Low cost airlines, wine clubs and business models

Did you know that budget airlines make a loss on ‘the metal’ [the wonderful term they use to describe flying fare-paying passengers by aeroplane], but make their margin from what are known as ancillaries, such as on-board catering, sales and charging for luggage? I didn’t, until yesterday lunchtime, when I attended the press launch of the Flybe wine club. During the presentation, Flybe's director of marketing Simon Lilley explained that despite not breaking even with their core business—flying people—the budget airline model is one that works if you maximize your ancillary income. This was one of the motivations behind launching a wine club.

In fact, Flybe are pretty good with this – they make £7 per passenger. Doesn’t sound a lot, but when you realize that they fly 8 million people a year, and do the maths, that’s a tidy sum. And unlike some of the other budget carriers, they are looking to give people a good flying experience and develop some relationship with their customers.

The wine club is being run by Wines4Business, which is one of Peter Jones’ legion of entrepreneurial ventures, and which I have some involvement in as resident wine expert. Peter was there to give a short speech: if you are used to seeing him on television (Tycoon, Dragon’s Den, etc.), the first thing you notice is how incredibly tall he is. Indeed, seeing as Lilley is on the short side, it was amusing to see the photographer struggling to get a shot of them together which included both their heads. Peter is also a tremendously good people person. Engaging, sincere and clearly pretty smart.

Back to budget airlines. It’s interesting to see a business where the core activity is not the profit driver. I guess TV has been like this for ages. You make good television programs and get lots of viewers because you have an interesting schedule. But you give this all away free and rely on advertising revenue: you’ve attracted an audience for advertisers to target (the BBC is an exception here, relying on a licence fee). But now with cable/satellite services we’re seeing the revision of this model: there’s a split between advertising revenue and subscription, with some content being paid for.

But I can see a situation where advertising revenue comes under threat: as people download programmes for later viewing, they can skip the adverts. Of course, we’ve been doing this for years with VCRs, but not to the extent that we stop watching broadcast material. Advertisers will need to move away from the 30 second commercial towards sponsoring programmes and other ways of getting their message across that can’t be fast-forwarded. There becomes a merging of editoral/advertising boundaries.

So how do I develop wineanorak? I give content away free, and gain advertising revenue, much like traditional commercial broadcasting. More than that, though, I see giving content away as having less tangible benefits. By being widely read my reputation spreads, and from this there are ancillary benefits that pay. I wouldn’t have found a way into writing for magazines and newspapers without the website; it’s my presence on the net that has got me some of my contacts and paying gigs. These are my ‘ancillaries’ that the budget airline business relies on for profitability.