At a time when civil aviation regulator DGCA has sought a report from all the domestic carriers on the reason behind the recent hikes in cancellation charges by them, airlines have said that in future similar hikes are imminent as they focus more on extracting extra revenue from ancillary segments. This will also ensure that airlines raise the contribution of ancillary revenue in the total sales to bring it at par with the global airline business model where the former is 10% of the latter.
Ancillary revenues mean earnings from activities and services such as cancellation charges, preferred seating, in-flight meals, hotel and car rental services, frequent flier programme etc. IdeaWorks a global consulting group which tracks ancillary revenue in its recent report states that globally the share of ancillary revenue has grown by 163% between 2010-15.
“India is a very price sensitive market hence there are limitations in increasing the air fares and thus in order to keep up with the competition we (the industry) have started focusing more on ancillary revenue,” an executive of a major airline told FE. “Un-bundling of services will be a major focus in the coming years,” he added.
Low-cost carriers like Indigo and SpiceJet are already on the path to ramp up their ancillary segment. At the beginning of calendar 2015 SpiceJet’s revenue from ancillary business stood at 6% which subsequently increased to 16% of total revenues at the end of December quarter. Ajay Singh in an interview with FE earlier this year had stated that the airline plans to increase its revenues to more than 20% in the coming years. Similarly, Indigo saw its ancillary revenue jump by 27% in December to R5,14.8 crore, comprising 12% of its total revenue.
“Indian carriers would increasingly unbundle airline ticket as has been seen in the case of major global carriers. Also airlines are attempting to lower the fares in the lowest bucket and hence airlines could be differentiating on restrictions like cancellation charges etc,” Abhay Krishna Agarwal, partner, infrastructure &PPP at E&Y told FE.
“Hiking cancellation charges is a signalling device to act as a deterrent to passengers and help increase airlines ancillary revenue,” he added.
Even though the domestic airlines have increased their focus on ancillary revenue, data accessed by FE reveals that Asia-Pacific aviation sector is far behind than its North America and Europe counterparts when its comes to ancillary revenue. North America followed by Europe top the list of generating the maximum amount through ancillary segments in 2015, with North American airlines generating $22 billion an average of 11% of their total revenue and European airlines generating $18.3 billion, an average of 9.24% of their total revenue. While, Asia-Pacific airlines generate around $13.1 billion an average of 6.5% of their total revenue.