Global Economics

Airlines Push Limits of Selling Onboard


From Broadway tickets to upgraded food, carriers such as American, BA, and JAL are copying Ryanair's success at merchandising to passengers in the air

Booking ski-hire, Broadway tickets or train tickets are just some of the new services being offered to customers up in the sky as airlines seek new ways to beat the downturn and make money.

Winter-sport operator TUI (TUIGn.DE) Ski is now offering passengers ski hire, lift passes and reservations for après-ski events as they fly into resorts – receiving a commission from every sale. American Airlines (AMR), meanwhile, is testing on-board sales so that passengers can buy tickets for Broadway shows as they cross the Atlantic, while those coming back to Britain can get their Heathrow-to-Paddington express tickets ready even before landing.

Finding new ways of selling more to passengers in the skies has suddenly stepped up as the world' s airlines struggle to make money from flying. American Airlines is working with GuestLogix (GXI.V) on its new ticketing service, and both Ryanair (RYAAY) and British Airways (BAY.L) are signed up to use the same system. Japan Airlines and All Nippon Airways, like EasyJet (EZY.L), are also looking at imaginative new ways to improve services, mainly by offering better food in the sky. JAL will soon offer on-board vending machines selling alcoholic drinks to customers in the airline's revamped cabins, while, on ANA, economy passengers will be able to have business-class meals, as well as to order drinks through their seat-back touch screens.

"The global on-board sales market could be worth up to $45bn a year," said Brett Proud, the vice president for sales at GuestLogix. "At American Airlines they are hoping to realise the potential of on-board advertising and product placement – nowhere else are customers 'sealed in' for an average of three hours with nothing to do but shop."

These latest moves to improve retail profitability in the air come as the industry faces one of its worst years for decades. But will they make any real difference to revenues?

Giovanni Bisignani, the director general of the International Air Transport Association, is downbeat. "The dimension of this crisis is larger and will be longer-lasting than the post-9/11 period. It will be at least two or three years before revenues recover."

EasyJet disappointed investors at its half-year results on Wednesday, and Air France posted particularly bad results last week with a €147m (£131m) loss for the second quarter, compared with a €27m profit for the same period a year earlier. In response to the downturn, Air France management announced that it intends to cut 1,700 jobs in 2010.

Japanese carrier JAL is desperately seeking a rescue package to offset its $15bn debt as Tokyo indicated that it would not step in to save the ailing airline from bankruptcy. Tyler Brûlé, the editor-in-chief of Monocle magazine, has warned that rival ANA will "cause JAL to despair" as it revamps its services while JAL is forced to seek a bailout.

Industry losses for 2009 are expected to be in excess of $11bn, but some airlines are more willing than others to embrace a new approach to on-board retail. Ryanair, the low-fares Irish carrier, has been at the forefront of in-flight retail and was the first European airline to sell tickets for onward travel on board its flights. Now, 20 per cent of the airline's revenues come from the sale of optional extras.

"Ryanair has pushed the envelope as far as it can and has pioneered the growth in ancillary revenue," said Wyn Ellis, analyst at Numis Securities. "I'm sure it'll try and get more out of car hire and hotels."

EasyJet has pursued extra revenues, though less aggressively than Ryanair. But analysts expect that easyJet will further increase its income from extras such as Speedy Boarding and on-board sales, having recently improved its in-flight product line.

GuestLogix conducted a survey of 3,500 airline passengers which showed that many were keen to buy ground transfers on board to avoid queues on arrival. In response, the Toronto-based company has signed deals with every big airport in the world to offer tickets for onward transfers through the company's OnTouch system.

Despite the vast potential for airlines such as BA and Virgin Atlantic to increase their revenue from onboard retail, analysts warn that the premium carriers should be wary of following the likes of Ryanair too closely. One analyst cautioned BA in particular; the airline is now charging passengers if they want to choose their seats before flying, and also plans to charge for additional hold bags. He warned that aggressive on-board sales might push premium customers towards the budget airlines. Wyn Ellis of Numis says that while increasing its on-board product line might help with profits, BA risks playing into the hands of Ryanair as the two airlines become less distinct but BA continues to charge more.

BA, like Virgin Atlantic, has been cautious in changing its on-board retail model, sticking to a traditional duty-free service. A spokesman for the airline said: "At BA we don't see on-board retail as bolstering our bottom line, but rather benefiting our customers. It is not something that we are dependent on, rather it's an additional service that we offer." The airline acknowledges that it earns a "modest profit" from its duty-free shop and recently made its Highlife shop available online to sell to passengers after their flights have touched down. BA recently introduced in-flight mobile-phone services on all its business routes from London City airport to New York, from which it earns a commission. However, there are no plans for a roll-out on all services because of the cost involved.

EasyJet recently overhauled its onboard retail system to help it to track its on-board sales and target products more accurately. A spokesman for the airline said: "In the past we tried to sell German beer to French passengers and vice versa, which didn't really work, so now we're looking to stock our aircraft locally with more consideration of what each market will want."

As easyJet has grown, it has taken account of its passengers' requirements by, for example, stocking kosher food on its Tel Aviv route as well as planning to introduce halal food on its Turkish and North African routes.

In its full-year results last week, when the Luton-based carrier announced a 50 per cent slump in profits, management indicated that it wanted food and drink to become a "more important" part of the business. In addition to catering, the airline has started selling discounted Oyster cards – Transport for London's pre-paid passes – and rail tickets on its London routes. EasyJet receives a commission on sales, and, according to the airline, the new products have been such a success that the airline is now looking to introduce similar travel products on flights to other destinations.

Some airlines remain above such tactics. Virgin Atlantic, like BA, has been reluctant to put the hard sell on its passengers, choosing instead to focus efforts on keeping costs down elsewhere in the business to allow staff to concentrate on on-board service. A spokesman for the airline said: "The staff focuses on providing service with a smile. Our competitors have an expensive cost structure with many aircraft, whereas we only have 37 aircraft. There is a small take from our on-board duty-free but it's profitable." The airline introduced a line of in-flight laptop chargers in October for use in Upper Class cabins, which have, it says, been a success.

However, Gert Zonneveld, a Panmure Gordon analyst, says: "They are missing an opportunity and they could cash in on the untapped market, which would make sense as long as they didn't bombard their passengers. It depends on whether the unions and whether staff contracts allow for sales in the same way as Ryanair's contracts do. Also, it's complicated by the fact that Virgin offers food for free, and so would have to choose products for which demand would be highest."

But it is Ryanair that has led European airlines in adopting on-board retail as a big part of its business strategy. Today the airline receives 20 per cent of revenues from optional extras, including on-board retail, with passengers spending £9 ($15) on average. The Irish carrier was the first in Europe to sell tickets for onward travel and has introduced a number of exclusive products, including scratch cards and smoke-free cigarettes. A spokesman for the airline says: "All of the products available on board come through third-party suppliers and we're open to all propositions. We respond to customer demand. A Ryanair poll showed that many customers wanted to be allowed to smoke on board. So we found a supplier and we have been selling smokeless electronic cigarettes for four months now and they have been very successful."

Ryanair offers its customers car hire and hotel bookings on its website, though there are not yet any plans to offer these services on board its aircraft. Analysts expect that the airline will try to "get more out of car hire and hotels" in the near future, though they also acknowledge that Ryanair has probably pushed on-board retail as far as it can.


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