Ancillary Revenue In Focus For Airlines

As post-pandemic travel patterns evolve, airlines around the world are exploring opportunities to boost ancillary revenue made possible by technological advances.

Consumer demand patterns are changing. Although business travel has yet to return to pre-pandemic levels, demand for leisure travel is booming. Many airlines report strong demand for premium seats from leisure travelers. Whatever the reasons for their trips , passengers are increasingly digital-savvy and keen to pick and choose their options before their journeys, at the airport and onboard.

• Air France-KLM ancillaries have grown 28% since 2019
• Frontier Airlines sees revenue boost from new offerings

Some new airlines have opted to offer branded fares that bundle together such options as meal choices and lounge access to boost their ancillaries, according to IdeaWorksCompany, a consultancy specializing in airline ancillary revenue, in a recent report written with CarTrawler.

“The rise of branded fares among new-entrant airlines highlights a fundamental shift in consumer behavior and thus a sharp emphasis on enhancing the booking experience,” CarTrawler Chief Commercial Officer Aileen McCormack said in a press release. “Branded fares not only drive ancillary revenue but also exemplify strategic marketing’s influence on consumer decisions.”

In the U.S., low-cost and ultra-low-cost carriers are beefing up their ancillary and premium offerings as consumer preferences continue to trend in that direction. The revenue streams could bolster their bottom line following a tough year for lower-fare carriers.

So far this year, Frontier Airlines launched BizFares on its global distribution system and bundled such perks as premium seating and complementary carry-ons for higher ticket prices. The carrier is also offering an UpFront Plus seating category in the first two rows that guarantees an empty middle seat.

“I think that’s going to give a good revenue boost,” CEO Barry Biffle said at the J.P. Morgan Industrials Conference in March.

Spirit Airlines, moving past several challenging years and two failed mergers, describes itself as now unbridled in its ability to evolve its offerings. While core elements of its model will remain, others will be refined. The carrier is in the midst of a seating refresh to create more “usable legroom,” through which it sees “material” double-digit improvement in guest satisfaction numbers. Spirit says more is on the way.

JetBlue Airways introduced a core-preferred seating category in the first quarter of 2024, offering window and aisle seats near the front of the core cabin for an additional fee. It also launched peak-season pricing for checked luggage during certain high-traffic periods and holidays, citing higher costs. The fees will help keep base fares low and the seatback TVs and high-speed Wi-Fi free, the carrier explains.

Two-thirds of the revenue initiatives JetBlue is pursuing this year are ancillaries, CEO Joanna Geraghty said at the J.P. Morgan conference.

“Ancillary revenue opportunities—whether that’s fees or better targeting customers with even more space and upsell—[we’re] continuing to focus there,” she said.

A big driver of nonticket revenue for large U.S. global network airlines is remuneration from their co-branded credit cards. Delta Air Lines increased its revenue from partner American Express to $6.8 billion in 2023 from $2 billion in 2014. The company expects $7.5 billion from the arrangement this year and set a target to reach $10 billion with American Express in the next few years, Delta CEO Ed Bastian said at the conference.

Bastian calculated that co-brand spending on the Delta American Express credit card is approaching 1% of U.S. GDP, “which is a pretty lofty number.”

American Airlines, which has co-branded credit cards through Citi and Barclays, is renegotiating those deals to create more value. The carrier garnered $5.2 billion from its credit card agreements in 2023, up from $4.5 billion in 2022.

“We envision a partnership that materially improves the cash remuneration that we see today,” American Chief Commercial Officer Vasu Raja said during the company’s investor day in March. For the last several years, payments have been growing approximately 7% annually, he explained. “We are targeting something closer to 10% per year, which would be a material level of growth and one commensurate with the customer base we have.”

Asia-Pacific airlines have also been enjoying an ancillary boost since the pandemic. This is particularly true for low-cost and hybrid carriers, which have traditionally been innovative with ancillaries.

Malaysia-based low-cost carrier (LCC) AirAsia reports a 13% increase in per-passenger ancillary revenue for fiscal 2023, which runs through March 31, from fiscal 2019. The fiscal 2023 total was a record for the LCC, representing 18% of its total aviation-related revenue.

AirAsia’s ancillary revenue per passenger increased through the year, rising 13% from the first quarter to the fourth, thanks to baggage fees, seat selection and inflight product sales. The airline also introduced new ancillary products, such as Fastpass, which enables express immigration at some airports, and the option for customers to bid for seat upgrades. In addition, AirAsia enhanced its travel insurance package and improved pricing optimization for its ancillary products, with dynamic fee bundling and personalized offers based on customers’ purchasing behavior.

“We anticipate further upside in ancillary income as we enhance our product offerings,” AirAsia Aviation CEO Bo Lingam says.

Other Asia-Pacific LCCs have seen strong gains in ancillary categories as well. For the six months through Dec. 31, 2023, Jetstar’s domestic ancillary revenue was up 36% compared with the same period in 2019. Cebu Pacific’s ancillary yield rose by 21% in 2023 versus the previous year, and 39% versus 2019. VietJet reported that its combined cargo and ancillary revenue increased by more than 60% year-over-year and accounted for 39% of its total air transport revenue.

In Europe, too, airlines are attempting to make the most of ancillary revenue potential, from full-service legacy groups to low-cost operators. Latvian flag carrier AirBaltic has partnered with Pros to use its artificial intelligence-powered Dynamic Ancillary Pricing and merchandising technology to offer personalized offers based on detailed customer segmentation.

Implemented late last year, the program automates and optimizes the pricing of seat assignments, allowing the airline to adjust prices based on demand and customer preferences to maximize revenue from its ancillary products and services.

AirBaltic told Aviation Week the results have been “promising”: “By addressing the risks and considerations involved in dynamic pricing, AirBaltic is evaluating to extend these AI-driven strategies to other ancillary products, such as baggage and special equipment.”

Whatever the business model, ancillaries are an important part of airline revenue. For airlines to get the most out of them, digitalization is key.

Presenting Air France-KLM’s annual results in February, CEO Ben Smith pointed to a 28% increase in ancillary revenue since 2019 to €950 million ($1 billion) in 2023, out of total revenue of €30 billion. “As we add more and more digital functionality to our ability to secure additional ancillary revenue, we should see that going up more and more,” he said.

Expanding ancillaries is key for Air France-KLM to achieve its medium-term margin target of 8%. “We want to increase the panel of options we’re offering clients,” Smith said. “There’s always an IT development behind any new option—that could be onboard purchases or lounge access.”

One major ancillary development has been the recent decision for low-cost subsidiary Transavia to begin charging customers for cabin baggage. Smith said the group has been considering this for several months and sees it as bringing Transavia in line with other LCCs. While he did not give details, he said it would bring in “a lot of extra money” and noted that a digital upgrade had enabled the measure. Though it is not a positive development for customers, he said, they “are used to it.”

Another recent IdeaWorksCompany and CarTrawler report estimated that global airline baggage fee revenue was up 15% year-over-year in 2023 at $33.3 billion but stable as a proportion of overall airline revenue at 4.1% compared with 4.2% in 2022.

“Baggage fees, once dominant, now share the stage with assigned seating revenue, reflecting changing consumer behaviors,” McCormack said.

Norwegian CEO Geir Karlsen agrees that ancillaries are important. “It’s definitely a focus area,” he told Aviation Week. The carrier has been focusing on making ancillary purchases easier for passengers. “We have implemented just recently the customer’s ability to buy ancillaries in an easier way. At Oslo, you can buy ancillaries at check-in kiosks. Self-service facilities are something we’ve been focusing on.”

As Norwegian integrates the recently acquired regional carrier Wideroe, it is investing in improving the platform so that ticket sales between the two carriers are seamless for passengers, Karlsen said.

“We are a very digitalized airline,” Finnair Market Director for Europe Javier Roig Sanchez said. “Ancillaries are very, very important. I would go as far as to say that airlines don’t really make money just by selling airline tickets. Those tickets need to be accompanied by as many other things as possible. And to do that, we need to digitalize to the max.”

A growing proportion of the airline’s sales now pass through modern digital channels. The number of active users of the Finnair mobile application increased 18.3% year-over-year to 853,000 as customers were able to make more changes and purchase more ancillaries directly from the app, the company said in its annual results statement. Ancillary revenue rose to €43.8 million in the fourth quarter of 2023 from €32.4 million in the same quarter a year earlier, driven by frequent-flyer revenue, advance seat reservations and excess baggage.