US airlines rake in highest amount of ancillary revenue -- report

The three major U.S. airlines led the pack in the amount of revenue derived from the sale of so-called ancillary services, according to a report detailing the ancillary revenue earned in 2015 by 67 of the world's airlines.

Conducted by IdeaWorksCompany and sponsored by CarTrawler, researchers dug into financial filings made by 135 airlines worldwide, 67 of which disclosed qualifying revenue activity, and determined that those airlines earned a combined total of nearly $40.5bn in ancillary revenue last year.

Ancillary revenue is revenue gained from retail activities, à la carte services including food and beverage and checked-bag fees, the sale of frequent flier miles, commission-based products including hotel stays and rental cars, and miscellaneous sources such as advertising.

While airlines all over the world benefit from ancillary revenue, the degree to which airlines disclose financial results varies. Financial statements for U.S.-based airlines universally provide a high level summary of ancillary revenue results while publicly held low-cost carriers almost always make direct reference to ancillary revenues achievements due to investor interest in the topic.

The carrier that reported the most income from ancillary revenue in 2015 was United Airlines (NYSE:UAL), which also topped the list in 2014 and 2013. The Chicago-headquartered airline reported nearly $6.2bn in ancillary revenue, up from more than $5.86bn in 2014 and $5.7bn in 2013. American Airlines (NASDAQ:AAL) reported $4.7bn, only slightly higher than the combined total of $4.65bn in 2014 for American and its merger partner US Airways but up significantly from a combined total of $3.18bn in 2013, when the two carriers reported separately.

Delta Air Lines (NYSE:DAL) continued to occupy third place, deriving nearly $3.8bn from ancillary revenue compared to $3.21bn in 2014 and $2.53bn in 2013. Air France/KLM was fourth with approximately $2.16bn, an increase from $2.05bn in 2014 and $1.71bn in 2013. Southwest Airlines (NYSE:LUV) bumped Ireland-based low-cost carrier Ryanair out the No. 5 slot with nearly $2.12bn in ancillary revenue.

Rounding out 2015's top 10 were Ryanair with $1.74bn, Lufthansa Group with $1.49bn, easyJet with $1.47bn, Qantas Airways with $1.17bn, though that was mostly from the transactions related to its frequent flier program, and Seattle-headquartered Alaska Air Group (NYSE:ALK) with $1.09bn.

Perhaps more telling than the dollars earned are the percentages of total revenue derived from ancillary services. "It is a logical corollary that airlines with low average fares will have the highest percentage of ancillary revenue," according to the report's authors, and the numbers bear that out.

Spirit Airlines ancillary revenue profile from IdeaWorksCompanySince 2011, the top slot has been held by U.S.-based Spirit Airlines (NASDAQ:SAVE), which is conspicuous among consumers and regulators for its aggressive pursuit of à la carte sales. The airline has a policy of “no waivers & favors” for enforcing its fee structure.

In 2015, Spirit derived 43.4 percent of its total revenue from ancillary services, up from nearly 39 percent in 2014. Allegiant was second, obtaining 37.6 percent of its total revenue from ancillary sales. Wizz Air was third at 36.4 percent, U.K. low-cost carrier was fourth at 29.4 percent and Ryanair was fifth at 24 percent.

While ancillary revenue overall is up across the board, the average amount obtained per passenger, on average, is mixed.

Spirit topped the list of ancillary revenue per passenger, obtaining an average of $51.80 from à la carte fees, but that marks a decline from its figures for 2014 when it obtained an average of $52.35 per passenger. The highest per-passenger average for 2015 is also lower than in 2014 when topped the list with $56.28 per passenger in ancillary revenue. In 2015, obtained $50.84 per passenger.

Other carriers that saw declines in the average amount obtained from each passenger include Qantas, which dropped to $42.70 in 2015 compared to $50.16 the previous year and Malaysia’s AirAsia X, which declined to $35.01 per passenger compared to $43.22 last year.

While widely characterized by travelers as airlines "nickel-and-diming" passengers by charging them for everything from advance seat selection to in-flight headsets, the report showed that is not always the case. Air Canada, for example, earned $548m of its $682.4m in ancillary revenue from the Aeroplan loyalty program for the purchase of reward travel.

Other airlines also earned significant ancillary revenue from items that are truly optional.

Qatar Airways posted revenue of $548m of its $590.9m in ancillary revenue from the sale of duty free goods and beverages. Southwest Airlines earned an estimated $260m from EarlyBird check-in during 2015. Of United's $6.2bn in ancillary revenue, nearly $3bn came from mileage sales, with the majority sold to Chase Bank for the MileagePlus co-branded credit card. Allegiant earned $40.2m from third parties for commissions on items including hotel rooms and rental cars.

Charges for other items, including Premium Economy seating, unaccompanied minors and overweight baggage charges are also readily understood by the majority of travelers. Specifically, Delta saw a revenue boost of $125m during 4Q15 from sales of its Comfort + seating.

Many carriers reported more modest ancillary revenue; 22 of the 67 reported that less than five percent of total revenue came from the sale of ancillary services. The three airlines that reported the lowest percentage of ancillary revenue were Japan's All Nippon Airways (ANA), and U.A.E.-based Emirates reported 0.5 percent of their revenue from ancillary services, while Garuda Indonesia reported only 0.3 percent, all of which came from excess baggage fees.

My take

While the report contains a great deal of interesting and useful data, its author is clearly in support of the practice of à la carte pricing, referring at one point to "optional extras such as checked bags [and] seat assignments".

The report also includes some statements and conclusions that I find debatable, including that "Consumers embrace these à la carte methods", and "Consumer behavior supports the popularity of seat-only tickets that deliver lower prices." Certainly, some consumers will endure any hardship to save a few dollars and that is certainly their choice.

The problems that I and others see is the degree to which the practice has metastasized in some airlines and that there is increasingly less choice available.

For example, I have no issue with customers paying or choosing to decline on-board food and drink, in-flight entertainment options, Wi-Fi, early boarding and other similar facets of flying. I am less sanguine about checked bags fees, as baggage is almost always a necessary part of air travel. Being charged to reserve a seat in advance, talk to a live agent or print out my boarding pass make me absolutely livid. Ancillary revenue is an area I believe needs to be more strictly controlled.

The author concludes that the à la carte pricing model has created deeply discounted "basic" or "seat-only fares" and that more carriers will follow suit. However, those fares lose some of their appeal when the fees and charges are tacked on. 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 his “$209 fare” on Spirit to a total cost of more than $484. A cynical observer might conclude that the "basic" or "seat-only fares" are a come-on.

If only a few airlines were rapacious in their à la carte pricing (or nickel-and-diming), it would be a simple matter of passengers who don't mind the practice patronizing those carriers while others take their business elsewhere. However, because it is becoming so wide-spread, it may be only a matter of time before there is no real choice left and that air travelers may soon have to face the reality of being nickel-and-dimed no matter which carrier they choose.

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