Ancillary Revenue Is the New Black

In the post deregulation era, most U.S. airlines have focused on cost reduction far more than revenue enhancement. While it's always important to keep costs in check, there is a world of untapped ancillary revenue potential -- if carriers can get passengers to buy in.

Ancillary revenue, which has only really become popular in the last couple of years, is anything that the airline can collect above and beyond the basic price of the ticket. Ryanair in Europe was the first to make a great living on ancillary revenue. Here in the United States, Allegiant Air has been the king of the castle. In fact, by the last quarter of 2007, Allegiant was earning nearly $25 in ancillary revenue for every passenger it flew. That's nearly a fifth of their operating revenue. Pretty impressive, right?

For an existing airline, the idea sounds promising. Here's how I envision a conversation at the top of the ivory tower at any legacy carrier in the United States:

Nervous Exec: We're losing a ton of money. Fix it. Eager Underling: Um, why don't we raise fares? Nervous Exec: Can't do it. There's too much competition and too much capacity. Eager Underling: OK, then why don't we keep fares where they are but strip out amenities that cost us money? Nervous Exec: Sounds pretty good, but there has to be more that we can do with that idea. Eager Underling: Instead of ditching those amenities, we keep them but we charge people extra for them. Nervous Exec: Brilliant! (Sound of Guinness glasses clinking)

But as I've written in my other blog, it's always harder to start charging for something that used to be free than it is to just start it up with a fee in the first place. That's probably why Allegiant and Ryanair have been so successful. Most people have never known those airlines without all the additional fees.

Just this year we've seen consumers and the media lambast airlines for charging $25 for the second checked bag which used to be free, charging for extra legroom that used to be included, and adding a booking fee to some reservations booked on the airline's own website.

While many of the ancillary revenue plays so far consisted of charging for things that used to be free, there is more opportunity here for innovation that can actually generate a return on investment. Take Air Canada, for example. As far as legacy carriers go, they've been way ahead of the curve in offering customer a menu from which they can pick and choose added amenities.

The airline's latest offering is protection for passengers who are stranded due to weather or air traffic control delays. For the most part, if a customer gets stuck due to delays beyond the control of the airline, the carrier's responsibility is just to get that person on their next available flight out of town and nothing more. Delays within the airline's control, however, end up with meals, hotels, and reaccommodation on other airlines if possible. Air Canada is now offering the second type of protection for delays that are beyond the airline's control if the customer is willing to pay $25 to $35 each way at booking.

This is a service that was never offered before, but as an ancillary revenue opportunity it's a win-win situation. It's these types of offerings that can really help an airline vault ahead, and it's where future development of ancillary revenue opportunities should be focused.