Merchandising ’17:

Trends in
Airline Ancillaries
1
Exploiting untapped strategic
opportunities
Airlines led the business world in Airlines are developing this customer
their development of variable pricing of centricity against a challenging industry
airfares, known as yield management, background. With airfares falling by
and in expanding to revenue almost 40% over the past two
management. Airlines continue to lead decades, most airline executives cite
the business world, embracing the competition as the greatest challenge
truism that all customers are different facing their respective firms.
and have different needs. Customers Established Full-Service Carriers (FSCs)
fly with airlines for a variety of reasons, face challenges from Low-Cost Carriers
from metropolitan boardroom meetings (LCCs) offering low fares and options
to hangouts with college friends to far priced separately, and all carriers
away family adventures. Airlines are confront an array of choices related to
progressively enhancing their offers to how to create offers and communicate
reflect the different needs and values with customers.
of their customers. And as customers
are able to get more of what they need And while the industry faces
from their airline, the airline is able to challenges, demand is rising steadily.
capture more revenue. Since 2000, passenger volume has
nearly doubled.

Worldwide passengers and average airline revenue per passenger

Millions USD

4000 300

3500

3000 Passengers number 250

(millions)
2500
211
2000 200

1500 -37%

1000 Average airline revenue per departing passenger 150

(in 2015 US$)
500 132

0 100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: IATA, Amadeus calculations using IATA & World Bank data

3
 There have been other changes in As the percentage grows, and airlines
the industry, too. In commercial recognize the competitive importance
departments at airlines around the of ancillary, the need for optimisation
world, analytics have taken hold and increases. Ancillary merchandising, the
inform more decisions than ever. Those art and science of creating and
decisions include how, where, when, communicating the optimal mix of
and at what price to offer options as options at the right price, at the right
diverse as checked baggage, pre- time, represents a key driver for airline
assigned seats, onboard meals, and revenues.
hotel bookings, all of which fall broadly
under the category of ancillary.
Revenue from ancillary options has
almost doubled as a percentage of
total airline income from 4.8% in 2010
to 9.1% in 2016. Some airlines book
more than 40% of their passenger
revenue from these options.

Total ancillary revenues and as % of global airlines revenues

Billion USD

70 10 %
9%
60
8%
50 7%

40 6%
5%
30 4%
20 3%
2%
10
1%
0 0%
2010 2011 2012 2013 2014 2015 2016

Total ancillary revenue As share of total airlines revenue

Source: IdeaWorksCompany and CarTrawler

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Getting it right: the mix, the match
and the math
Therefore it comes as no surprise that Nevertheless, only a few players
carriers are both well-aware and have so far applied merchandising
well-positioned to monetise on this techniques in a comprehensive way.
opportunity. After all: Many LCCs have created separate
offers and ancillary products, but have
• airlines can gain insight from yet to apply merchandising techniques
aggregated customer behavior data to them. Several FSCs are meeting the
observed during airline interactions challenge of LCCs in their markets
with their customers; through ancillary offerings similar
to the LCCs, but other FSCs display
• airlines are uniquely positioned to reluctance to offer options to
offer flight-related options, like customers separately from the airfare.
checked baggage and pre-assigned
seats; The reluctance on the part of some
FSCs is understandable. Selecting
• many customers book their flight and managing the right ancillary
early in their travel planning process, merchandising techniques is complex,
providing airlines with an opportunity touching on customer insights,
to participate in subsequent decisions, competitive intelligence, and the ability
like hotel bookings and rental cars. of the management organisation to
adopt a set of marketing activities
previously unnecessary.

Launching an ancillary program

represents a real opportunity and a real
challenge. An airline can't just copy
other airlines and hope to get it right.
Uninformed choices can cause an
airline to waste resources and valuable
time heading off in unprofitable
directions. But wise choices, with tactics
supporting a coherent overall strategy,
allow the airline to increase their
customers' satisfaction, increase their
revenue, and increase their competitive
position.

5
 The Accenture Amadeus Alliance To complete such wide-ranging
has recently completed an exhaustive research, the Alliance pulled together
study that gets right to the heart of its unique, industry shaping assets;
this matter, drilling down to the Amadeus' long and deep experience
specifics of describing and analysing and expertise in providing services and
merchandising practices and actions solutions to airlines and Accenture's
employed in real time. The goal has global leadership in digital, advanced
been to analytics and change management.
To shed light on the most important
• create a comprehensive overview that dimensions of merchandising ancillary
reflects the variations in application services, the study analyzed numerous
by airlines, real-life examples from 5 different
perspectives:
• give granular details of actual
implementation, • Product strategies,

• offer sets of informative, neutral, • Pricing mechanisms,

independent data and
• Placement (communications
• provide an actionable travel guide activities),
airlines can use to benefit best from
merchandising ancillary services. • Promotion (recommendation
techniques),

• Positioning (clustering and targeting).

This enabled the Alliance to describe

and explain developments under each
of these pillars and in this way guide
airlines along their journey towards
merchandising ancillary services in a
way tailored to give them the best
results and then gauge these against
disruptors in this ever more important
arena.

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7
 Product strategies
The study captures merchandising of The study depicts the current state of
the most important ancillary categories: product strategies in each of the five
major regions3 and provides relevant
• baggage, examples and a cross-regional
comparative maturity assessment
• seat assignment, as a summary.

• unbundling, The graph below shows some criteria

for assessing the maturity level, here
• packs of services, using the example of bag services
offered among the wide range of
• cabin upgrade, airlines studied.

• Wi-Fi with in-flight entertainment,

• boarding privileges,

• and others2.

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The following will give you just a few
examples of positioning and merchan-
dising for a small selection of the
above-mentioned services.

2
Including: meals, duty free, extra space, surcharges 3
North America, Europe (with Russia), Asia-Pacific
& fees, dynamic fare families, insurance, third party (APAC), Middle East and Africa, Latin America (with
services, fare lock, flexibility & SMS. the Caribbean).

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 Baggage and pre-assigned seats

The most commonly purchased purchase their bag option early.

ancillary options are for checked When presented at initial booking, the
baggage and pre-assigned seats. customer is able to contextualise the
The analysis has revealed regional price of the option in the price of the
differences in offering baggage services entire journey. Economists call this
across touchpoints. Whereas most “price framing.” It also keeps the
European FSCs offer checked baggage customer from having to “reach for his
sales at every stage of the customer wallet” too often, is more convenient
journey, from booking to check-in, this and affordable online – an incentive for
is not often the case elsewhere. Almost the customer to book directly on the
all LCCs offer checked baggage options site – and saves both the customer and
separately from their base fare. Many the airline’s agents time at the airport.4
LCCs offer the lowest price at initial
booking, when the customer books the This shows how honing a strategy to
airfare, and increase the price of the merchandise, monetise and maximise
bag option as the customer passes revenue on baggage services requires
certain figurative gates, like the detailed information so the airline can
check-in period, or arrival at the make the most of its offering while
airport, as their departure approaches. avoiding a costly trial-and-error
approach which may waste resources
There are several reasons for this and cause confusion among airline
tactic, mostly around the creation of agents and employees.
a price incentive for a customer to

Purchase of checked baggage policies across regions and customer journey stages

FSCsL
FSCs LCCs
CCs
in all
North Latin Middle East regions
Region Europe
America America & Africa
In-path
purchase

MBB
purchase

Check-in
purchase

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In offering pre-assigned seat options, For FSCs, ancillary options present an
LCCs generally emphasize the physical opportunity to enhance their competi-
variations between the seat options. tive position, in addition to meeting
Some LCCs offer up to 10 different customers' varied travel needs. The
seating zones with highlighted features, exhaustive information from the
including proximity to the front of the Alliance study demonstrates that
aircraft, extra legroom, or window or airlines have adopted multiple strate-
aisle seats. gies varied by their location, type, and
maturity in adopting ancillary offers.
Some FSCs are also starting to offer
pre-assigned seat options. These tend
to be offered by an airline as part of a 4
The study also takes regulatory pitfalls into account.
strategy to offer some fares structured Here, for example, the US DOT specifically forbids the
along the low-fare model employed by use of price ranges for checked baggage, and has the
many LCCs. Those fares are available authority to level hefty fines in such cases!
for the same flights as other fares that
include options like checked baggage
and pre-assigned seats as part of the
fare. The FSC is then able to offer a low
fare that is comparable to the low fare
offered by an LCC in the same market.

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 Bundling and packs of services

Across industries, product bundling is In the airline industry, explicit offers for
the act of selling several products for bundles of products and services varies
one price. A firm may sell only the greatly across geographies and
bundle, known as ‘pure bundling,’ or markets, and between FSCs and LCCs.
may sell the bundle and the included Some airlines have been offering
products individually, known as ‘mixed multiple fares, each with different
bundling.’ There are many reasons to options, for about a decade now. More
bundle products; for airlines, a mixed recently, carriers have begun bundling
bundling strategy is a powerful way services as separate from the fare. The
airlines can use to meet varied main challenge of bundles, also known
customer needs and maximise revenue. as “packs,” is to understand how
different customers value the options in
Basically, it’s a way to increase volume them, or the mix thereof, and then offer
without decreasing the list price. Some the best bundle personalised to those
customers value only one product, but values. The most sophisticated
value it highly, while others value that applications use grouping techniques to
same product less. If the airline lowers associate a customer with other
the list price, both groups of customers customers and anticipate how the
will buy the product, but the airline will customer will value different options.
be undercharging the first group. By With that value estimation, bundle
bundling the product with others, the pricing becomes an optimisation
airline can continue to sell the first activity that can be accomplished using
group of customers the product at the linear programming.
higher list price, and the second group,
a bundle of products with the product The presentation of bundles presents
included. That bundle would be priced another opportunity. Some airlines have
higher than the individual product, but adopted a strategy of using prescriptive
since the price would be allocated analytics to recommend a single
across multiple products, the second bundle, while other airlines offer one or
group of customers gets the product more bundles to all customers. If the
for less. Both groups are able to buy airline offers multiple bundles the
the product and the airline maximises messaging around each may be
revenue. designed to help customers self-select
based on their own perceived needs.

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Bundling offers an excellent opportunity first glance counterintuitive. For
to match consumer choice to consumer instance, because the bag is such a
expectations, and when done optimally dominant element of a typical pack or
it not only gives the customer what he fare, one might overlook that the
or she wants at the best price, it also willingness to pay for it is actually quite
captures the greatest revenue possible low among many high value, last-min-
for the airline. ute bookers. They prefer to travel with
hand luggage so do not require
For more than thirty years, economists extended bag options. Therefore,
have honed bundling strategies, and bundling of amenities has to remain
the Accenture Amadeus Alliance dynamic to be relevant to each
specialises in just this sort of know- passenger, so that the high value
ledge. The study brings together the passenger in this example will be
most important aspects that account satisfied by receiving the lowest fare
even for issues that might appear at bundle to meet his needs – without any
bag option!

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 Selected other product strategies
highlights
Upgrades: there are several tactics for Priority boarding: airlines that offer
offering customers the ability to priority boarding tend to do so either as
upgrade their cabin of service. A part of a fare associated with a higher
bidding process is most common in cabin, a reward for loyalty, or sold
Eurasia. North American FSCs tend to separately as an ancillary product. As
put more effort into using upgrades as each of these tactics serve somewhat
rewards, and focusing on selling the different airline commercial strategies,
fares associated with the premium in airlines seeking to advance each one,
cabins. . balancing the offer of priority boarding
and ensuring the delivery of an
appropriate boarding process can
create a new challenge.

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Pricing mechanisms

New technology unlocks optimization and revenue

generation

Having developed successful product As ancillary revenue represents a

strategies, airlines need to apply the greater share of their overall revenue,
right pricing mechanisms to optimise it’s not surprising that LCCs have
ancillary revenue, as they do with generally moved ahead of FSCs in the
airfares. Advances in data science, application of advanced pricing
applied microeconomics, and retailing techniques.
offer new opportunities to create the
right prices for the right customers. Specifically, the research shows that
some LCCs offer passengers interested
Our research indicates that airlines in the most expensive fares the highest
demonstrate different levels of baggage prices. Analysis of another
maturity in the area of ancillary pricing. LCC revealed a logarithmic correlation
Many airlines offer static price points, between baggage pricing and airfare. A
effectively failing to take advantage of third LCC adjusts their baggage offer
the advances in pricing now available. based on the number of times the
Some airlines using basic calculations customer has shopped the fare, using
to determine ancillary prices, including website analytics to vary the price.
stage-length based pricing (with no
longer flights associated to higher
prices) and pegging ancillary pricing
to fares. A very few airlines utilise more
sophisticated techniques, including
dynamic customer grouping, Integer
Linear Programming (ILP) optimisation,
and frequent changes based on the
observed price elasticity of demand for
certain products. Some airlines combine
data science techniques with heuristics
– beliefs that airline management hold
about customers, markets, or other
variables - to produce their ancillary
pricing.

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 Source: Accenture Amadeus Alliance research

16
17
 Source: Accenture Amadeus Alliance research

As with baggage options, the research to consider all seat assignment prices
indicates that airline maturity in price at the same time to, as it’s put colloqui-
setting for pre-assigned seats varies ally, “move demand up and down the
from very basic static pricing, in most plane.” Insight from the research helps
cases, to more sophisticated. The offer clarify the overall picture of how
for pre-assigned seats is structured airlines across the industry are
differently than checked baggage, and addressing ancillary pricing, and of the
so the relevant techniques are different opportunity that exists for so many
too. Pre-assigned seats are offered on airlines to improve customer satisfac-
a seat map of the airplane, with the tion and revenue generation.
location and the price demonstrating
the characteristics of a menu. Menu
pricing represents its own challenges
and opportunities, as customers’
perceptions are shaped by the prices of
all of the offerings. Taking that
consideration into account, some
airlines are using integrated ILP models

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Promotion
The power of persuasion: behavioral economics (the study of how
the way an airline consumers actually make choices).
Those designs and experiences help
approaches the ‘nudge’ customers into making rational
customer can choices for their air travel.
significantly affect
Many airlines offer ancillaries in a
uptake passive, merely functional, design. In
the first design approach in the chart
The eCommerce design and user below, an airline offers services during
experience offered by an airline the booking process, but does nothing
represents a key element in how it to promote them. Ancillary options are
connects its ancillary options to its present but the offer is not compelling
customers. This section and the or engaging. A step up from this is
following one deal with how individual when an airline uses visual highlighting
offers are promoted and where the or messaging to influence a passenger’s
offers are placed for the customer. decision. Airlines in a more advanced
position engage the customer in
Airline websites serve many different making a decision regarding the
purposes simultaneously, and the ancillary option, to ensure the customer
research indicates a wide variety of has understood and considered their
different approaches to promoting options. A further, somewhat controver-
passenger purchases of ancillary sial step is known as “opt-out,” when an
services during the booking process. airline pre-selects additional services
Comparatively, those that could be using the argument that it saves time,
considered the most advanced utilised and here the passenger has to take
established best practices from action to remove the added services
eCommerce and tactics drawn from from the booking. This practice is not
considered legal in all territories.

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 lar!
Popu
Recommendation techniques

BUY BUY BUY BUY BUY BUY BUY BUY

I do not want to carry any bags

Least persuasive Moderate Most persuasive

Only CTA buttons Additional action required when choosing Airline preselects services
(e.g. “buy“, “purchase“) the cheapest option e.g. “I do not want...“ for a costomer

FSC Much more LCCs use

visual highlighting
LCC techniques
Registration during booking

www Register www Log in www Log in www

Register

Basic

No registration or not Log in only available Registration and log in Registration

explosed available required

FSC Many FSCs tend not

to fully leverage the
LCC registration

As with all eCommerce, there are many responds to different targeted

ways to present messaging. Some LCCs messages.
encourage purchase of ancillary options
by pointing out that those same options In order to group customers as they
will cost more later, or may not be shop on the website, the airline can
available if not purchased now. Other leverage the data available at the time
messages may stress the comfort of a of the ancillary offering. Generally,
certain option, like a premium seat, or airlines collect dates of travel, origin
the wisdom of other choices, like and destination, and the number of
purchasing travel insurance. passengers before any ancillary offer.
Some airlines also collect the traveller’s
The traditional method of evaluating details before surfacing any ancillary
these tactics is A/B testing, and some offers, which allows for even more
airlines do run it extensively. Most accurate merchandising. A few LCCs
eCommerce A/B testing is designed to also require registration before booking
consider a change to the website that a ticket, allowing for the airline to
all customers would see. However, better communicate with those
airlines have a unique opportunity to customers, and adding them to the
group customers by their likely needs, general marketing database.
and to A/B test how each group

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 Placement
Making your presence known
In addition to promotion of a specific The first opportunity for the airline to
offer, the channel and time are also offer ancillary services usually occurs
important considerations. Airline during the initial booking process on
websites, including web check-in and the airline’s website. eCommerce
mobile interactions, are the focus of best-practices generally focus on the
the ancillary merchandising strategy, clarity of the offer and the minimisation
along with triggered communications of any negative user experience. Many
- generally emails - regarding the retailers who offer commoditised small
customer’s trip. consumer items focus on the time, in
Number of ancillary services offered during booking

Source: Accenture Amadeus Alliance research

21
 seconds and in clicks, necessary for the The Accenture Amadeus Alliance can
customer to complete a purchase. help airlines streamline the entire
Using this same concept, the research process. It can also propose the proper
showed how various airlines performed trials and testing to detect and correct
based on the number of ancillary offers errors before they can occur and to
and the time required to complete the combine a great variety of services on
initial booking. Results indicate that offer but still assure a smooth, custom-
some airlines make quite a few offers er-friendly booking process.
to their customers in a quick and
efficient manner. Others take more
time, either due to the number of
pages in the sales funnel, or “booking
flow,” or due to slow page load times.
Airlines that consider a rapid booking
process to be essential to their website
can still offer multiple ancillary
products.

Positioning
Getting personal: targeting the right customers with
the right offers

Airlines can refine their offers based on temporal considerations: what they
the anticipated needs of customers are doing at the moment. In travel,
across all promotions and placements. the concept is to associate customers
The concept of “customer segmenta- travelling for similar reasons into
tion” has been around for decades. It is groups and use that grouping to
the process of grouping potential drive merchandising.
customers by persistent characteristics,
including age, number of children, and Many airlines still use campaigns and
household income. Many industries use messaging that is the same for all
this technique widely. Another grouping customers and potential customers.
technique, known as “cohort assign- Several airlines use customer segmen-
ment,” groups customers by more tation to create and drive their market-

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ing campaigns, featuring destinations includes recognising the customer by
and messaging likely to appeal to (preferred) name or their previous
people within those groups. Some interactions with the firm. Across
airlines also try to communicate industries, personalised emails enjoy
differently to business travellers and higher open rates and higher
those travelling for leisure, which is an engagement. Some airlines follow the
example cohort assignment. Some eCommerce standard of using previous
airlines have recognised that the binary browsing history to personalise their
distinction of business versus leisure is website when a customer returns.
not sufficient to describe what a Examples include banners with offers
customer will need on their trip. Is the that specifically target searches the
leisure trip a short one to see the customer has made previously, often
customer’s daughter graduate from with appropriately pre-filled search
university, or the customer’s big annual boxes. If a customer shops a particular
vacation for two weeks at a beach? destination but does not purchase,
some airlines will remarket to the
Recognition of the need to develop the customer, sending an email about the
capability to predict the relevance of specific destination or using retargeting
offers based on the customers’ needs advertising to encourage the customer
has increased in the airline industry, to return.
though specific applications are few
and far between. One airline has a
design to surface different types of
rental cars based on a customer's
cohort, and tailor the messaging to
emphasise the quality of the vehicle or
the savings.

One airline has created a marketing

automation system matrix with rules
and logic to target customers with
relevant up-sell products. A total of
76,000 unique emails were dynamical-
ly generated resulting in a 197%
increase in up-selling revenue over just
one year. In terms of the nature of the
offer, personalizing the messaging

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 Guiding airlines on their journey
to superior merchandising
Our research demonstrates the wide The relevant considerations to find the
array of choices made by airlines right ancillary merchandising strategy
around their ancillary offers. The offers are complex. Some elements require
give customers the ability to choose advanced data science and applied
options, products, and services that will microeconomics. But the rewards are
enhance their travel experience, and worth the effort. As airlines advance
only pay for those they value. the maturity of their offers, they will
progressively improve their customers’
experience and their revenue. Airlines
can maintain their brand and improve
their competitive position.

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 Guiding airlines as they make such airlines tangible, actionable and
far-reaching decisions is precisely why sustainable guidance while taking
Amadeus and Accenture formed their proper account of all aspects of their
Alliance. The Alliance pulls together business: regional specificities, business
Amadeus' unparalleled, deep industry models, customer profiles, brand
expertise and handling massive data perceptions, etc. This Alliance study
and Accenture's global leadership in aims specifically at helping airlines turn
digital capabilities, advanced analytics their visions for merchandising ancillary
and change management to deliver services into reality.
industry-shaping assets that give
This journey, like all well-planned
travel, starts with good research. Your
customers seek, appreciate and even
demand comprehensive, unbiased
Optimal ancillary solution
information when they make their
travel plans. They not only want the
Optimal solution
best deals, they also want to find the
Missed best sights, and get to them in quickest,
opportunity C/X Brand
(revenue) challenges easiest and cheapest way possible,
while avoiding missteps, pitfalls and
especially costly and time-consuming
tourist traps. After all, their time, effort
and funds are limited. Airlines have the
same reasons for searching out and
demanding nothing less: exhaustive,
neutral and clearly actionable research
so they do not waste valuable time and
resources, a tour guide to lead them
along their journey towards transform-
ing their ancillary service merchandis-
ing and reaching their destination in the
fastest, most expedient and affordable
Filling manner possible, making stops only
opportunity
gap where necessary and maneuvering
around all the traps and pitfalls.
SETTING OPTIMAL ANCILLARY SOLUTION TAKING INTO
ACCOUNT GEOGRAPHIES, BUSINESS MODELS, CUSTOMER
PROFILES AND VARIOUS MERCHANDISING TECHNIQUES

25
 Accenture Amadeus
Alliance Traveller trends
research is an excellent
travel guide when it
comes to this journey
– not only because of all the data.
Dedicated Alliance specialists are
available to consult and bring it all
alive. They accompany airline clients
every step of the way through what it
all means for them individually until
they can create the framework that fits
them best, and then go on to help them
scale and adapt with agility over time
as their needs change and grow.

Before you take the next step on this

journey, contact your Accenture or
Amadeus representative or visit
amadeus.com or accenture.com

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27
 About Amadeus
Amadeus is a leading provider of advanced
technology solutions for the global travel
industry. Customer groups include travel
providers (e.g. airlines, hotels, rail and ferry
operators, etc.), travel sellers (travel agencies
and websites), and travel buyers (corporations
and travel management companies).

The Amadeus group employs around 15,200

people worldwide and does business in more
than 190 countries. The company has central
sites in Spain (corporate headquarters), France About Accenture
(development) and Germany (operations), and Accenture is a leading global professional
offices in 70 countries around the world. services company, providing a broad
range of services and solutions in strategy,
This year marks 30 years since Amadeus was consulting, digital, technology and opera-
founded. Throughout 2017, the company will tions. Combining unmatched experience and
be celebrating 30 years of collaboration with specialized skills across more than
customers, 30 years of technological 40 industries and all business functions –
innovation and 30 years of helping power underpinned by the world’s largest delivery
better journeys for travellers all over the world. network – Accenture works at the inter­
section of business and technology to help
The group operates a transaction-based clients improve their performance and
business model. create sustainable value for their stakehold-
ers. With approximately 373,000 people
Amadeus is listed on the Spanish Stock serving clients in more than 120 countries,
Exchange under the symbol "AMS.MC" and is a Accenture drives innovation to improve the
component of the IBEX 35 index. way the world works and lives.

To find out more about Amadeus please visit

www.amadeus.com, and www.amadeus.com/
blog for more on the travel industry.

© 2017 Amadeus IT Group

and its affiliates and subsidiaries www.amadeus.accenture.com

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