Ancillary Revenue - History and Rationale

History and Rationale

The most aggressive proponent of ancillary revenue development within Europe has been Europe’s largest low fare airline, Ryanair.

While ancillary revenues were not invented by Ryanair, the extreme business model envisioned by Michael O'Leary, the Ryanair Chief Executive, proposed to use commissions from pay-per-view entertainment, onboard shopping, internet gaming, car hire and hotel bookings to eventually replace the revenue from selling airline seats.

He described ancillary revenue during a 2001 interview in the UK Sunday Times. “The other airlines are asking how they can put up fares. We are asking how we could get rid of them.” While it may not be realistic to anticipate that consumers will systematically be able to “fly for free,” airlines already benefit from the additional profit provided by ancillary revenue. O’Leary’s radical idea catalyzed an industry-wide trend to coax more revenue from the profit-challenged airline business.

Management at competing airlines often ridiculed the path pursued by Ryanair. Traditional carriers defined their product distinction by bundling many amenities into the price of an airline ticket. At the same time, not all low cost carriers had embraced the option of selling an unbundled airline experience.

The unrelenting increase in the price of jet fuel has greatly impacted the economics of the airline business. When combined with other factors, the outcome has created considerable challenges for traditional airlines and low fare carriers. 2007 had been especially difficult as the price oil reached the neighborhood of $100 per barrel during late 2007. Concurrent with this, Ryanair announced record half-year profits. Announcing these results Ryanair’s CEO, Michael O'Leary, said: “These record profits reflect a 20% growth in passenger volumes, a 1% decline in yields, and strong ancillary growth. Ancillary revenues grew by 54% to €252 million, due to improved penetration of car hire, hotels, travel insurance, as well as strong onboard sales and excess baggage revenues. Ancillaries now account for just over 16% of total revenues as we make steady progress towards our 20% target.”

Ryanair’s €408 million profit, along with ancillary revenues of €252 million, is an example of the potential significance of ancillary revenues in airline profits.

Other airlines all over the world also report ancillary revenue from legacy airlines to low cost carriers. The following lists total ancillary revenue reported by these airlines for fiscal year 2006: easyJet €189,476,508, Aer Lingus €63,407,000, SkyEurope €10,827,000, AirAsia (Malaysia) €22,713,479.

The importance of ancillary revenues has further increased. According to a study published by Amadeus and IdeaWorks, airlines’ ancillary revenues will increase from $ 13.5 billion in 2009 to $22.6 billion in 2010. In 2009 United Airlines had a total of about $ 1.5 billion in ancillary revenues; for many airlines ancillary revenues accounted for a huge part of their total revenues, like Allegiant (29.2%), Spirit Airlines (23.9%) and RyanAir (22.2%).