price is one of the main factors that determine the success of many airlines in the aviation industry, and companies must low their airfare to remain competitive (Tolkin, 2010, p.24).
The strategies also help in blurring the difference between economy and business class that was initially associated with legacy airlines. The hard economic times made business travelers to move to economy class, which led to a reduction in revenue in network airlines. Therefore, the ancillary services can now be used to regain the lost revenue due to the shift (Wolf, 2005, p.2). In short, ancillary revenue strategies have enabled network airlines to offer flexible quality services to all their customers to increase revenues. As a result, the main benefits of ancillary plans are increased revenues to the company and enhanced quality services and products that meet consumer expectations.
Despite the many advantages and benefits that may be associated with ancillary strategies, they also have some business risks. One of the main risks of the strategies is that the customers may end up avoiding an airline company due to extra charges on ancillary services (Kimes, 2013, p.15). There is a general perception among airline stakeholders that the ancillary charges grossly exceed the marginal cost of the products or service that they offer. Consequently, the ancillary services may lead to consumer backlash, which may cause losses in the long run. An airline company, therefore, can end up losing customers due to the extra charges for ancillary services.
The high level of ancillary services offered by carriers can also reduce the performance of employees (Marcenko, 2015, p.19). Some workers feel that the excess services degrade their profession, and such employees can quickly show laxity in their jobs. Therefore, companies risk low employee performance as a result of ancillary revenue strategies that are put in place. Therefore, according to Cui, Duenyas, and Sahin (2015, p.3), for an airline company to motivate its customers, carriers may be forced to employ more staff, which may also end up increasing the cost of operations. There is a need to manage ancillary revenue effectively to maximize benefits and minimize potential risks.
Generating Ancillary Revenue through Third Party Advertising
Third party advertising is one of the strategies that are used by airline companies to generate more ancillary revenue. There is a growing recognition that third party marketing is one of the leading ancillary revenue contributors to airline firms (Dombrowski, 2014, p.13). Increased technological advancement has significantly helped in the development of third party advertising in the industry. Currently, both LCCs and network airlines are using third party advertising to generate additional revenue. This section of the report, therefore, analyzes how Virgin Atlantic and EasyJet are utilizing third-party advertising to earn more ancillary revenue.
EasyJet
EasyJet is currently the second largest low-cost airline in the whole of Europe after Ryanair. Its passengers have been increasing at annual rate of 3.4% since 2009, and it is operating on 400 routes worldwide (Koenigsberg, Muller, and Vilcassim, 2004, p.6). The airline company has been able to enhance its ancillary revenue due to its many additional services like the third party advertising.
Like many low-cost airlines like Ryanair, EasyJet aggressively sells advertising that reaches millions of customers who use its aircraft to various destinations. It majorly uses in-flight magazines to enhance the effectiveness of its third party advertisings that as the potential of generating more ancillary revenue (Hazel, Stalnaker, and Taylor, 2012, p.12). For instance, the company is using its magazine known as EasyJet Travelers to advertise for various products and services that various firms offer across the globe. It is estimated that about 7.2 million passengers read the magazine every month (Sarker, Hossan, and Zaman, 2012, p.21). The airline also uses other customer communication channels airline in-flight entertainment services like game devices and digital TV to reach out to various clients. EasyJet uses both interior and exterior of its aircraft to facilitate third party advertisements that help in generating ancillary revenue.
EasyJet uses its boarding passes, seatback tray tables, and storage bins to advertise various products for different companies. In many cases, the adverts are aimed at promoting different restaurants and lounges, consumable products, and some tourist destinations (Curtis and Rhoades, 2013, p.11). The company has earned a lot of revenue as a result of third party advertising. For instance, in 2013, it made a total of £203 million in its third party advertising.
The successful third party advertising by EasyJet is associated with its strong brand in the aviation industry, especially in Europe. The airline is associated with customer-centric and affinity driving brand, as it offers a variety of quality services that meet the needs and expectations of its clients (Snyder and Tai, 2014, p.258). The company brand aims at making air traveling easier, convenient, and entertaining, which is has achieved through ancillary services.
Virgin Atlantic
Virgin Atlantic is one of the network airlines that is based in the UK. It is the country’s second-largest airline carrier. It was established in 1984. The company operates long-haul services in various parts of the world (Notis, 2015, p.18). The company has thirty routes worldwide. It was one of the legacy airlines whose survival faced a greater threat because of the arrival of low-cost carriers like EasyJet. The threat made it embrace ancillary services to generate additional revenue.
Unlike EasyJet that uses both internal and external of their aircraft to carry out their third party advertising, Virgin Atlantic only uses the in-flight adverts to generate ancillary revenue. It mainly uses in-flight TV and magazines to advertise various products that give it additional revenue. It is mainly using its special magazine known as Virgin Atlantic Inflight Magazine to facilitate third party advertising. It is also using television programming to advertising various products to its clients across the globe.
Both EasyJet and Virgin Atlantic have almost the same brand positions as they strive to be consumer centric airlines. The two airlines are both sensitive to customer needs and expectations, and they are offering quality services and products that satisfy the desires of their clients. Both airlines companies are also coming up with various ancillary services to lower the airfare cost. Therefore, their third party adverts are also consumer based, and they are using the avenue to generate more revenue. However, it comes out that the third party advertising by EasyJet is more robust compared to that of Virgin Atlantic.
Conclusion
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