Airlines finding ways to pad pockets with ancillary sales, Travel Weekly reports: <?XML:NAMESPACE PREFIX = O ?>

<?XML:NAMESPACE PREFIX = ST1 ?>LONDON -- Just how far will an airline go these days to earn a few extra bucks?

One airline executive attending the third-annual World Low Cost Airlines Congress here describes how a certain Asian low-cost carrier uses blankets to increase its nonfare revenue: When in-flight sales of blankets aren't going well, the flight attendants, who get a commission on sales, ask the pilots to crank up the air conditioning.

Most airlines aren't taking things that far, but low-cost carriers in Europe and Asia in particular are getting aggressive about increasing their ancillary revenue, defined as revenue derived from anything other than passenger ticket sales. Some airlines already have ancillary revenue managers.

Besides, some executives argue, it is not really a unique business model. For example, Tony Davis, CEO of Tiger Airways in Singapore, noted that "movie theaters make more money selling popcorn and Coke than they do selling the ticket for the movie."

No airline is making more money from ancillary sales than from ticket sales, but the amounts are steadily increasing.

Diono Nurjadin, president, director and majority owner of Indonesia's Mandala Airlines, said the carrier's aim is to increase ancillary sales to 30% of its revenue within three years.

Ryanair reported that its ancillary revenue rose 31% in the quarter ended June 30, outpacing its 20% increase in traffic. That revenue was realized primarily from hotel and car rental bookings and travel insurance sales, but it also included in-flight sales and other sources. In all, the ancillary category accounted for 13% of its revenue in the quarter.

Last year, Ryanair reportedly offered about a quarter of its tickets for free (not counting taxes). CEO Michael O'Leary got lots of attention this year when he predicted that ancillary revenue would get such a boost from in-flight gambling that Ryanair might be able to offer half its tickets for free by 2010.

At EasyJet, ancillary revenue increased by 31%, or $1 per seat, for the six months ended June 30, and accounted for 8% of revenue.

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But the airlines want more. At last week's conference, possible methods for doing so were discussed by airlines and the suppliers who can help them do it. A preconference workshop was also devoted to the topic.

The basic principle is one the cruise lines have embraced for years: Airlines are not just carrying passengers; they're carrying a captive, largely untapped consumer market. The airlines should try to sell them whatever travel- and nontravel-related products they can while in the air, as long as those products are compatible with their brand.

"You've got your customers trapped in your shop for two hours at least; now what are you going to sell them," said Mezzo Movies CEO Dave Sampson, who led the workshop. He's a former retail senior executive and mobile phone company marketing manager who now pitches his company's handheld entertainment devices as in-flight money-makers.

Low-cost carriers are using a variety of methods to try to increase their ancillary revenue. Among them:

• Hotel, car rental and travel insurance sales. Dynamic packaging lets travelers mix and match their hotel, car rental and flight arrangements. One delegate said one airline's conversion rate increased by 20 times after it offered dynamic packaging. Airlines still see room for growth in this area, including more sales of destination shows and tours, in part by offering more free travel guides at the time of booking.

• In-flight sales of meals, snacks and beverages. The latest trend in food sales is to offer passengers branded foods. The big topic now is letting customers pre-order food as part of the booking process, which would allow for a wider selection for passengers and let airlines know how much food to bring on board. Scotland's Flyglobespan already offers this option.

• Gambling. Ryanair and U.K.-based Flybe both sell scratch cards for prizes. Now Ryanair wants to move to full-fledged gambling, probably on mobile phones, Sampson said.

• Video gaming. Popular among younger consumers, this is seen as a potentially lucrative market. Possibilities include multiplayer gaming, not only onboard the aircraft but also with the gamer's usual playing partners in cyberspace once broadband Internet access is available onboard.

• Mobile phone usage. Ryanair recently announced it would outfit its entire fleet to enable the use of cell phones and PDAs, with the first equipped by the second half of 2007. Ryanair will get a cut of the international roaming or text-messaging fees.

• SIM cards. Mandala Airlines, remaking itself as a low-cost carrier, is selling SIM (subscriber identity module) cards to passengers. SIMs make mobile phones compatible with the cellular system used in the passengers' destinations, without incurring international roaming fees.

• Advertising. This has already moved well beyond in-flight magazines to include ads in lounges, on aircraft overhead bins and tray tables, and even on the aircraft fuselage. Tiger Airways has Visa patches on some of its flight attendants' uniforms.

The payoff for allowing a company to plaster the outside of an aircraft with its ads can range from $450,000 to $750,000 per aircraft for two years, said Richard Baker, commercial director for OnPack media.

• Fee for all. This refers to new fees such as credit card usage fees and checked-bag fees. Flybe Chief Commercial Officer Mike Rutter said that with Internet check-in now an option, Flybe would like to start charging customers, within 12 to 18 months, for airport counter check-in. Some airlines also have begun charging for assigned and preferential seating.

• In-flight entertainment. In addition to charging for headsets, an idea still unproven for short-haul flights, JetBlue, for example, offers live TV for free but also offers pay-per-view movies.

• Lounges. It was assumed that low-cost carriers could not offer airport lounges because of the expense, but now EasyJet, Ryanair, Virgin Express, SkyEurope and Air Europa are selling access to lounges run by a private contractor.

• Merchandise and services. The Web site of Ryanair, the ancillary revenue champion, includes a smorgasbord of still other products and services. For example, the airline has partnered with a major bank to offer personal loans and with insurance brokers to sell home and property insurance -- all promoted on its home page.

All of this could be just the beginning.

Bestselling business author W. Chan Kim told delegates, "When I talk to the other side of the industry, they want to use your industry as a selling platform. ... You have bargaining power."

Sampson said many companies also were willing to do demographic research on passengers, provided the airline provides access to its basic data for analysis. An analysis would give airlines another way to pitch themselves to other companies.

There is no guarantee that every ancillary revenue gambit will work. Sampson expressed skepticism about the potential for gambling, which may only appeal to a small segment of travelers, and about cell phone service, because people may worry how fellow passengers will react.

"In the retailing space, you need to make sure you are marketing to customers who are going to buy it," Sampson said. That means selling items on flights that you believe passengers will be predisposed to buy.

The length of a flight is also a factor, since passengers may not have the time, inclination or motivation to buy on a one-hour flight. But many low-cost carriers are flying somewhat longer distances these days.

While the pursuit of ancillary revenue is becoming a global trend, U.S. low-cost carriers are relative laggards.

Jim Parker, managing director of Raymond James, noted Southwest gets only 2% from nonflight revenue and cargo, far below the ancillary revenue numbers of carriers such as Ryanair and EasyJet.

"They are missing the boat," Parker said.

Southwest, however, takes a point of pride in resisting such charges. Its press office just sent the news media an e-mail listing the "top five reasons Southwest is different."

Among those reasons is not charging for in-flight snacks, explaining, "We won't nickel and dime you to death."