Tail wags the dog: When ancillary revenues trump primary

Ancillary revenues, particularly for the airline industry, has been in the news for the past few years. Last year American Airlines upped the ante in that area when they launched AA Direct Connect in an ostensible bid to lower booking fees paid to the GDS (Global Distribution System) majors. Since then American and other airlines have embarked on what has also been (euphemistically) called Optional Services. There is a general industry wide consensus that optional services "is the best means to derive additional passenger revenue from customers looking to "enhance their travel experience".  However, as any one who has boarded a flight, domestic or international, can easily attest there is very little that can be legitimately termed as an enhancement. Features that were heretofore free are now being charged for. These include seats with "extra" legroom (e.g. emergency row seats), "priority" boarding (some like RyanAir charge as much as $15 to get ahead and use the overhead cabin).

Ancillary revenue is big business for the airlines with some like Allegiant Air reporting as much as 30% of their total revenue and 50% of profits as being derived from ancillary sources. But the corollary to ancillary services is clutter to the booking process as a visit to Allegiant's home page reveals.  That can confuse customers and likely will disrupt the booking flow with a plethora of offerings from resort accommodations to golf packages which may suit vacation travelers but likely turn off others. In their zeal to grab dollars via a la carte offerings airlines seem to have ignored the direct correlation between time and revenue – a mosaic of offerings most likely will spur customers to move on rather than book.

Cruise lines are the fastest growing segment of the travel industry but, till recently, were also the most likely to offer packages as opposed to a la carte pricing. They too seem to be on the verge of jumping on board the ancillary revenue bandwagon as Christopher Elliot notes in a recent issue National Geographic Traveller headlined "All Exclusive Cruises" that a customer on Royal Caribbean cruise lamented that "Everywhere we went, they wanted to sell us something".  The article rightly points out that the "cruise ships no longer make money by carrying passengers. They make money by marketing a variety of services to them.”

The hospitality industry is behind though fast waking up to the "potential" of ancillary revenues. More than a few are pushing ahead with changes to their "booking engines" to allow the sale of more than hotel rooms with add-ons that extend beyond what are traditionally on offer in a hotel. These include highly lucrative items such as gift cards which apart from allowing fresh branding opportunities are a tremendous source of revenue from two ends: the fees from the sale of the cards as well as monies to be garnered from unspent dollars, a frequent occurrence with gift cards. 

Ultimately, the decision on whether or not to add on an ancillary item ought to rest on a full cost-benefit analysis that evaluates all aspects including on whether or not it redounds to the brand's value proposition. While there are clear tangible financial rewards to be had in the long run the pitfalls could limit if not negate the gains.

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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