Insignificant growth in passenger traffic has marred the prospects of airlines companies making good business.

According to the web site of Directorate General of Civil Aviation (DGCA), in the last four months ending April there has been decline of 0.35% to 2 crore in passenger traffic in comparison with the same period last year. This has resulted stiff competition with most players resorting to introducing discounts in tickets for immediate and future travels. As a result of this, there has been pressure on yields of airlines companies and subdued growth in revenues. However, to compensate the fall in passenger traffic, airlines companies have not restricted to price war this time. These companies are focusing on ancillary revenues. A case in the point is increasing charges for check-in of baggage depending on its weight. Such small sources of revenues are known as ancillary revenues. It is estimated that ancillary revenues have added meaningful growth to the topline of most airlines across globe. Hence, one cannot ignore these revenues. This time we present to you the emergence of ancillary revenues and how going ahead, it is going to ensure consistent flow of revenues even in times of weak passenger traffic. The basics Ancillary revenues are revenues, which airlines companies make through sources other than selling of tickets. This can be through baggage fees, food and other requirements on flights. Basically, it can be classified revenues which airlines companies beyond the sales of ticket in the overall travel experience of a passenger. Most low cost carriers in Europe and the United States skillfully employed this concept to create a crucial component of their toplines. According to various sources, ancillary revenues have been classified into categories such as a la Carte features, commissionbased products, and frequent flier activities. One of the earliest proponents of ancillary revenues was Europes low cost carrier airlines company Ryanair. It has been observed that Ryanair charged pay-per-view entertainment, onboard shopping,

internet gaming, car hire and hotel bookings. These revenues formed a meaningful portion of the companys total revenues. One of the chief reasons for the emergence of ancillary revenues in airlines companies total revenues is due to the realisation of limitation of price war strategy. For instance, if a country has four airlines, it is quite natural that the fourth player would find it difficult to emulate and sustain price war strategy followed by its three peers. Hence, the fourth player has to come out with a strategy to outdo its peers and in the process also make money. It is reported Michael O Leary Chief Executive Ryanair once said in an interview that 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. The increasing revenues from Ryanair benefited the company and it is also convinced other airlines to emulate Ryanair. This put the seeds of the increasing importance of ancillary revenues. Slowly it became an industry trend. Another reason for this huge acceptance of ancillary revenues is the cyclical nature of the airlines industry. Strong dependence on crude oil prices, erratic passenger traffic and overall business and political environment make business for airlines companies cyclical. Hence, having a meaningful portion of total revenues from sources other than the selling of tickets help airlines companies reduce their dependence on these factors. A study According to a study published by Amadeus and IdeaWorks, it was estimated that airlines companies ancillary revenues would increase to $22.6 billion in 2010 from $ 13.5 billion in 2009, growth of 67%. In 2009, it has been estimated that in the United States, the contribution of ancillary revenues to the total revenues of most airlines companies was in the range of 22-30%. The study categorised airlines into four categories based on their ability to generate ancillary revenues. These are:

 Traditional Airlines: This category represents a catch-all for the largest number of carriers. Ancillary revenue activity may consist of fees associated with excess or heavy bags and limited partner activity for a frequent flier program. The average percentage of revenue remained at 2.9%. Examples include Air Canada, Air New Zealand, Copa, Etihad, Finnair, and South African Airways. Major US Airlines: US-based majors generate strong ancillary revenue through a combination of frequent flier revenue and baggage fees. The percentage of revenue for this group was 10.1%, which is a drop from the 2011 rate of 11.9%. Examples include Alaska, American, and United. Ancillary Revenue Champs: These carriers generate the highest activity as a percentage of operating revenue. The percentage of revenue achieved by this group was 19.7%, which is down slightly from 19.8% for 2011. Examples include AirAsia, Allegiant Air, easyJet, and Spirit Airlines. Low Cost Carriers: LCCs throughout the world typically rely upon a mix of la carte fees to generate good levels of ancillary revenue. The percentage of revenue for this group was 7.2% and is above last years 6.5%. Examples include Jazeera Airways, JetBlue, Norwegian, Pegasus, Southwest, and GOL. It was found that ancillary revenue would reach $36.1 billion worldwide in 2012. The study took into account a large list of 176 airlines. The study found that the US airlines category produces a significant share of global ancillary revenue. It estimated that around $12.4 billion result (34.3% of the global total) is generated by just six airlines: Alaska Airlines, American, Delta, Hawaiian, United, and the US Airways. The joint study by Amadeus and IdeaWorksCompany observed that the majority of ancillary revenue for US major airlines is generated by the sale of frequent flier miles notably those linked to airline credit cards. This financial activity exceeds $6 billion annually in the US alone. Baggage fees for US carriers represent approximately

20% of their ancillary receipts. The remaining revenue is produced by an array of la carte and commission-based products. Other sources include onboard sales of food, beverages, Wifi, and commissions from hotel bookings. In addition, airlines offer an everincreasing selection of services that add to traveler convenience such as priority security screening, early boarding, exit row seat assignments, and single visit access to airport lounges. Interestingly, the study makes an interesting point as regards the future trend of ancillary revenues. It says, The current situation has made ancillary revenue more attractive, and needed, for airlines all over the world. If airlines were to forego the revenue contribution from the provision of ancillary services it would mean a loss for a great number. Ancillary revenue provides good amounts of cash to buy new aircraft interiors, invest in new equipment, and provide funds for expansion. Going ahead... Going ahead, the trend of weak passenger traffic is expected to continue given the economic slowdown and expectation of high crude oil prices. Considering these factors, ancillary revenues should compensate for the loss of revenues due to weak passenger traffic and high expenditure. It is estimated that Indias airlines companies earn 3-5% of total revenue from ancillary services. Experts believe that airlines companies can enhance this contribution in the range of 6-8% in the coming quarters. In Indian context, though the size of ancillary revenues would not be as big as their western counterparts but it forms a meaningful portion of total revenues. Jet Airways plans to double ancillary income to 10% in the next two years, Air India plans to sell meals on board like budget carriers, providing choice to customers to save some amount on ticket charges. In a good business season, this rate can fetch the company anywhere between Rs125-200 crore. Industry sources say that budget carrier IndiGo has over 6% income from ancillary services and the airline is consistently taking new

steps to increase the share of ancillary revenues in the coming quarters.