ABSTRACT
Achieving profitability in the airline industry is becoming an increasingly difficult task with each passing year. Around $85 billion was erased from the industry balance sheets in 2009 (15 per cent down on 2008 figures) because of the recession, while historical financial data shows that the world carriers lost $49.1 billion between 2000 and 2009, which is an average loss per year of around $5.0 billion (IATA, 2009). Ancillary revenue1 can go some way to clawing back those lost earnings. One of the oldest forms of ancillary revenue is in-flight sales of duty-free products, and for decades this was the solitary mechanism by which airlines could capture additional revenues from passengers while on-board. It proved lucrative despite the fact that many passengers had passed through airport duty-free shops prior to boarding their flight, as Generation Research (2009) pointed out that airlines were generating around $3 per passenger on in-flight retail in 2008 – a figure that has little changed since the mid 1990s. The indications are clear that passengers are willing to purchase products on board, as Korean Air and British Airways, for example, generated over $180 million and $140 million respectively from selling duty free items in 2008 (Generation Research, 2009). History suggests that airlines may have mismanaged the expectations of passengers as they have received all the perks of the trade (such as free baggage, meals, in-flight entertainment, and so on),2 which were all encapsulated within the ‘fare’. The industry operates in a hypercompetitive environment where the rivalry between carriers is very intense, and this forces airlines to set fares close to marginal costs or lower, which is a primary reason for the poor returns that this industry generates. Cargo was another area through which airlines made additional revenue from the flight, and this is an important component of the industry as it facilitates the transportation of perishable and high value goods that interlink
1 Ancillary revenues are incremental revenues that an airline earns after the fare has been paid and are generated either through the website or during the travel experience.
