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Airlines and Ancillary Services Revenue

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Abacus recently completed interviewing Asian airline executives in a merchandising survey. The surveyed results show that airlines across the region will be stepping up their efforts to capture new revenue growth through ancillary revenue.

The Abacus Merchandising Survey 2010 found that 75% of airlines’ management teams were either ‘very’ or ‘somewhat’ committed in making ancillary services as one of their key priorities for 2010. More than half these airlines were already somewhat or heavily involved in merchandising strategies such as branded fares or ancillary products and services.

Abacus Vice President of Marketing, Brett Henry, said, “The survey has made it clear that airlines in all segments across Asia, not just LCCs, are making ancillary revenues a key component of their future revenue growth strategies.”

Another key insight from the survey Asian airlines shows that travel agencies will play a key role in their ancillary revenue efforts. 60% of the airlines indicated the agency channel as a pivotal part of their merchandising expansion plan, and they look to work more closely with the agencies to drive greater ancillary revenue this year.

Regarded as a high-yield revenue stream, industry analysts think the unbundling of services can offer airlines opportunities for brand image enhancement, product differentiation and sustainable competitive advantage. A recent report by the Centre for Asia Pacific Airlines (CAPA) predicted that airlines worldwide are expected to generate US$58 billion in ancillaries this year. For leading low cost carriers in mature markets, ancillary revenue already accounts for more than 15% of total revenue.

However, most of the Asian airlines surveyed by Abacus had tied the contribution of ancillary sales to a nominal amount of less than 5% of their total sales.

“In the U.S., traditional network carriers now fill the top three positions in annual total ancillary revenue instead of budget airlines. There is a huge revenue opportunity for Asian airlines in cultivating ancillaries as part of their overall business strategy,” continued Mr Henry.

“We have seen some of the world’s top carriers applying a-la-carte fees to business class travel and premium seatings over the past year, and these moves have set the industry thinking about ancillary products as a viable revenue source. What is key to the success of introducing this new revenue strategy to the market lies in careful management of customers’ expectations without hurting the brand integrity of the carriers.”

The top ancillary revenue category cited by Asian airlines in the Abacus survey was the selling of travel insurance. Other key strategies cited included onboard advertising, premium seat assignments, branded fares adoption, advanced seat assignments, paying for the first checked bag and lounge access.

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