Pan-Pacific Conference XXXIV. Designing New Business Models in Developing Economies

A Study of Airline’s Ancillary Revenue Growth Strategy in The Era of Technologicallysavvy
Travelers
Ito, Tomihisa
Ito Consultancy on Airline Business
cafetf@kpe.biglobe.ne.jp
ABSTRACT
Ancillary revenue today is a large and crucial part of
airlines’ revenue, especially of that produced from
baggage fees and onboard sales of food and beverages.
However, it can be observed that there remains the
potential of growth as efforts continue for airlines to
pursue a larger profit. Meanwhile, passenger behavior
and passenger expectations have changed in the past
decade, due to change in the medium of information and
technology;. digital, mobile and social technology have
enabled passengers to remain connected regardless of
geolocation. According to Friedrich, Peterson and
Koster, an emerging new generation called “Generation
C” has been observed; the C initialing their attributes
“connected, communicating, content-centric,
computerized, community-oriented, and always
clicking.” To encompass this potential market, the next
up-coming category for airlines will be internet
connectivity, provided using Wi-Fi services. This paper
will discuss the strategy of grabbing the hearts of these
potential customers who may well become game
changers of the airlines industry.
INTRODUCTION
The concept of Ancillary Fees emerged in 2205, when
the LCC Ryanair began charging all checked baggage.
Today, ancillaries range across a wide variety of sales,
including onboard sales of food and beverages, baggage
fees, assigned seats or seat upgrades (including extra
legroom seats on exit rows), billing of call center support
for reservations, credit card fees, sales of rights for
priority check-in and screening for security, early
boarding privileges, in-flight entertainment, fees for
onboard Wi-Fi, and the list goes on.
This movement has also influenced legacy carriers;
American jetliners such as United Airline, US Airways
and American Airlines had begun charging baggage in
2008 to make up for the shrunken market after the 9/11
attacks. Ancillary Revenue was considered to be the best
strategy for reconstruction. Crude oil prices are currently
at 51.74USD as of March 16th, 2017, peaking at
120USD in 2008. Regardless of the drop in prices,
airlines continue to struggle with accommodating this
sharp price change, and with the growing problem of
labor costs among fixed costs, improving cost efficiency
for sustainable management is a large issue. Some
carriers are introducing energy-efficient aircrafts such as
B787, B737MAX, and A320NEO to reduce expenses,
however the dominant choice for the majority is to
increase Ancillary Revenue. Alex McWhirter comments
in Business Traveller Asia Pacific (2016): “Faced with
declining yield (revenue per seat), Dubai-based Emirates
have commenced to introduce ancillary fees as a means
of raising more cash. Emirates implemented a charge for
advanced seat selection for Economy Class Special and
Saver fares with a ticket purchased on or after 03 October
2016. According to Emirates, fuel had been its biggest
expense over the past year, at $5.4 billion and 26 percent
of operating costs, while the strong US dollar had eroded
its revenues by $1.6 billion, and its profits by $1.1
billion.” This change in policy by Emirates really was the
first of its kind; as a rich full service carrier.
On the other hand, there are LCCs that do not charge
baggage fees, the largest potential revenue of ancillary,
such as Southwest Airlines which continues to be
profitable. There are also bold measures taken to increase
customers by both. Full Service Carriers (FSC) and
LCCs: Brian Sumers comments in SKIFT (2017): "Two
major U.S. airlines have started selling no-frills discount
fares that do not permit most passengers to bring large
carry-on bags to stow in the overhead bins. United and
American designed their products to compete with fares
from ultra low cost U.S. airlines, including Spirit Airlines
and Frontier Airlines. Spirit and Frontier sell deeplydiscounted
tickets, but charge for bin space for larger
bags.”
Can this strategy of cutting down on customer services,
such as unbundling and charging carry-on bags, be
supported by the consumer market? The author will
proceed to examine the current young generation, which
will eventually become the main customers of all
airlines, and how they may affect ancillary revenue
strategies with internet connectivity and Wi-Fi
accessibility.
Leaping-Advancements in Onboard Internet
Connectivity
Today’s passengers expect that Inflight Entertainment
and Communications (IFEC) not only enable constant
connectivity from the airport of departure to the airport
of arrival including when up in the air, but also that they
are reliable, have high bandwidth performance, even at
an altitude of 35,000 feet.
It is currently possible on many airlines for wireless
devices such as smartphones, tablets, and laptop
computers to access e-mails, update SNS posts, and
browse the internet just as on land. Though it may seem
we have learned to accommodate these services over a
period of time, IFEC has only been around for several
years; companies such as Gogo, Panasonic Avionics, and
Row44 provide these internet services onboard via
satellite, by sending the strongest signals directly towards
aircrafts, which could only be possible with recent
technological advancements.
According to the research from 2015 by SITA’s Airline
IT Trends Survey, “66% of airlines will offer passengers
more wireless choices in-flight by 2018, compared to
only 28% today.” Recently, on the other hand, the inflight
connectivity market is showing growth in the
pursuit for greater bandwidth, better connections and
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