Airlines Turning To In-Flight Sales As Ticket Prices Decline

   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; [e-mail]