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How airlines are nickel and diming their way to record revenue

Customers might not like them, but airlines sure do. Airlines are on track to collect a record $42.6 billion in ancillary revenue, according to a new study.

That's a 17.9 percent increase compared to last year, according to carTrawler and IdeaWorks, which track ancillary fees for airlines around the world.

"On one level, I'm surprised by how quickly it (ancillary revenue) is growing," said Jay Sorensen, president of IdeaWorks. "I am not surprised because there is an obvious financial need on behalf of the airline industry."

In recent years, carriers around the world, especially in the U.S. and Europe, have added or raised fees for everything from checking bags to printing out boarding passes. It has added to the bottom line of nearly every airline in the world.

"These fees have become, for many airlines, the difference between a profit and a loss, and that is not lost on airline executives all over the world," said Sorensen. "That is why I think we are going to see more and more activity in this direction."

Here is the breakdown of ancillary revenue using data from IdeaWorks and carTrawler for the last three years and this year's forecast:

  • 2010: $22.6 billion
  • 2011: $32.5 billion
  • 2012: $36.1 billion
  • 2013 (est): $42.6 billion

Airlines receive 60 percent of ancillary revenue from frequent-flier programs, 25 percent from baggage fees, 10 percent from onboard/seating services fees and 5 percent of fees from travel services, according to the study.

Frequent-flier miles, credit cards climbing

For years, airlines have realized the value of co-branded credit cards that allow them to further profit. In the last two or three years, airlines have expanded these credit-card and frequent-flier programs. Increasingly, airlines are selling additional miles to retailers, banks and other businesses, which use these frequent flier miles to attract customers.

Sorensen says it's all about locking in customers.

"(Airlines) want to push the credit card, because they generate revenue whenever someone uses the credit card, but also, the more engaged the customer becomes in the credit-card relationship, the more loyal they become to a particular airline brand," he said.

Baggage fees now account for 25 percent of the ancillary revenue generated by airlines, up 5 percentage points from last year. Sorensen sees them growing outside the U.S. and thinks they will become "more prevalent" globally.

Fees Greatest in North America

North American airlines, which have been among the most aggressive adding fees, are well ahead of their counterparts around the world when it comes to collecting ancillary revenue. This year, carriers in North America are expected to bring in $17.2 billion, easily ahead of European airlines who are projected to collect $12.6 billion, according to the study.

Recently, the big push among airlines has been allowing customers to board early or pick their seat for a small fee. This is the type of à la carte fee airlines are pursuing because it gives customers the choice of paying up or simply ignoring the option.

As for those flying who don't like the growth in airline fees or feel they are being nickel and dimed, Sorensen says little is likely to change.

"The majority of the consumers do everything they can to avoid these fees, they take carry-ons, they don't eat anything on the airplane, so for the majority of the consumers these fees are almost they don't apply," said Sorensen. "For the consumers that are willing to pay more for comfort and convenience the answer is no, we have not reached a breaking point yet."

—By CNBC's Phil LeBeau

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