By Christopher Hinton
Fliers are finding more products and services for sale aboard
flights these days than at any other time in commercial-aviation
history, as a small group of point-of-sale providers leads airlines
into the retail world.
Already standard on budget carriers in Europe, companies such as
Canada's GuestLogix (GUESF) and the U.K.'s Onboard Retail Solutions
are out to change even the legacy U.S. airlines into flying
shopping malls. With the use of wireless handsets, flight
attendants can take purchase orders for food, luxury goods and
ground-based services such as transportation and theme-park ticket
sales.
Since the sales are all software-based, the carriers can keep
better track of what sells, breaking the data down for specific
flight routes, times and seasons.
That can be a huge benefit for airlines as they further unbundle
their products and services to create new revenue streams. With
average airfare prices plunging to five-year lows, many airline
executives have said they are becoming more reliant on nonticket
revenue to offset the difference.
"Several European carriers have shown great success with
generating ancillary revenue on board ... with up to four to five
different 'selling opportunities' on a given flight like drink
service, snacks, duty-free items and train tickets," said Alison
Croyle, a spokeswoman with JetBlue Airways Inc. (JBLU) in New York,
which has made some inroads with onboard retail.
According to Doug Cooper, an analyst with Paradigm Capital Inc.,
real airline-ticket prices have fallen some 20% in the last 15
years as fuel costs have more than doubled, leaving a significant
gap between sales and costs.
"Flying has become a commodity," Cooper said. "Consumers want to
fly, but at the cheapest possible price. In such an environment,
airlines will seek to drive [unit revenue] through nonticket
sources."
Breaking out nonticket passenger revenue is difficult. Airlines
guard the data closely, and the U.S. Transportation Bureau doesn't
provide much detail.
In the third quarter last year, the latest period for which data
is available, ancillary revenue for U.S. airlines climbed some 36%
to $2 billion, which included $740 million in baggage fees, in
addition to reservation change fees and some miscellaneous
operating revenue.
Revenue from onboard sales of food, blankets, seat upgrades and
entertainment, however, falls under "transportation-related
revenue," which also includes revenue from maintenance services
provided to other airlines and fare collected from code-share
partners. That category actually declined in the third quarter from
a year ago.
But Cooper figures the impact from onboard sales will eventually
be significant. Take AMR Corp.'s (AMR) American Airlines. If the
carrier--which gets about 100 million passengers a year--can just
sell 10% of its passengers $5 worth of food and beverage, it will
add about 5 cents a share to its bottom line.
"Now take that example and multiply it by any number of user
fees or ancillary revenue possibilities," Cooper said. "Even at
this early stage ... the importance of nonticket revenue cannot be
overstated."
AirTran Holdings (AAI), an airline based in Orlando, Fla.,
already generates most of its profit from ancillary fees, he
said.
"Ancillary revenue is their key to the return to profits, and
you are seeing that everywhere," said Dan Hayter of Onboard Retail
Solutions, which was founded in 1996 and concentrates primarily in
Europe, the Middle East and Asia.
Onboard Retail Solutions and GuestLogix provide the equipment
for airlines to record the retail transactions and also provide
services for maintaining the related software, analyzing the sales
data and developing strategy to increase sales.
Food, beverages and alcohol are the biggest sellers, but there's
the potential to provide more services for both business and
leisure travelers. Passengers can order limousine service before
landing at their destinations, or purchase theater and theme-park
tickets. Airlines flying into Paris already offer Euro Disney
tickets, and flights into New York could soon offer tickets to
Broadway shows.
Not every inspiration works out. Attempts to sell cars and real
estate in the past have flopped.
But some carriers have found they can provide unique offerings
as well, based on their regional destinations. Hawaiian Airlines
(HA) offers through its Web site the option to purchase a lei
greeting upon arrival at the Honolulu Airport, complete with fresh
flowers.
As they take delivery of new Airbus jets this year, they will
have the opportunity to grant its customers the ability to purchase
the greeting while in flight.
"We are certainly hard at work to building the type of IT
platform to give us the ability to focus on opportunities that are
out there," said Chief Executive Mark Dunkerley. "We are in the
main focused on what kind of additional product benefits are out
there that our customers have a natural demand."
-Christopher Hinton; 415-439-6400; AskNewswires@dowjones.com