Ancillaries play a key role in the aviation finance storyline. The 2024 CarTrawler yearbook of Ancillary revenue, published recently, shows that total airline revenue last year exceeded pre-pandemic levels, reaching $918 Billion.
Ancillary services were a major factor in this growth. Passengers are increasingly willing to pay extra for personalization options, such as legroom, early boarding, or checked luggage. According to a CarTrawler report 57 airlines collectively saw a $7.4billion increase in ancillary income in 2023. That’s a more 25% increase than in 2022.
Why haven’t airlines expanded beyond the common offerings, when ancillaries are a revenue generator for airlines?
They are working on it. FLYR announced that it will be partnering with Riyadh Air in an effort to provide “All-in One Planning”. The partnership allows travelers to book third-party services like hotel reservations, activities, experiences, insurance, and car transfers along with the more common bags, extra legs room, and lounge access.
“Using FLYR to replace PSS” [passenger service system] Cole Wrightson is the chief technology officer of FLYR.
He continued, “By offering a seamless way for customers to book not only flights but also a full range travel-related products, Riyadh Air improves the overall experience of travel while also tapping into a new revenue stream, positioning them more effectively to compete in the broader marketplace.”
FLYR isn’t the only tech firm in the industry. Amadeus launched Nevio, a new solution for airline retailing, in 2023 and Sabre launched SabreMosaic, its own retailing platform, in May.
Experts say that while innovation in the airline industry has been slow, airlines are still working to expand their offerings beyond what most travelers think of today.
The “why”, “how” and “what” of ancillary service
According to industry experts, the goal of airlines is to create a comprehensive retail space, with a wide range of products and services that meet travelers’ needs.
“The dream of the airline is the marketplace – the travel marketplace,”
said Eric Léopold, founder and managing director of aviation consultancy Threedot.
That includes selling hotel reservations and car rentals, as well as whole travel itineraries. It’s an idea that makes sense by Léopold’s estimation. Airlines have first-hand knowledge of the travel plans of many travelers who purchase their flights first.
“They know what you are eating, because they serve it.” [on the plane],” Léopold said. “So if you can pick your preference in the meal, they say, ‘oh, we noticed you like Italian food, by the way, when you arrive at your destination, here’s the top five Italian restaurants when you arrive, and here’s the 10% voucher discount if you come on our behalf.'”
The travel market is the dream of every airline. This retail strategy is a slow-moving one, in part due to the complexity of systems needed to support it.
“The ancillary world, once you start to dig into it, is quite a complex world,”
said Sinead Finn, founder of Affinnity airline consulting agency.
It’s complex because to offer new services, airlines need to change their tech stacks. It takes a lot of planning to change airline systems, many of which have existed for a long time. It goes beyond the challenges of maintaining operations. Airlines’ systems have to be compatible and work with other systems, including airports.
Ancillary service distribution was initially only possible through direct airline channels. But as technology improved, third-party channels became available. But for now many airlines are focused on ensuring their basic booking and servicing capabilities through NDC and APIs are functioning properly, said Damian Hickey, global head of travel partners at Travelport, and after those pieces are settled, there may be more interest in adding a la carte ancillaries to help personalize travelers’ journeys.
“Global distribution systems”, online travel agencies, Travel Management Companies, online booking tools and agency’s custom user interfaces. “All parties need to speak the language of the other to ensure that shopping, booking, and service flow smoothly,” Hickey said.
“To add to the complexity, each airline has its own timeline, faces their own technical challenges and implements their own unique strategy to achieve their NDC journey.” “Nothing can be’standard.’”
NDC could add to the complexity. NDC was designed to provide travelers with better ticket offers, improved merchandising and personalization. The way airlines use NDC varies. Some offer the same products to customers whether they purchase travel directly or indirectly, while others use NDC to push their customers away from third party sellers and towards their own channels.
Hickey stated that “this approach adds layers to the travel’s complexity challenge, making it more complicated for buyers and travelers to shop and to book.”
“Consumers need not know what NDC or EDIFACT is. What matters to them are things like prices, flight times, bag allowances, Wi-Fi options and whether they get a free toothbrush — for them the distribution mechanism is irrelevant.”
The needle had been moving forward before COVID shuttered the travel industry, and after a three year COVID-afflicted stretch, airlines started making a profit again in many areas of the world, Léopold said.
As a consequence, ancillary services are now progressing again. Finn credits the progress made by the airlines to their work on systems during the pandemic.
Finn said that the experience gave them a chance to look at technology in a new light.
“I think this is why we see that ancillaries perform better than before COVID.”
Additional considerations
Airlines can find it difficult to change the ancillary service offerings they offer because of customer expectations. This impacts what customers are willing to pay.
Low-cost carriers may find it easier to sell a reservation with no frills that requires the purchase ancillary service because of how consumers perceive that travel experience. Legacy carriers that are more established may not receive the same reception when they charge extra for what customers expect to be included.
While ancillary service revenue may seem easy to increase, the challenges extend beyond the airline’s internal operations and customer relationships.
Regulations are at play, too, posing challenges, Léopold said, citing the United States’ quest to regulate ancillary fees, a move that the Travel Technology Association railed against, and The European Package Travel Directive. The inter-modality connection poses a problem for third-party accessories, as well.
The next step is to connect rail with the air. And how can you include railways in that airline agreement, so customers are taken into account? Léopold said, referencing the International Air Transport Association’s policies on passenger rights. Alternately, it will be a mess. You’re going see hundreds of people stuck and looking for hotels in cities.
