July 23, 2012 at 9:44 AM ET
A $10 priority-boarding fee here, a $25 checked-bag fee there; pretty soon, you’re talking real money.
$22.6 billion, in fact. According to the annual Amadeus Review of Ancillary Revenue Results released Monday, that’s how much ancillary revenue 50 airlines around the world reported making in 2011, a 66-percent jump from the $13.5 billion that the 47 airlines that reported such income made in 2009.
However, the 2011 total represents just a 5.3-percent rise from 2010, an increase that suggests that the days of slapping new fees on standard services may be winding down.
“Among the top producers, the growth is slowing because they’re reaching the limit of what can be sold to a customer,” said Jay Sorensen, president of IdeaWorks, who helped produce the report. “But worldwide, it’s going to keep growing because there are so many carriers that are still not doing the bare minimum.”
For this year’s report, Sorensen looked at the financial filings made by 108 carriers and tallied the non-ticket revenues for the 50 that disclosed them. Those revenues include both à la carte fees, such as those for checked bags, priority seating and cabin amenities, and the revenues airlines earn through co-branding partnerships with credit card companies.
The top five earners by dollar value last year:
Yes, Southwest, despite the fact that airline allows passengers to check two bags for free. In fact, 2011 represented the first year that the carrier cracked the top 10.
According to the report, it did so by earning $142 million through its EarlyBird priority-seating service, $96 million from its Business Select program and an additional $250 million through improvements to its Rapid Rewards co-branded credit card partnership with Visa.
Less surprising, perhaps, low-cost carriers dominated the results when calculated as a percentage of total revenue. Fee-dependent Spirit topped that list, earning one-third (33.2 percent) of its total revenue via ancillary revenue, followed by UK-based carrier Jet2 (27.1 percent), Allegiant (27 percent), easyJet (20.8 percent) and Ryanair (20.5 percent).
In a way, carriers such as Spirit cut to the heart of the matter. On the one hand, many consumers feel they’re being nickeled and dimed when they have to pay for services that were once considered part of their ticket purchase; on the other, airlines note that so-called “unbundling” of fares lets travelers pay for only the services they use, which helps keep fares down.
Much of the heat in the debate can be traced to the plethora of fees that began appearing in 2008 and the ham-handed way the airlines introduced them.
“When the more controversial fees — like first-bag fees — came out, the airlines were really just fishing for revenue,” said Brett Snyder, aka The Cranky Flier. “They were flailing and grasping at anything they could.”
But over time and with better disclosure, many fliers have come to the conclusion that unbundling fares also increases choice. If, for example, they choose not to check a bag, they say, why should the costs involved in handling it be rolled into their tickets?
“I love the idea that I can pick or choose what services and amenities I want,” said Snyder, “but I want those options presented to me early on so there are no surprises down the line.”
Meanwhile, and regardless of where individual travelers stand on the issue, it’s obvious that ancillary revenues have become the lifeblood of the industry, providing billions of dollars in income at a time when high oil prices and economic jitters continue to take a toll on the business.
According to the International Air Transport Association, the global industry posted an estimated net profit of $7.9 billion last year on revenues of $597 billion, a post-tax margin of 1.3 percent. This year, the organization expects net profits to drop to $3 billion or just 0.5 percent of revenues.
Given those pressures and the difficulty of raising fares in tough times, it’s unlikely that the airlines will forgo their ancillary revenues anytime soon. The rate at which those revenues increase may slow — as noted, many airlines have already snagged the low-hanging fruit of bag fees, change fees, food and beverage, etc. — but that will simply push some to get more, shall we say, creative.
Pre-ordering upgraded meals before your flight? KLM is now charging 12 to 15 euros on select flights. Permanent RFID-equipped bag tags that let passengers bypass the lines at the ticket counter? Qantas sells its Q Bag Tag for AUD$50. And Vueling, the Spanish low-cost carrier, will hold the middle seat empty, board you early and provide a drink and a snack for 60 euros, or around $73. No doubt, others are in the works.
“We’ve seen the industry move swiftly to grasp some clear opportunities for providing ancillary services, such as baggage fees, extra legroom and on-board catering,” said Holger Taubmann, senior vice president of distribution at Amadeus. “The next wave of innovation in ancillary services will come from those airlines which develop new products that support their brand positioning and deliver value to the traveler by meeting their individual needs and preferences.”
Or, as Sorensen puts it, “Consumers are beginning to begrudgingly accept this method of airlines’ pricing their products. They’re not at the level of embracing it but for consumers who can travel light, don’t care when they board and don’t want to eat on the plane, they’ll find their way to a cheaper fare.”
Rob Lovitt is a longtime travel writer who still believes the journey is as important as the destination. Follow him at Twitter.
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