LCCs shoring up ancillary revenues

Globally, airlines earn 5-10% of their revenues from this.

As Indian low-cost carriers (LCCs) try to fight increasing losses, they are making a renewed effort to shore up their ancillary revenues.

So, you have a SpiceJet or GoAir trying to bundle you travel insurance with an air ticket or Air Deccan mining its customer base to cross-sell third-party medical insurance to its customers.

Airlines earn ancillary revenues from freight, sale of food, drinks and gifts onboard, sale of travel insurance, hotel rooms and car rentals, through frequent flier programmes, and by trying to cross-sell other products like credit cards and medical insurance. Globally, airlines make 4-5 per cent of their revenues from ancillary sources.

These ancillary services allow the airlines to offer the lowest possible fare, encouraging people who want the so-called extras to pay for them.

''By not having to cross-subsidise the preferred seating or hot meal of my fellow passenger, I can get the lowest price while other passengers have access to the extras they are willing to pay for,'' said Belgium-based airline consultant David Huttner.

Taking a cue from SpiceJet's offering of a travel insurance product, GoAir on Monday unveiled its travel insurance product in alliance with Tata-AIG, which offers to insure passengers against trip cancellations, baggage loss and flight delays, besides loss of life and medical reimbursement, all for Rs 129 or $3. Simplify Deccan, which sells hotels and car rentals and space in its in-flight

magazine, is trying to mine its customer database and sell medical insurance scheme of third-party companies.

Earlier, Deccan had tried to sell advertising space on aircraft body, on head-rest cover, and space on its in-flight magazine.

While airlines make 4-5 per cent of their revenues from ancillary sources, LCCs generate 10-15 per cent of their revenues from ancillary sources. European budget carrier RyanAir plans to increase ancillary revenues to 20 per cent in three years.

For the quarter-ended December 2007, RyanAir earned 111 million euros (Rs 637 crore) of ancillary revenues. In India, airlines are still struggling in their single-digit revenues from ancillary services.

Budget carrier Indigo, which started operations 18 months back, makes 5 per cent of its revenues from ancillary streams, mostly by selling food onboard, and carrying some freight.

''We would like to develop these or other streams,'' said Indigo CEO Bruce Ashby. Deccan and SpiceJet didn't comment, but had earlier said they earn 6-7 per cent of their revenues from ancillary sources.

GoAir earns its ancillary revenues from facilities like in-flight shopping, food and beverages retailing, in-flight contests, home delivery of tickets, hotel bookings, insurances and space selling in its in-flight magazine.

''Ancillary revenues are an integral part of our strategy. Over the next year we plan to enhance our ancillary revenues by adding new streams,'' said GoAir CEO Edgardo Badiali.

No more secondary

Historically, the most common ancillary revenues airlines enjoyed were from on-board sale of alcoholic drinks and duty free/general items. This was the main source of ancillary revenues for many years and constituted around 1 per cent to 4 per cent of an airline's gross revenues.

Now, even frequent flier programmes generate ancillary revenues for airlines through complex exchanges of points and services with other non-airline partners such as hotels, car rentals, restaurants, credit cards.

Ancillary revenues are important to all airlines, irrespective of whether they are full-service carrier (LCC). But LCCs tend to offer a more unbundled product, instead of a high all-inclusive fare.

Some LCCs offer a low-base fare and add-on items that the customer may purchase if desired, such as food. For many LCCs, ancillary revenues represent more than 10 per cent of their revenue stream.

In India, Air India offers ground-handling and engineering services to many international airlines. Indian used to offer these services to Kingfisher Airlines. Such a facility can come up adjacent to an international airport that can accommodate all types of aircraft regardless of size.