Ancillary revenue and the future of African airlines 

BY EKELEM AIRHIHEN  

Ekelem Airhihen, a chartered accountant, is an airport customer experience specialist. He can be reached on ekyair@yahoo.com and +2348023125396 (WhatsApp only) 

Ancillary revenue in the airline industry is revenue from non-ticket sources. Ancillary revenue is generated by activities and services that yield cash flow for airlines beyond the simple transportation of customers from one point to another. It involves a wide range of activities such as commissions from hotel bookings, sale of frequent flyer miles to partners, provision of a la carte services, baggage fees and on board food and services. The a la carte services pay attention to the comfort of passengers. Services involved are premium seat allocation, sale of food and beverages during flight, as well as early screening and boarding.

IATA states : “In 2021, overall traveller numbers were 47% of 2019 levels. This is expected to improve to 83% in 2022. 94% in 2023. 103% in 2024 and 111% in 2025.” These are industry wide data. For Africa, IATA  expects 76% in 2022. 85% in 2023. 93% in 2024 and 101% in 2025. These numbers point to a ready and growing market for passengers who would like to pay extra for more comfort and convenience. Statista.com states that the airline industry has become more and more contingent on ancillary revenue as airlines work hard towards improving their operating margins with new revenue sources. It further states that ancillary revenue amounted to 109.5 billion U.S dollars in 2019.

Statista stated further that US carriers generate their largest share of ancillary revenue from a la carte services. It gives examples such as Delta Comfort. Here Delta Airlines provides priority boarding, more legroom, onboard food and beverages and inflight entertainment. American Airlines and United also offer premium economy services such as extra  legroom among others.

In a recent publication by McKinsey (Winning in Loyalty, August 3, 2022), it states that 3 out of 4 members of top performing loyalty programmes changed their behaviour to generate more value for businesses. It states further on why loyalty matters, that 64 percent are more likely to purchase more frequently, 50 percent are more likely to recommend to others, 35 percent are more likely to choose a brand over competitors and 31 percent are more willing to pay a higher price to stay with a brand. This gives hope for airlines that seek to generate more value from ancillary revenues. 

Customer experience has always made a difference to the bottom line and airline business is no exception. If the customer experience is positive it will positively impact revenue and the reverse will be the case with a negative customer experience.

McKinsey in its publication gives six considerations to foster loyalty. These may provide a framework for African airlines to think through in a bid to capture more ancillary revenue and stay afloat this period of operational difficulty from supply shocks and logistics challenges that have in some countries become an existential threat to airlines.

The first is Target. Identify specific customer behaviours, then focus on them to drive incrementality from among high value customer segments that have been targeted. Passenger personas have continued to be of interest in the industry. This will continue as they provide valuable insights into how to derive value from passengers. Some recent studies have also looked at post Covid-19 passenger personas, watching out for changing behaviour among passengers.

Engagement is the second. Here the emphasis is to turbocharge customer engagement beyond transactions. Examples are gamified design, signature experiences and some other mix of benefits that are compelling. Gamification involves adding game mechanics into nongame environments such as a business intranet, website, online community to increase participation. It seeks to engage with consumers, employees and  partners to inspire, collaborate, share and interact.

Personalisation, which is the third will, of course, mean that airlines will begin to pay more attention to the mass of data generated through interactions with customers across various channels. It requires the use of advanced data and analytics to unlock tailored experiences, offers and customer journeys across touchpoints.

The fourth is Ecosystem. To deliver a value proposition for the customer that is cross-sectoral and outstanding will require tapping into a network of internal and external assets in one integrated experience. Partnerships are cited as an example of what can be leveraged on to create an ecosystem to foster customer loyalty.

Thinking Economics will be required to ensure the success of any plan to foster customer loyalty. Airlines should not ignore the economics of whatever loyalty programme is put in place. They need to constantly think about it and review the same. The emphasis should be on maximising the gap between the cost of running loyalty programmes and the value perceived by customers. Loyalty assets should be continually reassessed to find out how to build additional revenue streams threfrom.

Data usage from loyalty programmes should be maximised as the sixth consideration. These data should be used internally to accelerate business priorities across the organisation it suggests. Other areas where this data usage will be found useful are CRM, marketing, pricing, promo, products, services and customer service.

So, there is still a ray of hope for African airlines in the face of a harsh operating environment from global events. Data and the customer hold the key to resilience in the face of the storms.

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