As fares reduce, ancillaries have risen and during COVID-impacted 2020 are predicted to account for a greater share of revenues, a ‘much-needed silver lining during an unprecedented year’

25 November, 2020

Air fares have been falling steadily over the past decade mainly influenced by changing airline business models, unpackaged offers and a transition to ancillary revenue sources. These trends are perfectly illustrated in the recently published CarTrawler Worldwide Estimate of Ancillary Revenue, produced in partnership with IdeaWorks Company, which also highlights the impact of this year's COVID-19 influenced travel environment on airline revenues.

The publication projects airline ancillary revenue - the gained revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience - will drop to USD58.2 billion worldwide in 2020, compared to USD109.5 billion in 2019, a -47% reduction, dropping slightly below the USD59.2 billion amount for 2015.

This reduction is less than the predicted revenue declines for the industry and highlights that ancillaries are becoming a more prominent part of the sector as the LCCs that favour and deploy the model more effectively than legacy airlines are currently leading the industry recovery thanks to their predominantly short-haul networks.

"COVID-19's impact on the travel industry cannot be understated, but ancillary revenue has been a much-needed silver lining during an unprecedented year," says Aileen McCormack, chief commercial officer at CarTrawler.

This is illustrated in the following graph from the IdeaWorks Company report that charts a declining average global air fare trend from International Air Transport Association (IATA) data against a quickly ascending ancillary revenue line from its own analysis of individual airline reports. In 2020 the reduction in air fares and rising ancillary revenue per passenger are particularly evident. An estimated 8.3% rise in 2020 from USD23.91 in 2019 to USD25.90 means a more than trebling of ancillary revenue per passenger between 2010 and 2020.

"Even though the average fare has dropped steadily over the past decade, we have seen significant growth in ancillary revenue per passenger - a figure that has grown by over 200% since 2010 and whose trajectory has been unaffected by the pandemic," explains Ms McCormack.

Ancillary revenue is generated by activities and services that yield cashflow for airlines beyond the simple transportation of customers from A to B. This wide range of activities includes commissions gained from hotel bookings, the sale of frequent flyer miles to partners, and the provision of a la carte services − providing more tailored options for consumers.

At the start of the decade ancillary revenues accounted for less than 6%, according to estimates. However, this exceeded double-digits from 2017, jumping to 12.2% in 2019 after a 14.0% year-on-year rise and a 1.5 percentage point increase. The latest estimates for 2020 project a similar 1.4 percentage point rise on 2019 to a 13.6% share of global revenue, a +11.5% year-on-year growth.

Projections are generally based on trends, but with nothing normal about 2020, so surely it is near impossible to deliver an accurate estimate. IdeaWorks Company maintains that there is plenty of evidence to indicate the level of 2019 customer support for a la carte purchases will continue through 2020.

The report highlights that second quarter 2020 financial disclosures collected from 17 airlines revealed the ancillary revenue average among the carriers was 21.7% for the first quarter of 2019 and 22.1% for 2020. In addition, feedback from airline executives all over the world indicated consumer buying behaviour related to a la carte services like baggage and seating is comparable to 2019.

The report defines LCCs as "ancillary revenue champs" and important generators of ancillary revenue, particularly in the current environment. But as a single category, these airlines are behind traditional airlines in total ancillary revenue. Traditional airlines represent "the largest category of passenger traffic and revenue and have treated ancillary revenue as a crucial source of support for many years," it explains. Emirates Airline is cited as a traditional airline that "now emphasises ancillary revenue".

The performance of ancillary revenue will certainly play a role in maintaining a level of aviation employment and safeguarding many routes while air fares are artificially low. This will "provide some cushion for the hard landing the industry is experiencing," says the report. Where ancillary revenue "once provided padding for better profit," it now operates as "a reliable cushion to help protect airlines" from external influences such as this year's unprecedented pandemic.