Third party ancillary revenues in the airline sector: An exploratory study

Some airlines, especially Low Cost Carriers (LCCs), have earned significant profits from revenues derived from ancillary revenues. However, to date few have been able to derive a meaningful portion of revenues from 3^rd party ancillaries. The key to increasing these revenues comes from an understanding of passenger willingness to pay for 3^rd party products/services, coupled with increasing customer awareness and consequently the all-important customer conversion. This study assesses the 3^rd party ancillary services that passengers are more willing to purchase, along with the potential offers that might increase their willingness to purchase specific 3^rd party services. A mixed methods approach was used consisting of a passenger survey and nine expert interviews. The main findings are that car hire, airport parking, and the sale of hotel rooms had the most significant associations with customer willingness to pay. It was also found that there was a significant association between specific offers and increased willingness to purchase. The 15% discount off a future flight, and to a lesser extent, hotel price guarantees were the most significant. Expert interviewees confirmed that the future sustainability of this revenue stream for airlines is centred on mobile digital devices, customer conversion, and exploiting potential market opportunities.     

The economic viability of long-haul low cost operations: Evidence from the transatlantic market

The recent strong performance of long-haul low-cost carriers AirAsia X and JetStar have re-raised the question of the long-term feasibility of long-haul low-cost operations. For the first time, this study contains a detailed financial assessment of low-cost operations on the transatlantic market using best-in class aircraft technology, the Boeing 787. The study's main findings demonstrate how challenging the successful running of a European long-haul low-cost carrier can be. In particular, on-going operating profit appears to be very sensitive to variations in demand and fuel prices, despite the use of new, highly efficient B787s. The findings show any prospective long-haul low-cost carrier that pursuing a demand focussed network strategy can ensure financial viability. This involves the creation of higher seating densities, higher cargo revenues and additional ancillary revenues.     

An analysis of traveler need for and willingness to purchase airline dynamic packaging: A Korean case study

This study analyzes (1) the need among air travelers for commission-based ancillary products and services from airline websites via dynamic packaging and (2) the willingness to purchase them. For this purpose, a survey is conducted with 2030 airline customers in Korea. This study aims to provide insights into Korean traveler preference to enable airlines serving Korean customers to formulate and implement successful business strategies that incorporate dynamic packaging into airline websites to expand ancillary revenues. The results confirm that Korean travelers demonstrate the need for and willingness to purchase commission-based ancillaries when purchasing tickets from airlines. On average, commission-based ancillary products are positively received by respondents. Airport transfers (e.g. rail and shuttle services), foreign currency exchange offers, and travel insurance are the most popular. Female travelers, travelers in their 20s, and frequent travelers (10 + times a year) report a significantly higher need for and willingness to purchase a set of commission-based ancillaries with flights from airline websites. Willingness to purchase third-party products from airlines is higher than in previous studies, and the preference rankings also differ. This study supports the viability of commission-based ancillary offerings from airline websites targeting Korean travelers. It shows the potential for airlines to successfully upsell and cross-sell via dynamic packaging strategies, one of the first steps toward becoming competitive travel retailers.     

Spatially dispersed employee recovery: An airline case study

Employee recovery addresses either employee well-being or management's practices in aiding employees in recovering themselves following a service failure. This paper surveys the cabin crew at a small, European, low-cost carrier and investigates employees' perceptions of management practices to aid personnel achieve service recovery. Employee recovery within service research often focuses on front-line employees that work in a fixed location, however a contribution to the field is made by investigating the recovery of spatially dispersed personnel, such as operational personnel in the transport sector, who have a work place away from a fixed or central location and have minimal management contact. Results suggest that the support employees receive from management, such as recognition, information sharing, training, and strategic awareness are all important for spatially dispersed front-line employees' satisfaction with management's actions and overall employee recovery.     

Price rivalry in airline markets: a study of a successful strategy of a network carrier against a low-cost carrier

In the post-liberalization period, competition has increased in airline markets. In this context, network carriers have two alternative strategies to compete with low-cost carriers. First, they may establish a low-cost subsidiary. Second, they may try to reduce costs using the main brand. This paper examines a successful strategy of the first type implemented by Iberia in the Spanish domestic market. Our analysis of data and the estimation of a pricing equation show that Iberia has been able to charge lower prices than rivals with its low-cost subsidiary. The pricing policy of the Spanish network carrier has been particularly aggressive on less dense routes and shorter routes.     

Cost convergence in the US airline industry: An analysis of unit costs 1995–2006

Recent changes in the strategies of US airlines have led to a convergence of unit costs between the network legacy carriers and low-cost carriers. We develop a methodology for breaking down operating cost data reported by the airlines and argue that certain cost categories must be excluded to make a valid comparison between the carrier groups. We find significant evidence of convergence in unit costs excluding fuel and transport-related expenses, and labor unit costs in particular. While network legacy carriers have improved cost efficiency through dramatic labor cost reductions and longer stage length flying, low-cost carriers labor unit costs continue to increase as these former new entrant airlines mature.     

An examination of the consequences of corporate social responsibility in the airline industry: Work engagement,career satisfaction,and voice behavior

Underpinned by social exchange and social information processing theories, our study proposes and tests a research model that investigates flight attendants' perceptions of corporate social responsibility practices. Data came from flight attendants in a major low-cost carrier at different, successive points in time. The structural equation modeling results reveal that work engagement is the underlying mechanism through which corporate social responsibility, as manifested by the economic, legal, ethical, and philanthropic practices, is linked to flight attendants' career satisfaction and voice behavior. Simply stated, the empirical data support all hypotheses and the research model we have proposed is viable. The results have important implications about flight attendants' perceptions of corporate social responsibility practices and the aforesaid outcomes.     

The emergence and effects of the ultra-low cost carrier (ULCC) business model in the U.S. airline industry

The effects of “low cost carriers” (LCCs) such as Southwest Airlines and JetBlue Airways on the competitive landscape of the U.S. airline industry have been thoroughly documented in the academic literature and the popular press. However, the more recent emergence of another distinct airline business model—the “ultra low cost carrier” (ULCC)—has received considerably less attention. By focusing on cost efficiencies and unbundled service offerings, the ULCCs have been able to undercut the fares of both traditional network and low-cost carriers in the markets they serve.In this paper, we conduct an analysis of ULCCs in the U.S. aviation industry and demonstrate how these carriers' business models, costs, and effects on air transportation markets differ from those of the traditional LCCs. We first describe the factors that have enabled ULCCs to achieve a cost advantage over traditional LCCs and network legacy carriers. Then, using econometric models, we examine the effects of ULCC and LCC presence, entry, and exit on base airfares in 3,004 U.S. air transportation markets from 2010 to 2015. We find that in 2015, ULCC presence in a market was associated with market base fares 21% lower than average, as compared to an 8% average reduction for LCC presence. We also find that while ULCC and LCC entry both result in a 14% average reduction in fares one year after entry, ULCCs are three times as likely to abandon a market within two years of entry than are the LCCs. The results suggest that the ULCCs represent a distinct business model from traditional LCCs and that as the ULCCs grow, they will continue to play a unique and increasingly important role in the U.S. airline industry.     

When legacy carriers converge with low-cost carriers: Exploring the fusion of European airline business models through a case-based analysis

The paper makes uses of cognitive mappings developed from personal interviews with a number of European airline executives to examine the differences in managerial attitudes of low-cost and transitional carriers. In particular it explores the extent to which there is a convergence of views regarding the ways various airline models will develop in the future.     

An examination of the revenue generating capability of co-branded cards associated with Frequent Flyer Programmes

The Frequent Flyer Program (FFP) is fast changing the scope of ancillary revenues. The sale of miles to third-party partners has epitomised the revenue generating capability of FFPs, which has yielded co-branded credit cards as a prominent instrument in substantially boosting earning streams. This study triangulates the tripartite composition of airlines, banks and payment networks that formulate the sale of miles and the resulting value that accrues. A survey was conducted at a prominent commercial conference devoted to the subject area, along with secondary data to ascertain the financial impact of today's FFPs and to investigate the underpinning factors as to how they are producing such stellar incremental revenue streams. The findings indicate that there are a low number of active FFP members, while one-third of new members signup for a co-branded credit card. The hierarchical tier structure supporting the compositional framework of FFPs has a significant impact on membership levels and loyalty engagement. A large proportion of ancillaries now evolve from airline co-branded credit cards which have significantly contributed in propping up the overall value of FFPs. Banks are distributing record numbers of airline co-branded credit cards where the top tier segment spend heavily, while a substantial proportion of such rewards cards now propagate through the payment networks. The symbiotic commercial partnership that is being forged between airlines and banks is prodigious and the industry has engineered a tool that harnesses noticeable returns which can significantly assist in sustaining the financial future in an ever changing landscape.     

Effects of cargo types and load efficiency on airline cargo revenues

Numerous factors affect air cargo revenue management. Air cargo companies base their cargo charges on whichever is the greater of gross weight or volumetric weight. We developed a cargo consolidation model based on air cargo characteristics, and investigated the effect of cargo density, the Density Ratio of Heavy cargo to Light cargo (DRHL), and the percentage of small cargo on the chargeable weights and revenues of airlines. The empirical results show that a higher DRHL indicates greater chargeable weight, and that as the DRHL climbs to a certain level, the extent of chargeable cargo weights tends to stabilize gradually. The closer the cargo density approaches the most suitable loading density for a flight, the greater the chargeable weight is. A higher proportion of small cargo loaded on an aircraft means higher airline revenue. Our results can effectively combine types of air cargo to increase loading rates and revenues for airlines.     

Business performance of airports: Non-aviation revenues and their determinants

Management of non-core commercial activities has become a key issue amongst the leverages for improving modern airport industry. Today airports have increased dramatically their dependence on non-aeronautical revenues, which on average account for half of all revenues with this share being highly heterogeneous across regions and airports. Using a dataset of German airports, this paper discusses the improvement of commercial revenues by exploring its determinants. Previous contributions assessed the impact of a selected set of variables non-aviation revenues. Such approach was mainly the effect of multicollinearity, as the majority of relevant variables are strongly correlated to the size of the structures. We address this issue by using ridge regression and partial least squares. Results suggest the potential conflict of non-aviation revenues per passenger and per square meter with the need to expand the number of passengers.     

An empirical investigation of European airline business models: Classification and hybridisation

Airline business models are evolving and what was once a clear distinction between low-cost carriers (LCCs) and full-service carriers (FSCs) is now less apparent. LCCs and FSCs are merging into new hybrid carrier business models, a convergence accomplished in different ways by various airlines. This paper aims to establish how many types of business models exist and to examine the defining characteristics of the various levels of hybridisation. This is an empirical study based on a sample of 49 European airlines. Data are collected in a categorical format, where appropriate, or transformed into categorical variables if numerical. The methodology employed for analysis is the well-established k-modes technique. The clustering process indicates that there are four observable airline categories: FSCs, LCCs, and two hybrid types in between.     

Entry patterns of low-cost carriers in Hong Kong and implications to the regional market

This study aims to provide a better understanding of Asia's low-cost carriers (LCCs) by empirically analysing their route entry patterns in Hong Kong. Two alternative models have been tested, namely a standard probit model and a generalized least squares estimation. Consistent findings from the two models suggest that LCCs in Asia have a preference for large markets with big populations, high incomes and high traffic volume. On the other hand, the dominance of incumbent full service airlines (FSAs), fierce route competition and the lack of secondary airports are not critical to the growth of LCCs. However, government regulations and airport access are main impediment factors. Despite the adoption of long-distance low-cost models by the region's airlines, geographic distance still plays an important role in LCCs' entry decisions. For the growth of low-cost travel and associated benefits in the tourism industry and overall economy, it is important for governments in the region to liberalize aviation markets, provide sufficient airport capacity, and promote efficient allocation of airport slots.     

Service quality and customer satisfaction of a UAE-based airline: An empirical investigation

This paper investigates the linkages among service quality, service provider image, customer expectations, perceived value, customer satisfaction and brand loyalty in a Dubai-based airline. Initially, the determinants of service quality were identified utilizing the SERVQUAL framework with some modification. Service quality was then used as an antecedent to measure customer satisfaction, a condition which can bring about brand loyalty. In a research initiative using a quantitative approach, data from 253 questionnaires was analyzed. Using structure equation modeling, the data analysis suggests that service quality, perceived value, and brand image have a positive significant impact on customer satisfaction, which can in turn lead to brand loyalty. Theoretical and managerial implications are discussed.     

Airlines-within-airlines strategies and existence of low-cost carriers

This paper investigates hub carriers’ airlines-within-airlines (AinA) strategies, intended to establish low-cost divisions offering nonstop flights on rim routes. An initial hub-spoke network is optimal if passenger differentiation between one-stop and nonstop services and via-hub time cost are small. If differentiation is substantial, a mixed one-stop and nonstop (point-to-point) network under AinA is optimal when via-hub time cost is small (large). Low-cost rivals on rim routes weaken AinA adoption and enhance welfare from a monopoly mixed network. In a perfect-substitute case, hub carriers may have excessive incentive to adopt AinA from a welfare viewpoint, especially, when low-cost rivals exist.     

Market orientation and business performance: An empirical investigation in the airline industry

As the airline industry has become more competitive, carriers have looked to improve performance and competitiveness. During the last decade, market-oriented corporate strategy has emerged as a significant antecedent of organizational performance and is presumed to contribute to long-term success. This study investigates potential influences of market orientation on airline performance. Data were collected by mail survey, and MARKOR was used to specify the dimensions of a market-orientated organization. The results support the positive influence of market orientation on business performance.     

Exploring characteristics of passengers using traditional and low-cost airlines: A case study of Belgrade Airport

Low cost carriers entered the Serbian air travel market after Serbia joined the European Common Aviation Area (ECAA) in 2006, prompting the development of healthy competition among airlines and resulting in significant traffic increase at Belgrade Airport. The aim of this paper is to examine the characteristics of passengers traveling on low-cost carriers (LCC) in comparison with those traveling on traditional airlines by using cluster analysis, and to provide practical implications to airport management in tailoring their strategies to meet growing demand. A comprehensive passenger survey was recently conducted at Belgrade Airport on the routes where competition between traditional and LCC carrier exists. The results reveal that emigrants, primarily encouraged by favorable fares, constitute a substantial portion of LCC passengers. Affordable service offered by LCC has also been a positive stimulus for emigrants, who purchase tickets for their friends and relatives to visit them in their host countries. On the other hand, passengers using traditional airlines could be generally classified into two segments, those who fly on business and those who fly for leisure purposes, and each had specific needs when choosing their airline.     

An investigation of service quality,customer satisfaction and loyalty in China's airline market

Customer loyalty is a source of competitive advantage and an important intangible asset to any organisations, but empirical evidence from China's airline market regarding the determinants of passenger satisfaction and loyalty is lacking. This paper investigates the service quality of four major airlines in China's domestic market and explores the links between their service quality and customer satisfaction, as well as the conditions under which airlines can retain existing passengers. In line with previous studies, service quality variables are significant factors influencing customer satisfaction levels. However, satisfactory service was not found to result in higher customer loyalty among business travellers. In comparison to Hainan Airlines, passengers who travelled with Air China, China Southern and China Eastern were more likely to switch to an alternate carrier, indicating lower levels of brand loyalty. In addition, the frequent flyer programs (FFPs) have been largely a failure for the four major airlines in terms of increasing customer loyalty, as revealed in this study. It is necessary to draw distinctions between business and leisure travellers when studying the determinants of customer satisfaction and customer loyalty. Ticket pricing had a positive and significant effect on passengers' overall satisfaction and in turn strengthened customer loyalty among leisure travellers, but achieved no impact on the satisfaction and loyalty of business passengers. Some demographic variables such as gender, income and education are statistically significant for one group of passengers but not for another in the probit models estimated. It is suggested that different marketing strategies may be used to target different market segments to improve customer loyalty.     

Evolution trends of the network structure of Spring Airlines in China: A temporal and spatial analysis

Both the sustainable development of China's economy and the deregulation of the China air transport market have acted as a spur for the halting development of low-cost carriers (LCCs) in China. To analyze the development trends of LCCs' network in China, this paper took Spring Airlines, the only LCC in China as an example. First, the winter flight plans of Spring Airlines from 2005 to 2013 were collected. Secondly, the development trends of air transport network of Spring Airlines were explored with methods of mathematical statistics and social network analysis. Additionally, the development trends were analyzed from the levels of navigable cities, air routes and air transport networks. The results show that although Spring Airlines actively launched air routes between tourist cities with non-class I airports, its network has been transformed from a star structure into a complex one with multi-hubs. The development process of the Spring Airlines network can be separated into three stages. In addition, the problems and evolution trends of its network are discussed further.