Wednesday, July 16, 2014

Survey: Five U.S. airlines take in more than $13 billion in ‘ancillary revenue’

A just-released survey shows that, in 2013, five U.S. airlines took in more than $13bn in so-called “ancillary revenue,” the industry term for revenue from non-ticket sources including à la carte fees like baggage charges, the sale of frequent flier miles, commissions on travel-oriented services and other items.

The results are contained in the annual CarTrawler survey of global airline ancillary revenue, a summary of which was released by IdeaWorksCompany July 16. The survey shows that worldwide, ancillary revenue grew to $31.5bn in 2013, a 12-fold increase from the first such survey in 2007, which was conducted before airlines started charging extra for checked bags, early boarding, and extra legroom.

Figures were obtained from the financial filings of 114 airlines, 59 of which disclose ancillary revenue activity. An 80-page compilation of results and overall rankings from the disclosing airlines will be released later this summer.

Far and away, United Airlines (NYSE:UAL) earned the most in ancillary revenue in 2013. It reported earning $5.7bn, more than double the $2.53bn earned by second-place Delta Air Lines (NYSE:DAL) and almost tripling the $2.08bn earned by third-place American (NYSE:AAL). Southwest Airlines (NYSE:LUV) was number six on the list of the 10 airlines that reported the most ancillary revenue, earning $1.63bn. US Airways, which has since merged with American, was number 10, with $1.1bn.

Overseas carriers Air France/KLM and Ryanair earned the fourth and fifth-m
ost ancillary revenue, respectively, while easyJet, Lufthansa and Qantas earned the seventh, eighth, and ninth-most, respectively.

Despite being measured in the billions of dollars, the total amount earned in ancillary revenue averages out to approximately $16 per passenger, according to the survey.

As a high school math teacher of mine was fond of saying, “You can drown trying to walk across a lake an average of two feet deep.” His take-home message was that averages can be fairly meaningless.

Photo credit Spirit Airlines
According to the survey, Florida-based Spirit Airlines (NASDAQ:SAVE), which ironically boasts of “fares … [that] simply reflect the cost of taking customers to their destination without any extras,” earned $51.22 per passenger in ancillary revenue, second only to U.K.-based Jet2.com, which reported the highest per-passenger ancillary revenue at $55.61.

Two other U.S. airlines were among the 10 carriers that earned the most ancillary revenue on a per-passenger basis. United Airlines’ ancillary revenue worked out to $40.97 per passenger, the sixth highest of reporting airlines. Seattle-based Alaska Airlines (NYSE:ALK) reported per-passenger ancillary revenue of $32.61, the tenth highest.

While fees for checked bags, early boarding and other à la carte items leap immediately to mind, it is important to note that the sources of ancillary revenue are as varied as the airlines themselves. A portion of the ancillary revenue stream comes from upgrades to economy seats with more legroom, in-flight food and beverages, and from loyalty programs and co-branded credit cards.

For example, the survey found that Southwest, which checks passengers’ first two bags without additional charge, realized $195m from EarlyBird check-in feature. United disclosed that the sale of miles for its Mileage Plus® program generated more than $2.9bn, or more than half of its ancillary revenue figures.

Australian airline Qantas derived approximately 80% of its ancillary revenue from its loyalty marketing efforts associated with its Qantas Loyalty business unit. The carrier de-emphasizes à la carte activities by continuing to bundle elements such as baggage, food, and beverages in its basic fares, according to the survey.

Air Greenland reported that $8.1m of its ancillary revenue came from the operation of its 100% owned Hotel Arctic, which is billed as the world's "most northerly 4-star hotel."

At the risk of sounding like an apologist for airline industry, it is important to understand that the industry has a fairly small profit margin. At a recent conference, the head of the International Air Transport Association predicted that the industry would see a net profit per passenger of 2.4% in 2014, which translates to less than $6 per passenger. With an average contribution of $16 per passenger, ancillary revenue is being credited by some in the industry as a major factor in allowing airlines to be profitable within the constraints of today’s business environment and the downward pressure it places on ticket prices.

“The [airlines] can't raise prices due to competitive reasons so they offer optional extras that persons can buy or not buy,” Jay Sorenson, president of IdeaWorksCompany told TheTravelPro in an e-mail. “I'd prefer the latter because I don't want to pay for ‘free’ meals … and checked bags - - because I carry mine onboard.”

According to the survey, ancillary revenue, as well as the à la carte charges that generate a portion of it, are almost certainly here to stay.

“[Airlines’] behaviors provide evidence the ancillary revenue revolution has reached every nook and cranny of the airline industry in terms of geography and business models,” the survey’s authors note.

Visit my main page at TheTravelPro.us for more news, reviews, and personal observations on the world of upmarket travel.


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