Air New Zealand chief executive Greg Foran explains why fares are going up. Video / Supplied
Airline ancillary revenue is heading toward US$103 billion ($167b) this year, a 56 per cent increase on 2021.
The value of add-ons to Air New Zealand and how its Airpoints programme helped it through the
collapse in revenue are also outlined in other data from CarTrawler and IdeaWorksCompany.
While the extra charges annoy many passengers, the study concludes its global estimate reveals the “double benefit” of ancillary revenue; it provides needed income for airlines and delivers overall lower costs for consumers.
CarTrawler is a provider of online car rental distribution systems, and IdeaWorksCompany, a United States-based consultant on ancillary revenue, project airline ancillary revenue will increase to US$102.8b worldwide in 2022, compared to US$65.8b in 2021 and the US$109.5b record of 2019.
The Worldwide Estimate of Ancillary Revenue represents an increase built upon a 2022 passenger jump, with consumer support for a la carte services and co-branded credit cards showing gains.
Earlier this year, the firms reported the ancillary revenue disclosed by 75 airlines for 2021. These statistics were applied to a larger list of 122 airlines to provide a global projection of ancillary revenue by the world’s airlines for 2022.
“The billions in revenue realised by the 75 airlines included in this yearbook very likely represent the difference between a difficult survival or disappearance from the route map of the global airline industry,” it says.
Aileen McCormack, chief commercial officer of CarTrawler, said the industry needed an agile response to unprecedented difficulties.
“This ability to respond quickly, pivot strongly, and implement change at pace, is a key reason why ancillary revenue – and travel generally – has been able to recover so well.”
An analysis of last year’s Air New Zealand accounts shows ancillary revenue of $332m (from total revenue of $2.5b) in the 2021 financial year, down nearly $100m on the year before the impact of Covid-19 groundings hit.
This added up to an estimated NZ$38.40 a passenger.
The 13 per cent share of total revenue at Air New Zealand is small compared to specialised low-cost carriers.
Hungary’s Wizz Air led the field with add-ons making up 56 per cent of the total.
But Air New Zealand is up the pack in the estimate of frequent flyer revenue. The long-awaited overhaul of its Airpoints scheme remains a work in progress but a new programme for its 3.6 million members will better reward its most elite members and it plans to introduce a credit card.
CarTrawler estimates Airpoints yields $76 per member, compared to an average of US$31 across the five largest US airlines; Alaska, American, Delta, Southwest, and United. (The report says 90 per cent of the latest increase in revenue among US carriers is due to co-branded credit cards).
“Air New Zealand has a history of describing ancillary revenue activities in its investor documents, without disclosing a specific revenue amount.”
One New Zealand analyst says calculating the true contribution of Airpoints is also difficult as it is hard to determine the internal value the airline ascribes to each Airpoints dollar.
Since the reports, Air NZ has changed tack with its approach to add-ons on some flights.
Its “Seats to Suit” programme introduced in 2010 was acknowledged as a commercial game changer, especially on the highly competitive Tasman market but last month it ditched seat-only fares on Tahiti, Perth, and Honolulu flights, replacing them with all-inclusive fares. Among low-cost carriers typically, about 45 per cent of consumers choose to spend more by adding services.
“The last two decades have witnessed virtually every other airline adopting more and more pages from the LCC playbook. The ancillary revenue method represents a powerful airline retail system. The base fare will fluctuate as determined by supply and demand, while the ancillary revenue components provide a layer of stability in the topsy-turvy world of a global business,” says CarTrawler.
The yearbook further defines ancillary revenue:
Frequent Flyer programmes: The frequent flyer category largely consists of the sale of miles or points to programme partners such as hotel chains and car rental companies, co-branded credit cards, online malls, retailers, and communication services. Miles or points sold directly to programme members also qualify.
A la carte features: These represent the items on the ancillary revenue menu and consist of the amenities consumers can add to their air travel experience. The list continues to grow and the following are typical activities: 1) onboard sales of food and beverages, 2) checking of baggage and excess baggage, 3) assigned seats or better seats such as exit rows, 4) call centre support for reservations, 5) fees charged for purchases made with credit or debit cards, 6) priority check-in and screening, 7) early boarding benefits, 8) onboard entertainment systems, and 9) wireless internet access.
Commission-based products: Commissions earned by airlines on the sale of hotel accommodations, car rentals and travel insurance. This category primarily involves the carrier’s website, but it can include the sale of duty-free and consumer products onboard aircraft and includes any advertising initiative linked to passenger travel. The following are typical activities: revenue generated from an inflight magazine, advertising messages sold in or on aircraft, loading bridges, gate areas, and airport lounges, and fees-based placement of consumer products and samples.
Fare or product bundles: Airlines may allocate a portion of the price associated with a fare bundle or product bundle as ancillary revenue. This is determined by assigning a revenue value to the extra services included in the bundle, such as checked baggage, early boarding, and extra legroom seating.
New examples of add-ons reported in the last year include China Southern introducing a “Luggage Home” service which provides home delivery of checked baggage for a fee. Norway’s Flyr brought in a “Too Good To Go” service where it offers fresh food from its flights at a 50 per cent reduced price in the afternoon.
In what was a response to borders closed by Covid, South Korea’s T’way Air ran no-landing flights for more than two hours to allow duty-free sales of alcohol while Singapore Airlines opened up planes for dining while parked at Changi Airport.
EasyJet in November 2021 began selling large cabin baggage as a standalone product. Switching to a fee for large carry-ons reduced flight disruptions caused by the need to transfer bags from the cabin to the baggage hold. Flight disruptions from this decreased from 13 per cent to 1.4 per cent of flights.