Insights 18 October 2018 By: James Schildknecht

Up-Gauging and Up-Selling: Airline Ancillary Revenue in Latin America

Airlines operating in the Caribbean and North, Central, and South America operate in a hemisphere of extremes – from the world’s most powerful economy (the US) to some of the poorest countries (Haiti, Nicaragua) as well as an expanding middle class in regional powerhouses like Mexico, Brazil and Costa Rica.

Given the market diversity even within individual countries, Latin America’s top four airlines have only been able to gain 40% of regional market share compared to 68% for the US Big Four. This is not surprising in Latin America where business models, revenue strategies and route priorities can vary markedly from airline to airline. But low-cost airlines have gained a foothold (primarily in Mexico and Brazil) and have changed the landscape in terms of how airlines sell to passengers in Latin America – even influencing legacy carriers.

Connecting Aircraft Up-Gauging with Ancillary Up-Selling

Ancillary revenue strategies are becoming much more prominent, accepted and successful in the region, albeit slowly. The ability to increase non-ticket revenue is key to airline revenue management as it helps reduce fare prices and further stimulate demand, which is precisely how LCCs and ULCCs have succeeded. But all carriers – whether full-service, low-cost, ultra-low-cost or hybrid – are now walking a tight balancing act between up-gauging their aircraft to increase capacity and up-selling/cross-selling their customers to increase non-ticket revenue.

These two strategic “poles” (up-gauging and up-selling) will increasingly converge as Wi-Fi connectivity on newer aircraft boosts ancillary revenue in Latin America from $49 million in 2018 to $1.9 billion by 2035. Now is the time for airlines serving Latin America to start integrating ancillaries into a more holistic, seamless mobile experience where they can engage growing volumes of passengers and capture more of their travel dollars (or pesos, or reals, etc.).

Network carriers’ capacity restraints are a natural limitation to revenue growth, but they have learned to imitate the low-cost carriers’ “à la carte” business model by unbundling fares (where allowed by law) and charging separately for ancillary services such as:

  • Extra seats, baggage, leg room
  • Buy-onboard programs for food and beverage
  • Upgrades and privileges (W-IFEC bundling, dedicated toilets on some premium fares)
  • Packaged merchandise (hotels, car rentals, tours and activities)

To be more successful with their ancillary revenue strategies, however, airlines in Latin America will need to continue prioritizing their direct booking channels (where they can directly control ancillary offers) and take a mobile-first approach to passenger transactions, interactions and communications (to be able to offer them ancillaries at more touchpoints throughout their journey).

The Impact of Airline Deregulation on Ancillary Revenue in Latin America

The region’s leading full-service carrier, LATAM Airlines, just last year added ancillary services in Brazil to its program within Amadeus. This followed a 2016 decision by Brazil’s senate allowing carriers to charge for luggage, a deregulatory move that lead to an increase in Gol Airlines’ ancillary sales by 15% to $89M. However, in 2018 Brazil’s senate approved a bill prohibiting airlines from charging passengers to choose their seats. This regulatory uncertainty in Latin America when it comes to ancillaries not only affects the strategies and priorities of regional airlines, but also hinders global players entering the market.

Wherever airlines operate (or want to operate), they are increasingly dependent on ancillaries to increase non-ticket revenue, so that they are not forced to stretch capacity growth beyond its economic limits. Personalization has been a simple solution because it just involves using airlines’ existing data more intelligently to make the right offers at the right time – in other words, applying technology to basic sales and marketing. A study by the London School of Economics (LSE) found that the average order value for personalized transactions is 12% higher than those without, but only 11% of existing airline schemes offer personalized rewards based on purchase history or location data.

One reason airlines are not able to personalize their ancillary selling, and thereby increase ancillary revenue, is because they have limited campaign management tools to be able to orchestrate sales opportunities in the mobile channel, where 20% of all Internet traffic will come from by 2021. With better campaign management and mobile marketing tools, airlines in Latin America will be able to:

  • Improve their presence with any passenger carrying a smartphone or other mobile device.
  • Reach passengers with ancillary offers at more touchpoints (check-in, boarding, arrivals).
  • More dynamically price/package their ancillary offers based on day, route, season.
  • Easily add new products and services or enhance existing ones (for example, baggage tracking).

Air Travel in Mexico, Brazil and Central America

While South America and the Caribbean may be the most prominent Latin American travel destinations for business and leisure, there has also been significant growth in Central America.

Copa Airlines in Panama (full-service carrier serving the entire region) and Volaris (low-cost carrier based in Mexico with a subsidiary in Costa Rica) have benefited from the higher passenger flows to and from Latin America and have themselves been instrumental in stimulating demand.

The simultaneous expansion into Central America by US airlines such as JetBlue and Southwest has also been key for increasing capacity (available seat miles or ASM) and ancillary revenue in a region where many travelers are only just starting to form brand loyalties and established habits (such as making ancillary purchases through an airline direct booking).

Among carriers directly serving Central America, Volaris in Mexico and Costa Rica has taken a “You Decide” approach to ancillaries to make air travel cheaper and more attractive to emerging consumers in the region. Between 2011 and 2016, Volaris grew per-passenger revenue by 21.9% CAGR with $20.43 per passenger in non-ticket revenue. For comparison, Hungarian LCC Wizz Air generated $29.20 per passenger but ancillaries made up 41% of Wizz’s non-ticket revenue versus 25% for Volaris, showing how much room there is for ancillary growth in Latin America versus more mature markets. In Mexico City, overall market growth in the same period (2011-2016) was 11% but Volaris grew 61% and other Mexican carriers grew 46%, perhaps a sign of more equal competition, even though US carriers still account for 46% of capacity in Central America versus 38% for local carriers.

Loyalty Programs for Latin American Airlines

As in Mexico, Brazil’s low-cost carriers have been instrumental in growing commercial air travel. As previously mentioned, Gol has benefited significantly from the push toward greater deregulation and the ability to offer different fare families (PROMO, LIGHT) on Economy seat sales.  And the Smiles frequent flyer program (FFP), which is aligned with Gol and may soon be fully acquired by the airline, has more than 12 million members in Latin America.

Just as legacy carriers have used the ancillary business model (unbundling, dynamically re-bundling) to compete with LCCs on cost, LCCs such as Gol have found ways to do more with less and use ancillaries to enhance their “bare bones” passenger experience. Inflight connectivity will only strengthen the importance of Smiles and other FFPs in Latin America for building relationships with passengers and making it easier and more attractive to “earn and burn” rewards at more touchpoints throughout their journey. But FFPs will need to be integrated seamlessly into a wider mobile user experience so that ancillaries feel naturally like options and choices rather than ‘nickle-and-diming.’

To appreciate the situation and opportunity for Latin American airlines, consider Volaris’ social media campaign with the hashtag #NoMásCamión or “No More Bus” in Spanish. This was part of a bus to air substitution program meant to attract travelers in the region who are more accustomed to travel by ground than by air. From educating ground travelers to attracting them with trials, low fares for first time flyers and first sells, Volaris and other Latin American airlines need to be flexible and dynamic in how they sell to passengers and package fares with ancillaries.

Ancillary selling will continue to shape airline strategy and technology investments as non-ticket revenue becomes more prominent in their bottom lines, and they continue to make the transition from simple e-commerce to mobile-first or m-commerce. The mobile channel is certainly the most frictionless, scalable and cost-effective method to reach Latin American travelers throughout their journey, from booking to post-booking and beyond. Whether by enabling a retail design strategy that motivates passengers to spend beyond the base fare, or by making sure the most relevant payment method is available for the initial booking all the way through ancillary-related upselling tactics post booking, ensuring seamless transactions in the mobile channel pays dividends for airlines. CellPoint Mobile has helped AVA Airways, Sunrise Airways and other Latin American and Caribbean carriers build up their direct mobile channels and be more effective in selling ancillaries to passengers.