A look at how ancillaries can take ULCCs to new frontiers through personalization
The dawn of Ultra Low Cost Carriers (ULCC), also known as bare fare carriers, has changed the way most of us travel today. ULCCs are airlines that offer low-fare, high-value packages, usually from secondary airports. They are the dollar store of the airline industry.
ULCCs are different when compared to Low Cost Carriers (LCC) or Network Legacy Carriers (NLC) through its completely unbundled, extremely low base fares and larger amount of ancillary revenues.
Ref: Oliver Wyman - AIRLINE ECONOMIC ANALYSIS 2018-2019 EDITION
The underlying business model focuses on cost efficiencies derived from:
- Unbundling service offerings
- Flying point-to-point
- Offering only one class
- High-density seating – seats that can be pre-reclined with usable leg-room
- No free meals and drinks
- No seat assignments - advance seat selection is charged
- Single type aircraft use - for example, Spirit Airlines, one of the youngest and most fuel efficient in the United States, has all-Airbus fleet, thus avoiding the incremental costs of training crews across multiple types of aircraft
- Mainly flights to secondary or uncongested airports that have lesser parking fees
- Minimal use of travel agents and intermediaries for distribution - majority of booking comes from direct booking channels
- Highly productive workforce
- Efficient flight scheduling, including minimal ground times between flights
Reference: MIT, U.S. Airline Business Models 2006-2015 Trends and Key Impacts
ULCC’s low-cost structure is one of the primary competitive advantages. However, overtime ULCCs need to differentiate and evolve themselves to maintain competitiveness, as it will be difficult to sustain operations at low costs.
- Maintenance costs are bound to go up as the fleet gets older. This will in turn also affect aircraft utilization
- ULCCs will not be able to maintain the same labor costs, and by increasing their reach and revenue , labor costs are bound to increase
- Fuel expenses are dependent on the oil market and cannot be a dependency on ensuring competitive advantage
Ref: Oliver Wyman - AIRLINE ECONOMIC ANALYSIS 2018-2019 EDITION
Ancillary Revenue: The Dark Horse
ULCC’s generally target cost-conscious customers who usually pay for their own travel - typically a leisure traveler who takes a decision to travel based on the ultra-low fares.
The unbundling of the traditional fare charged for a flight ticket has given rise to ULCCs’ most trusted revenue source - Ancillary Revenue. The fare paid on booking is the bare minimum confirmation of a seat on the plane. Every other amenity in the journey, apart from the process of seat booking, is an additional charge. These fees range from carry-on baggage, checked baggage, seat selection, advanced boarding, meals and onboard entertainment. In comparison, Low Cost Carriers (LCCs) and other carriers do provide some amenities for as part of the fare.
As of 2018, ancillary revenue accounted for nearly 40-45% of a ULCC’s operating revenue in US when compared to an average of 15% for other airlines like Southwest & Delta.
In this extremely competitive industry, competitors are not far behind. Major US airlines like Delta, American and United are already out with ‘Basic Economy Fare’ to attract value-conscious flyers.
With competition tightening in the ancillary sector of the industry, ULCCs are starting to explore new frontiers of ancillary offerings. Allegiant Air, for example, have looked beyond selling pre-flight and on-flight ancillaries. Travelers using Allegiant Air are offered a selection of hotels and cars hire to improve their travel experience. They have also gone the extra mile to build their own resort in Florida as an upsell to flight tickets.
Personalization: Weaponizing Ancillaries
Today, most customers find themselves in the booking cycle hounded with ancillaries to purchase from, some of which may not be even pertinent to their travel or relevant to their current context. This distracts and demotivates customers from making a purchase that is beneficial to them and the airline. For e.g., selling a beach side resort to a business traveler is of lesser or no value than selling the same resort to a leisure traveler.
Airline companies have an abundance of information related to a traveler’s browsing and booking patterns. This Big Data can be used to personalize the experience of a traveler, thereby enabling the airline to know what specific ancillary product to sell and when. The key is to recommend the right product to the right customer at the right price. Airline companies can attain this through personalization.
Most airlines today do not dynamically price their ancillaries, but through data-driven analytics and personalization, there exists scope to personalize some, if not all, the ancillary products. For example, advance seat selection for a family travelling together on a holiday can be priced differently from a business consultant travelling for a weekly business trip.
Customizing and personalizing the booking experience can go a long way in changing this mindset and driving customers to make purchases. Air Asia achieved an increase in revenue of roughly EUR 105 million using data to ensure that targeted offers were made to customers. Another Australian LCC increased its annual revenue to the tune of $9.9 Million AUD over the course of 8 months with the use of personalization.
Airlines must explore products like Mindtree’s Connected Traveler, which is a Cloud-based solution built using Big Data, Machine Learning and AI components with travel-specific data models. It is a flexible suite of travel industry offerings that help elevate the omnichannel customer experience through micro targeting and context weighted personalization.
ULCC’s operates in an extremely regulated and competitive industry. Industry having high fixed costs like aircraft, fuel, aviation insurances, airport cost etc. We believe going forward, ULCC’s need to reduce the reliance on low cost structure. Whilst there will continue to be multiple avenues to stay ahead of the competition like exploring profitable international sector or serving underserve domestic market or forming network alliances, but we believe ULCC’s should continue to focus on increasing their non-ticket revenue by increasing their ancillary offerings and ancillary revenue by effective targeting. The key to understand the user, user context and offer the best possible experience throughout the user journey. Personalization through analytics, AI and machine learning will go a long way to meet this objective. Stay tuned to our next blog to find out more on personalization in the ancillary segment.