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TREND WATCH

Tuesday, 22 February, 2011, 14 : 45 PM [IST]

Revenue from third-party services set to grow ten times faster than general travel industry sales: Amadeus

Two words make travel marketers’ eyes sparkle as they contemplate on how to increase customer engagement, they are-‘Ancillary services’. TravelBiz Monitor presents the study ‘Cross-Sell Your Way To Profit’, developed by Forrester Consulting and commissioned by Amadeus, on how travel suppliers are using third-party ancillary services to drive new revenues and enhance their travellers’ experiences
Ancillary services are at the forefront of the travel industry as it strives to become — and remain — financially stronger. Ancillary services are also the key to helping travel suppliers find ways to better respond to and serve travellers’ needs for additional services or amenities in order to have more enjoyable, productive trips. While much has been written about ancillary services in the last two years, almost all of this content has been focused on airlines’ à la carte, or unbundled, ancillary services. These à la carte ancillary services are operated or delivered directly by the travel supplier. Examples of à la carte ancillary services include airline checked baggage fees and a hotel owned-and-operated restaurant.

The study states that third-party ancillary services provide travel suppliers with an under-explored revenue-generating opportunity, expected to increase by 30 per cent by 2015 compared to 2010. There is growing recognition that third-party ancillary services will become important revenue contributors to travel suppliers, provided they offer a relevant product mix and make these services available throughout a journey and across channels. Third-party ancillary services offer the potential for travel suppliers to extend the length and breadth of traveller interactions before, during, and after a trip.

The study is based on quantitative research with 67 per cent of respondents drawn from travel brands that generate annual revenues in excess of USD one billion. In addition, the study includes qualitative input from industry experts across airlines, hotels, rail and cruise operators that details the scale of the revenue opportunity, the future third-party ancillary services set to drive sales and the shifting mix of channels required to effectively sell third-party ancillary services according to customer needs.

In this study, the focus is on the untapped potential of third-party or commission-based ancillary services for all travel suppliers, such as airlines, hotels, cruise lines, car rental companies, and inter-city railroads and ferry operators. Third-party ancillary services can be defined as follows: Third-party ancillary services are those operated or delivered by a third-party provider to the travel supplier, for which the supplier earns revenue via the payment of fees or commissions from the third party. Travel insurance, a hotel room cross-sold on an airline website, and a shore excursion operated by a local tour operator but sold by a cruise line to its passengers are different examples of third-party ancillary services. Many travel providers in these segments have built their business on third-party ancillary services. The revenue upside for travel suppliers from third-party ancillary services is significant, with commissions ranging from five-ten per cent for ferry bookings, ten-15 per cent for car rental and hotel bookings, ten-16 per cent for cruise bookings, and 30-50 per cent for travel insurance.

The Next Five Years: Becoming A True Retailer

Travel has traditionally been a retail-like business. Regardless of their geography, sector, and even product quality, travel suppliers tend to rely on price to attract and keep their customers. Relying on price alone, though, can be hazardous to a travel seller’s financial health. Data from Forrester’s US Consumer Technographics research shows that though price certainly matters, attributes like brand, reliability and overall value are equally important to travellers as they plan and book their trips. (See Figure 9). Yet in spite of the travel industry’s retail-like nature, travel suppliers have not necessarily been quick to adopt the retailing mindset that is now required in order to successfully promote and sell à la carte and third-party ancillary services. When compared to non-travel retailers such as Tesco, Wal-Mart, and Amazon, travel suppliers continue to face a long and challenging path if they hope to capitalise on travellers’ willingness to pay for services that meet their needs and inspire their imagination.

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With Strength in Travel and Destination Services, Airlines see Media as new revenue source
Travel suppliers’ focus on ancillary services, combined with the potential to utilise customer data to target offers and a growing mix of channels through which to sell, further propels travel suppliers toward becoming true retailers. What’s intriguing is that airlines and hotels alike are prepared to offer substantially more third-party ancillary services by 2015— services that will allow individual suppliers’ sites to better compete with third-party intermediaries.

Travel services like hotels and rental cars, destination services like sightseeing tours and media vehicles like selling advertising to third-party businesses in order to reach passengers at their destinations which are all expected to be growth areas for airlines (see Figure 10).

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Travel services are the most popular category now and will remain so through ongoing growth. Travel services include transportation, accommodations and journey-focused services like commuter rail tickets, airport parking and airport transfers. Eleven of the 12 airlines in this study currently offer the ‘triple crown’ of travel services — travel insurance, hotels and rental cars — on their websites. Also more airlines intend to sell a wider selection of niche travel services like cruises, commuter rail tickets, and airport parking concierge services — a mix of both mundane, expected products and more adventurous, inspiring products. By offering these services, airlines and other travel suppliers could fulfill many of the product areas in which they don’t currently participate while also offering a more comprehensive travel experience to their customers.

Due to a surge in entertainment ticket sales, airlines will see destination-related products grow. Dominated by sightseeing tours, destination services already have presence on airline websites. In five years, airline participation in this category will increase to 37 per cent. Recognising that people travel to do things at their destinations, more airlines plan to sell tickets to various events, including concerts and theatres. Since this may offer ‘frictionless fulfillment’ — travellers take their receipt to the box office window to collect their tickets — and is desired by entertainment-focused travellers, it’s no surprise that within five years, this is expected to be one of the top third-party ancillary service products. This offers airlines, as well as other travel providers, the opportunity to inspire customers with new products and services. By doing so, airlines are bringing together the key ingredients of the total travel experience.

Airlines become digital marketing and media firms. Media-related ancillary services are of growing interest to airlines. For example, offering advertising of another business’ products and services on their website’s airport terminal maps is something that interests half of the airlines in this study. This is creative and is something more airlines should consider. Airlines’ insight into knowing where a passenger may be, as they will have knowledge of the passengers’ route through an airport, would be useful to a variety of businesses. However, with this insight comes great responsibility. Airlines that offer media products to advertisers must protect travellers’ individual personal information and respect their passengers’ privacy, least they find themselves on the wrong end of a negative publicity firestorm.

Hotels to Focus on Destination Services for Third-Party Ancillary Services Growth
Hotels aren’t airlines. From the study, it is clear that they intend to take a different approach towards third-party ancillary services (see Figure 11).

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Eight in ten hotel websites will sell some type of destination service. Twelve of 19 hotels now offer activities like sightseeing tours — a product that all hotels are expected to offer by 2015. Hotels show substantial interest in selling tickets to sporting events, concerts and similar types of entertainment. By 2015, the number of hotels that sell this product will more than triple from 2010 levels.

Expect hotels to aggressively pursue media services. Few hotels offer any media-related ancillary services on their websites today. By 2015, not participating in media-related ancillary services will be the exception for hotels, not the rule. Look for hotels to embrace advertising-supported digital property maps and serve as brokers to third parties that want to advertise to their guests.

Hotels give more emphasis to third-party, on-property ancillary services than travel services. Recognising that the skills needed to be a successful hotel operator aren’t necessarily the same as those needed to be a successful restaurateur, hotel owners sometimes outsource their restaurants to third-parties. To ensure these establishments succeed — hotels collect a portion of restaurant sales as revenue — 12 of 19 hotels now offer restaurant reservations on their websites, and more will do so by 2015. All hotels that have a spa will also sell those services on their websites by 2015. Guest room Wi-Fi service is another on-property third-party ancillary service that hotels increasingly intend to sell on their websites. Hotels’ interest in selling these on-property services — all operated by third-parties on behalf of the hotel — exceeds their interest in selling third-party travel services. For example, by 2015, more hotels will sell golf tee times than rental cars, travel insurance, or airline tickets.
 
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