How Ancillary Fees Have Changed The Airline Industry

 @MarkJohansonIBT
on June 07 2013 5:35 AM

An increasing number of bag charges, change fees and upgrades imposed by global airlines in 2012 helped them to attain an estimated $27.1 billion in ancillary revenue, more than double the number recorded just three years earlier. Indeed, a new study by Wisconsin-based IdeaWorksCompany and Ireland-based CarTrawler said ancillary fees aren't just a business strategy that’s en vogue at the moment, they’re the new model.

Ancillary revenue "will continue to grow,” Jay Sorensen, president of IdeaWorksCompany, said. “Bag fees will become more prevalent and free food in economy class will eventually disappear.”

Sorensen added that it’s best not to look at this trend as a negative. “These are good things because not everyone checks a bag and the quality of bag and food service improves when an airline treats it as a profit center, instead of a gift. Consumers will only pay for items that provide good value for money paid.”

Sorensen said he doesn’t necessarily anticipate a rash of new fees -- “some airline, someplace in the world has already introduced whatever might be considered new” -- but he does believe that airlines will become far more effective at selling optional extras through travel agency distribution systems.

“At present, the ‘best’ deals are offered at the airline sites, because online travel agents are not yet displaying everything that’s available for fares and a la carte services,” he said. “This is changing every day, but at present, the airline site is usually the best place for the lowest fare.”

Of course, this isn’t set in stone. Airlines will sometimes offer special fares to websites believed to generate incremental business from specific customer groups, Sorensen explained. “More airlines -- especially in the U.S. -- are offering credit cards that provide advantages such as bag-fee waivers and early boarding. If a consumer can consolidate travel on one carrier, these provide meaningful value.”

Once largely limited to low-fare airlines, ancillary revenue is now a staple of many larger global carriers. Indeed, one of the most interesting developments mentioned in the study is the arrival of bag fees in Europe at carriers such as Air France, KLM, Iberia and British Airways.

Over the seven years that IdeaWorksCompany has surveyed ancillary revenue, airlines have become more forthcoming about these activities, referencing them in their annual reports, quarterly investment analysts meetings or presentations at industry conferences.

“The blueprint for an airline business has changed dramatically,” Mike McGearty, CEO of CarTrawler, explained in the report, which is titled the CarTrawler Review of Ancillary Revenue Results. “Unbundling boosts profit margins through the sale of optional services, as do the commissions earned through the booking of ancillary products such as car rental.”

The more-aggressive airlines now derive more than 20 percent of their revenue from a la carte fees, while the best-performers nab more than $30 per passenger. Some including Spirit Airlines and AirAsia X achieve this through optional extras, while others such as Qantas and Virgin Atlantic gain much of their ancillary revenue from co-branded credit cards.

U.S. airlines dominated the list of top 10 ancillary revenue generators in 2012, with United Airlines ($5.35 billion) leading the way. Delta Air Lines ($2.58 billion), American Airlines ($1.99 billion) and Southwest ($1.66 billion), rounded out the top four, followed by Qantas Airways, Ryanair, Air France/KLM, easyJet, US Airways and Korean Air.

Low-cost carriers, meanwhile, dominated in terms of percentage earned from ancillary fees. Spirit Airlines derived more than one-third (38.5 percent) of its profits from charges beyond the base fare for flights in 2012, while both Allegiant and Jet2.com earned more than one-quarter of their revenue from a la carte add-ons.

To come up with these results, IdeaWorksCompany and CarTrawler reviewed the financial filings of 116 global airlines. In the first study on ancillary revenue, conducted in 2007, only 23 airlines disclosed activity, totaling $2.45 billion. For the 2012 results, 53 carriers provided information, totaling $27.1 billion. To the researchers, the numbers speak for themselves.

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