Ancillary revenues have become a billion dollar club with the industry’s ten largest airlines all reporting ten digit results for 2018, according to a recent report from IdeaWorks Company, in partnership with CarTrawler. Together these airlines generated USD35.2 billion in ancillary and a la carte revenues last year – a far cry from the USD2.1 billion total recorded in 2007, a figure the seven largest airlines now exceed on an annual basis.
When we consider ancillaries we tend to think of LCCs and baggage fees, a revenue stream that has now spread among traditional legacy airlines. However, ancillary revenue is not limited to fees for optional services, but also includes other ways in which passengers generate revenue for an airline, including loyalty schemes, buy on board services and duty free sales.
But which airlines top the charts for ancillaries? Away from the US majors – American Airlines, Delta Air Lines and Southwest Airlines – which all secured more than USD5 billion in estimated ancillary revenues, thanks in a big part to their loyal customer base and strong frequent flyer programmes, looking at ancillaries per revenue and per passenger perhaps gives a better view of the masters of the craft.
When it comes to ancillary revenue as a percentage of total revenue it is Mexican LCC VivaAerobus that heads the list, according to the report, one of five airlines – all LCCs – that secure more than 40% of revenue from ancillaries. The top ten are described as “a stable collection of airlines that generally realise higher percentages year-over-year”.
In fact, eight of the ten airlines saw rises compared to 2017. The collapse of WOW air has meant its results are no longer included and have allowed AirAsia Group to enter the top ten having boosted its own ancillary position from 17.3% in 2017 to 29.0% in 2018, which according to the report was due to enhanced performance together with better disclosure of the group’s results.
Ancillary revenue as a portion of total revenue appears to have reached a ceiling of 50%. “It’s easier for a non-global airline to achieve this high rate because the underlying passenger fares are lower for short- and medium-haul travel,” explains the report.
The report’s estimations show that VivaAerobus last year secured almost exactly half of its revenues through ancillaries (47.6%), pushing it ahead of Spirit Airlines (44.9%), Frontier Airlines (42.8%), Allegiant Air (41.2%) and Wizz Air (41.1%).
CHART – The top ten airlines ranked by ancillary revenue as a percentage of total revenue are dominated by LCCs, with carriers from Americas holding the top four spotsSource: 2018 Top 10 Airline Ancillary Revenue Rankings report from IdeaWorks Company
Interestingly, when you look at the top performing airlines by average ancillary revenue per passenger you see some traditional carriers, albeit the top ten is still dominated by LCCs. “Traditional airlines have moved quickly to expand revenue opportunities associated with seating,” highlights the report. Extra leg room seats, premium economy, and the basic element of assigned seating have become routine across all airline types, while the arrival of basic economy fares has opened the door for traditional airlines to experiment with an ever-expanding list of a la carte fees.
These fares allow the legacy airlines to compete with LCC arrivals. “These are indeed interesting times with unexpected outcomes,” says the report. “One can forgive consumers who are confused by the dizzying array of choices, and also confused by how this relates to the inherent promise of a global airline brand.”
It is estimated that both Spirit Airlines and Allegiant Air secured more than USD50 per passenger in ancillary spend in 2018, ahead of Frontier Airlines in third place. UK leisure carrier Jet2.com, formerly an LCC that ultimately reverse engineered the Inclusive Tour model to bring low fares to the sector, is the strongest performer outside of the Americas, while Qantas and its strong loyalty scheme, leads the legacy operators.
What is most apparent though is not just the ancillary returns per passengers, but how the levels have grown over the past ten years – more than double in most cases and for Frontier Airlines an almost thirteen-fold rise.
CHART – The top ten airlines ranked by ancillary revenue per passenger are again dominated by LCCs, but legacy airlines make an appearance, mainly powered by their loyalty programmesSource: 2018 Top 10 Airline Ancillary Revenue Rankings report from IdeaWorks Company