Monday, September 8, 2014

Report details ancillary revenue's role in keeping airlines profitable

A survey released in July showed that, in 2013, five U.S. airlines took in more than $13bn in so-called “ancillary revenue.” Now, more detail is available about the revenue airlines gain from non-ticket sources.

“The 2014 CarTrawler Yearbook of Ancillary Revenue … provides the most detailed global assessment of a bottom-line-booster that can represent more than 38 percent of a carrier’s revenue,” the firm IdeaWorksCompany said in an e-mail to TheTravelPro announcing the release of the 85-page report. That document shows that worldwide, ancillary revenue grew to $31.5bn in 2013 among 59 airlines that disclosed revenue in financial filings during 2013. Ancillary revenue comes from activities including à la carte fees like baggage charges, the sale of frequent flier miles, commissions on travel-oriented services including car rentals and other items.

“Ancillary revenue now provides the power for airlines to be profitable,” the company said, adding that, “The global airline industry hopes to achieve an average net margin of 2.4% for 2014, which is less than $6 per passenger.”

As previously reported by TheTravelPro, the first IdeaWorksCompany ancillary revenue report for 2007 identified $2.45 billion from just 23 airlines for an average of $6.99 per passenger. However, that was well before airlines started charging extra for checked bags, early boarding, and extra legroom. Now, six years later, every aspect of ancillary revenue has dramatically increased and the 12-fold increase in ancillary revenue that has resulted “has allowed the world’s airline industry to tilt into the column of profitability while keeping fares modest as consumers recover from recession,” according to the company.

The 2014 CarTrawler Yearbook of Ancillary Revenue is available free of charge. The full report is available here.

While checked bag fees, early boarding charges and premiums for extra legroom leap to mind, it is important to note that the sources of ancillary revenue vary widely and include in-flight food and beverages, loyalty programs and co-branded credit cards.

For example, Southwest Airlines (NYSE:LUV), which checks passengers’ first two bags without additional charge, realized $195m from EarlyBird check-in feature. United Airlines (NYSE:UAL) 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."

While some industry experts believe ancillary revenue will remain a major source of income for airlines, it is certainly no longer “under the radar.” As previously reported by TheTravelPro, the chairman of the U.S. Senate Committee on Commerce, Science and Transportation has launched an inquiry into how airlines disclose certain additional fees to consumers, citing concerns about transparency around those fees.

Personally, I appreciate the option to either purchase or pass on in-flight food and beverages which, as Allegiant Air (NYSE: ALGT) points out in its TV ads, aren’t free but included in the ticket price. However, having to pay to check a bag or for “extra” legroom chaps my hide.

The price of checking a bag ought to be included in the ticket price, and airlines need to simply increase the legroom for all economy passengers and charge us what they need to charge us, or they will see more events like the recent spate of in-flight fights over legroom.

Do airline executives seriously think we will stop flying and take the bus if they raise their fares? Sure, a few will opt for other modes of transportation. But virtually every flight I take has a list of “stand-by” passengers who don’t get on, which says to me that there is already more demand than supply when it comes to airline seats. Further, those fliers who are solely or primarily price-driven will gravitate to airlines that offer “bare-bones” service and/or take the approach that passengers will get used to whatever they dish out. Others, who are willing and able to pay a bit more for their tickets, will pay that price and have a more civilized experience as a result.

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


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