Virtually every time I fly, I hear or have at least one conversation with fellow travelers about the state of the U.S. airline industry, how service has dropped to what many of us consider an all-time low, and how angry we are about being nickel-and-dimed.
Sure, most of us see value in some aspects of á la carte pricing. Do we want to buy the airline’s packaged dinner or bring something on board from a vendor in the terminal? Are we going to indulge in a glass of wine or a beer, or not? Do we want to buy in-flight Wi-Fi or stay (perhaps blissfully) disconnected? Those types of choices are fine. But what irritates most of the people I talk to is the extremes to which some carriers go: charging for things like advance seat assignments, for printing a boarding pass, and on and on.
Ancillary revenue can come from the sale of á la carte services including meals and beverages on board, checked bags, advance seat selection, and checked-baggage fees. It also includes overweight and excess baggage fees, membership fees for an airline’s premium lounge as well as things like commissions earned from the sale of hotel room nights and rental cars, and the sale of frequent flier miles.
Based on my own experience as well as my own feelings on the matter, I was unwilling to accept the assertion in the report by IdeaWorksCompany that, “Consumers are coming to embrace the practice” of á la carte pricing at face value. I decided to dig into the report a little more deeply and to compare the report’s findings with the results of a survey that measures customer satisfaction with the world’s airlines.
The IdeaWorksCompany report delved into the amount of ancillary revenue earned by 67 of the world’s airlines that report their financial data in sufficient detail to make an analysis possible. Not all do, nor are they required to do so. Accordingly, the picture is not complete but nonetheless provides some interesting insights.
Was there any discernable correlation between the amount of ancillary revenue individual airlines reported and their customer satisfaction rankings as determined by the SKYTRAX World Airline Awards? Indeed there was.
Among traditional carriers – those with multiple cabin classes and that operate out of multiple hubs – the top-ranked carriers reported the smallest percentage of ancillary revenue.
Emirates, ranked No. 1 among the World’s Best Airlines in the 2016 SKYTRAX World Airline Awards, derived the second-smallest percentage of total income from ancillary revenue: 0.5 percent. Garuda Indonesia, the No. 11-ranked carrier, derived even less: 0.3 percent, all of which came from excess baggage charges, according to the report.
|Garuda jet at Boeing plant in Everett, Wash.|
Not all of the airlines ranked among the world’s 10 best disclosed financial data related to ancillary revenue.
The 10 airlines that derived the highest percentage of their income from ancillary revenue, according to the report, were all low-cost or no-frills airlines, only one of which showed up on the list of the World's 100 Best Airlines. It was Singapore's Tigerair, at No. 97.
There is little question that a segment of the traveling public embraces such carriers as Spirit Airlines, Allegiant and Frontier. The low “seat-only” fares are an obvious draw and no doubt some passengers pay the fare and buy nothing more. However, I believe that many – and perhaps most -- passengers are initially drawn in by the low published fare but do not accurately calculate the all-in cost.
Last year, Wall Street Journal reporter Scott McCartney wrote an article that included a breakdown that showed how ancillary fees, along with standard government fees and taxes, inflated the “$209 fare” to a total cost of more than $484.
Indeed, the growth being experienced by low-fare carriers could be interpreted as an indication that consumers who choose low-cost or no-frills carriers might be coming to embrace the practice of á la carte pricing, or at least accept it. However, the data doesn’t appear to show that the same acceptance when applied to traditional carriers.
The carriers at the top of the satisfaction rankings are traditional carriers that attribute the smallest portion of their total income to ancillary revenue. Low-cost carriers, which generally derive a far higher percentage of their total revenue from ancillary services than traditional carriers, are at the bottom of the customer satisfaction list if they made the list at all.
America’s big three legacy carriers are somewhere in the middle.
Delta Air Lines (NYSE:DAL) was ranked No. 35 in the 2016 SKYTRAX World Airline Awards, well ahead of United Airlines (NYSE:UAL) at No. 68 and American Airlines (NASDAQ:AAL) at No. 77.
Delta derived 9.3 percent of its total revenue from ancillary services, but a significant portion of that came from Delta Sky Miles activities and upgrades to Comfort + seating, its premium economy offering. Only about a fifth of the carrier’s ancillary revenue came from á la carte services like checked bag fees, inflight Wi-Fi, and upgrade packages, indicating that the carrier engages in less nickel-and-diming of its passengers than the other two carriers.
By comparison, United derived 16.4 percent of its total revenue from ancillary services while American drew 11.5 percent from ancillary revenue. In each case, a bit more than half came from the sale of ancillary services while a bit less than half came from frequent flier mileage activities.
In addition to its aggressive expansion in many major markets, Delta has also apparently been working to improve its service. It rose from No. 45 of the World’s 100 Best Airlines in 2015 to No. 35 this year.
United fell from No. 60 in 2015 to No. 68 in 2016 while its ancillary revenue per passenger rose from an average of $42.46 in 2014 to $44.16 in 2015. Meanwhile, American’s ranking was almost unchanged, rising from No. 79 last year to No. 77.
Obviously, an airline’s satisfaction ranking is influenced by more than just á la carte charges. However, because group leader Delta derived a significantly smaller portion of its ancillary revenue from the sale of in-flight services than did United and American, that suggests less nickel-and-diming than the other two carriers and, in my view, was likely a factor in Delta receiving the highest ranking of the three legacy carriers.
The 10 airlines that brought in the most ancillary revenue were all low-cost/no-frills carriers, and only one of those even made the list of the World’s Top 100 carriers.
Of the Top 10 of the World’s Top 100 Airlines that reported ancillary revenue, all but one derived less than 10 percent from ancillary services, and most took in a far smaller percentage than that.
Granted, there is a great deal more than U.S. airlines need to fix beyond reducing their nickel-and-diming of their customers before they can give the likes of Emirates, ANA and Qantas anything approaching competition. But U.S. carriers could learn from the highest-rated carriers, where excellent service provided as a package with fewer optional add-ons reaps significant benefits in terms of reputation, customer loyalty and, ultimately, profit.
It’s working for those international carriers; it can work for U.S. carriers as well.
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Photos by Carl Dombek
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