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Digitalization: Six Wins for The Future of Airline Duty Free Ancillary Sales

October 26, 2016

 

People often ask me "Hongbo, why do you want to set up a new technology business in a technology sensitive industry - AIRLINE/AIRPORT?" My standard answer - "Because I love airplanes!" It is true and that's where all began back in 2014. 

 

I have tremendous love for airplanes and for the airline industry but I often feel painful when I see year over year the profitability of the entire airline industry is being less than one technology company ...

 

PROFITABILITY OF AIRLINE INDUSTRY

 

According to IATA, the airline industry made a net profit of $33 billion in 2015. On the other hand, Apple Computers made a net income of $53.4 billion in the same year according to The Telegraph. The airline industry was 38.2% less profitable than Apple Computers.

 

But if we look at revenues, the entire industry made $718 billion in revenues in 2015 according to IATA versus Apple Computers only made $231.28 billion in revenues for the same year according to MarketWatch. In other words, the industry generated 215% more sales than Apple Computers did.

 

The airline industry has an extremely low margin on selling tickets, and there are multiple factors that will affect the operational costs for airlines e.g. fuel price. Thus this forces airline executives around the world to watch closely on unit revenue and calculating precisely on Revenue Per Available Seat Mile (PRASM) and scratching their heads to lower costs again and again so that unit revenue can be lifted up by $0.01 per passenger ... I am sure you have heard plenty of similar stories from your airline revenue management friends ...

 

Then the game-changing model of Low Cost Carriers appeared, when flight tickets are cheaper than train/bus tickets ... a new wave of fare comparison and competition began which forced airlines to further lower their fares and the same loop got even worse for revenue managers ... low revenue projections then pushed marketing managers to cut budgets, and when the budget for everyone got cut to so low that the airline would have to look for external financing ... that's when conferences like Aviation Financing Forums and even Financing Training classes tailored for airline executives being introduced ... Then growing passenger number, seeking to operate from secondary airports and purchasing more fuel efficient aircrafts become top priorities for all airlines. Meanwhile, Boeing and Rolls Royce saw the potential demand for single-aisle mid-size transatlantic aircrafts and putting together plans to ready themselves for a new round of competition. This is only a glance of what is happening in the airline industry. Don't get me wrong, I am not here complaining about the industry, as I said I have tremendous love for the industry but my huge pain is that I think the industry did not achieve the level of profitability that it should and it can. Let me explain my reasons below.

 

AIRLINE ANCILLARY SALES

 

From 2008 to 2016, according to Statista, the total revenue of the industry grew by 40% from $507 billion to $709 billion. however, according to IdeaWorksCompany report in 2016, the ancillary sales of the top ten airlines grew by 205% from $8.3 billion to $25 billion. "Back in 2008 the threshold was $245 million for a top ten position in the ancillary revenue rankings. Now, the top ten group is a billion-dollar club with annual ancillary revenue ranging from just over $1 billion to nearly $6.2 billion per airline." (Source: IdeaWorksCompany) It clearly indicates the ever-growing demand for ancillary products. Ancillary revenue is becoming a significant part of airline revenue. United Airlines made $6.2 billion in ancillary revenue in 2015. 43.4% of the total revenue for Spirit Airlines in 2015 was coming from ancillary revenue. Now let's look at a more detailed share of the 43.4% ancillary revenue, 18% from Checked Bags,14% from Online and Call Centre Fee, 4% assigned seating, 4% all other ancillary revenue, 3% sales of FFP points. (Source: IdeaWorksCompany) All looks pretty but where is duty free sales?

 

THE SIX WINS

 

According to PRNewswire, Duty Free Retailing Market Sales is forecasted to be worth $73.6 Billion by 2019. "Accounting for 30% of the total sales, Beauty, fragrances and cosmetics are the best-selling products in this channel." (Source: Generation data, sales in value.) Of the total sales, roughly airports account for 57.3%, airlines for 4.3%, ferries for 3.3% and others for 35.1% according to Tax Free World Association in 2016. "Over a billion people travel internationally each year—approximately 15 percent of the global population—and they spend the equivalent of more than a trillion dollars in the process." (Source: Travel Retail: A Sixth Continent With 1 Billion Consumers by Luxury Society in 2014) However speaking of shopping, if I were to ask you when was the last time you bought your flight ticket, I think majority of you will know or at least you may find answers from your e-tickets but Can you remember -

 

- When was the last time you bought duty free products in airport/inflight on aircraft?

 

- How many times have you missed the money saving opportunities on duty free shopping due to insufficient time & lack of convenience?

 

- And what did you really think in your mind when your partner gave that "mission critical" long shopping-list to you before you travel?

 

I believe the airline industry can achieve much higher profitability however it will not be from selling more flight tickets and increasing that $0.01 PRASM, but from ancillary products, from a greater revenue generation capability of duty free products. How? Through Six Wins

 

  • Passengers win

  • Airlines win

  • In Flight Entertainment Providers win

  • Airline Caterers win

  • Airport Based Travel Retailers win

  • Brands win

Passengers have desire to shop. Airlines provide a retail space in the air. In Flight Entertainment Providers host a digital shopping store. Airline Caterers provide convenient delivery services. Airport Based Travel Retailers provide attractive product catalogues. Brands provide more catchy products.

 

This is the vision of BONFLITE, we are striving the best of the best of ourselves every second and everyday to make this happen. We do it through helping airlines further advance or supplementing their digital transformation processes with our digital solutions. We want to create a greater level of profitability for everyone - passengers, airlines, in flight entertainment providers, airline caterers, airport based travel retailers and brands.

 

L'Oreal seems to agree with us, earlier this month on 08/10/2016, when speaking of digital, L’Oréal Travel Retail digital manager Thomas Laroia said "We believe digital is a game changer. However I would like to address simple message – as much as we are convinced digital can help to achieve bigger things, this can only be achieved if the industry unites – airlines, airports, retailers and supplier." (Source: DFNI Online: L’Oréal: travel-retail changing at the speed of light)

 

 

About BONFLITE:

Bonflite is the specialist duty free ancillary revenue partner for airlines, online travel providers and airport based travel retailers. Our mission is:

 

"Empower airline travel retailers and airport travel retailers to change the way they market, sell, and distribute products to their customers through innovative use of technology. Starting with Duty Free Shopping."

 

Official website: www.bonflite.com

Want to find out more about BONFLITE? Check out the short intro video below:

 

 

 

 

 

 

 

 

 

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