The U.S. airline industry, finally poised for rebound after a near financial meltdown in 2008, may owe its survival to the creative minds who brought you fees, fees and more fees.
The charges are a mixed blessing for airline passengers who resent paying for formerly complimentary services like bag checks, but who like the option to pay for in-flight Internet access, extra legroom or express check-in. For airlines, such charges are a gold mine with unlimited potential.
You're seeing more and more airlines adopt this. Nominally full-service airlines see this as a key part of their profitability now, said Andrew Watterson, an airline consultant at Oliver Wyman, a management consulting company.
Sales of ancillary goods and services by airlines enable them to squeeze more money out of their customers while keeping fares competitive. The strategy has paid off for U.S. carriers that have struggled for stability amid volatile fuel prices, fare competition and recession.
American Airlines, a unit of AMR Corp (AMR), lists its ancillary revenue as other revenues on its quarterly earnings statement. That figure, which rose 7 percent for the first six months of 2009 versus a year ago, includes service charges as well as other items such as maintenance revenue.
UAL Corp (UAUA), parent of United Airlines, said that in the first quarter of 2009, ancillary revenue and fees increased to $259 million. These revenues consist of various optional products, as well as ticket change fees and bag check fees.
Ancillary revenues and fees increased by about 60 percent in the first quarter at UAL to about $14 per passenger.
They've certainly created more ways for passengers to spend money, said Terry Trippler at tripplersview.com, a travel opinion website. But we do have to draw a line.
CHANGING THE WAY PLANES ARE MADE
The new reliance by U.S. carriers on ancillary revenue will change the way airplanes are made, said Colleen Rainbolt, a director in Boeing Co's (BA) Passenger Satisfaction and Revenue department of the commercial airplanes division.
Rainbolt said the key is to design the interior of an airplane with passenger comfort in mind and make many of the features optional so that airlines can charge for the options they deem appropriate.
It really depends on how an airline wants to use a cabin in order to maximize their own revenue, she said.
Nowhere is this budding trend more evident than on Boeing's 787 Dreamliner, which is scheduled for its first flight this year. The company put a much greater emphasis on passenger comforts for this aircraft -- adding perks such as big windows, electronic window shades and large overhead bins.
Boeing has made the cabin especially flexible so airlines have ways to upgrade a passenger's service in smaller increments than traditional leaps from economy class to business class to first class. Potentially a passenger could pay more to sit in a section with more leg room that does not feature the perks of business class.
Rainbolt noted that the recession has eroded the number of business travelers willing to pay for expensive business class seats.
The problem for airlines is that many of them earn a significant portion of their revenue through their business class cabin, she said. So having passengers fall back from business class into economy -- from a revenue perspective -- is not necessarily a good idea.
(Editing by Steve Orlofsky)