IdeaWorksCompany developed a definition of ancillary revenue which has been broadly accepted by the airline industry:
Revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience.
IdeaWorksCompany further defines ancillary revenue using these categories: 1) a la carte features, 2) commission-based products, 3) frequent flier activities, 4) advertising sold by the airline, and 5) the a la carte components associated with a fare or product bundle.
To add a bit more clarity to this declaration, IdeaWorksCompany offers these definitions:
- A la Carte Features: These represent the items on the ancillary revenue menu and consist of the amenities consumers can add to their air travel experience. The list continues to grow and the following are typical activities: 1) onboard sales of food and beverages, 2) checking of baggage and excess baggage, 3) assigned seats or better seats within the same cabin, 4) call center support for reservations, 5) fees charged for purchases made with credit cards, 6) priority check-in and screening, 7) early boarding benefits, 8) onboard entertainment systems, and 9) wireless internet access.
- Commission-Based Products: Ancillary revenue activities also include the commissions earned by airlines on the sale of hotel accommodations, car rentals and travel insurance. The commission-based category primarily involves the airline’s website, but it can include the sale of duty-free and consumer products onboard aircraft.
- Frequent Flier Programs: The frequent flier category largely consists of the sale of miles or points to program partners such as hotel chains and car rental companies, co-branded credit cards, online malls, retailers, and communication services. Sales of miles or points made directly to program members also qualify.
- Advertising Sold by the Airline. This is a new category for 2010 and includes any advertising initiative linked to passenger travel. The following are typical activities: 1) revenue generated from the in-flight magazine, 2) advertising messages sold in or on aircraft, loading bridges, gate areas, and airport lounges, and 3) fee-based placement of consumer products and samples.
- Fare or Product Bundle. Airlines may allocate a portion of the price associated with an economy class bundle or product bundle as ancillary revenue. This is determined by assigning a revenue value to the services included in the bundle, such as checked baggage, early boarding, and extra leg room seating.
The list is not intended to be exhaustive or complete; human imagination, including in business, is infinite. However, caution is advised when considering revenue sources not linked to the passenger travel experience. This includes air cargo, mail revenue, ground handling, and inflight kitchen operations. Some carriers consider this ancillary revenue, but they are best defined by the category of other revenue.
Usually offered as two or three fare choices based upon a “good, better, and best” quality hierarchy. The base fare provides minimal amenities and consumers may select higher-priced fares that offer more perks. Each fare type is always available and has a fixed (predictable) price premium. For example, the lowest priced fare doesn’t sell out as a flight fills up.
Distribution systems have a limit of 26 inventory classes for managing fares in any specific city pair. Yes, that’s the number of letters in the English alphabet. Continuous pricing uses calculations performed when a pricing query is made and is not limited to 26 possible outcomes. Fares are not set in advance, but rather an algorithm determines the range of possible outcomes.
Prices are determined at the time a consumer requests the product. The airline performs an evaluation of demand and supply using a combination of factors unique to each booking request, which may include the consumer’s purchase history with the airline.
Similar to branded fares, this method offers two or more fare choices. Amenities are linked to existing fare categories, with higher fares providing more perks. However, the lower dynamically priced fares sell out as demand increases, which limits the choices presented to consumers. The price difference between fares can be very large, especially as a flight fills up.
The New Distribution Capability (NDC), also known as IATA Resolution 787, describes a framework to enable merchandising a la carte services through a global distribution system (GDS) or online travel agency. This is a major change because it takes the pricing function out of the GDS and makes it the responsibility of the airline through its own passenger service system (PSS), pricing and merchandising engines. The GDS becomes a conduit for the pricing actions of the airline and actually identifies the consumer to the airline. This provides airlines the capability to offer dynamic pricing, which can include a bundle of amenities, tailored for individual consumers.