How Much are Airlines Making from Ancillary Revenue?
Posted by PeterGreenberg.com on November 17, 2014 at 8:33 am
Once upon a time, not so long ago, you bought an airline ticket, you checked your bags, they fed you, and you got to pick your seat. It was all included in the fare.
That is now a fairy tale. Today, there’s a darker story to tell…and it’s all about the brave new world of ancillary fees.
Ancillary fees include anything other than ticket sales, such as baggage fees, frequent flyer mile sales, and in-flight optimization, like choosing a seat and purchasing Wi-Fi. Let’s not forget…food.
According to the CarTrawler Yearbook of Ancillary Revenue created by IdeaWorks Company. only two U.S. airlines were part of the top 10 earners of ancillary revenue in 2007. But as of 2013, five U.S. airlines are in the top 10. Ancillary revenue for the entire airline community—international and domestic—hit $31.5 billion in 2013. The top 5 U.S. airlines earned over $13.5 billion alone.
Some new trends have emerged in the ancillary game. In 2007, the highest percentage of an airline’s revenue that derived from ancillary fees was 16.2 percent. That number is now up to 38.4 percent (Spirit Airlines), and demonstrates a new pattern among low-cost carriers to rely more and more on revenue from places other than airfare.
The folks at IdeaWorks, a company that tracks these things, has projected that ancillary revenue will climb to $49.9 billion worldwide in 2014—a 17.2 percent increase from 2013.
So, how are airlines making money from ancillary revenue? The largest contributor is the sale of frequent flyer miles—when the bank pays the airline to redeem your frequent flyer miles accrued through a credit card. This makes up 55 percent of profits from ancillary revenue, and has earned airlines $27.45 billion in 2013. Meanwhile, baggage fees accounted for 25 percent of ancillary revenue, 15 percent came from on-board retail and services, and travel insurance and retail made up 5 percent.
Here’s a closer look at the domestic airlines who make the top five in ancillary profits—as well as how much each passenger pays on average. We also included Spirit Airlines, the ancillary fee revolutionary, to analyze where other low-cost carrier ancillary fee models may be headed.
In 2013, United Airlines made $5.703 billion in ancillary revenue. None of the other listed airlines made the list in 2007. From 2007 to 2013, United increased its ancillary sales by 850 percent ($600 million in ancillary sales for that year). Ancillary revenue was 14.9 percent of United’s total revenue, costing each passenger an average of $40.97, with a total of over 139 million passengers.
United’s ancillary revenue consists of unbundling (checked bags and meals), in-flight products (Wi-Fi and entertainment streaming), flight personalization and upselling (premier access, United Club, fare lock, and premium cabin selling). These three categories add up to $2.8 billion. Frequent flyer mileage sales makes up the remaining $2.9 billion.
Future ancillary services for United include developing defined bundles of popular a la carte services and expanding availability through more channels, such as travel agents.
Delta Air Lines
Delta went from unlisted to second place in 2013 with ancillary revenue over $2.528 billion. This figure constitutes 6.7 percent of Delta’s total revenue for 2013 with an average of $15.35 in ancillary costs per passenger and a total passenger number of over 164 million. Interestingly, Delta had higher ridership than first-place holder, United, meaning that Delta has the opportunity to make more money in 2014 if it follows United’s lead.
Delta ancillary revenue for 2013 derived from checked bags fees of over $833 million, purchase of SkyMiles for over $960 million, and $635 million from purchasing preferred seats, in-flight Wi-Fi, hotels, car rentals, trip insurance, SkyClub passes, the Lift package (which includes priority boarding and a mileage booster), and the Ascent package
(which includes priority boarding and Wi-Fi).
American trails right behind Delta with $2.079 billion in ancillary revenue for 2013. This figure makes up 7.8 percent of Delta’s total revenue, costing the average passenger $19.12, with a total of more than 108 million passengers in 2013.
The $2.079 billion figure comes from membership fees and revenue from the Admirals Club, mileage credits for the AAdvantage program and Dividend Miles Program, administrative service charges, baggage handling fees, and marketing service revenue.
Southwest Airlines (includes AirTran Airways)
Southwest made about $1.624 billion from ancillary sales in 2013 totaling 9.2% of revenue. The average ancillary costs per passenger were $12.19 for over 133 million passengers. Southwest also had higher ridership than its predecessor on this list, American, but kept ancillary fees $6.93 lower.
AirTran’s ancillary charges are different than Southwest’s and include checked baggage, carriage of pets, liquor sales, advance seat assignments, call center services, priority seat selection, special services (such as the transport of unaccompanied minors), and extension or transfer of A+ Miles Rewards.
Southwest’s ancillary revenue includes baggage fees ($143.5 million), unaccompanied minor travel, Pets are Welcome on Southwest (PAWS), Rapid Rewards frequent flier program, Business Select fares ($100 million) and in-flight Wi-Fi.
IdeaWorks Company estimates that Southwest Rapid Rewards earned $980 million in 2012, and the airline earned an additional $100 million in 2013, reaching a total of $1.08 billion for 2013.
Ancillary revenue increased for Southwest via the sale of open premium boarding positions at the gate and by increasing the EarlyBird check-in price (revenue for this alone hit $195 million).
US Airways was ranked fifth for U.S. airline ancillary revenue earnings with a total of $1.103 billion. Ancillary charges cost each of the 85 million passengers an average of $12.97.
Ancillary revenue for US Airways included baggage charges, beverage sales, processing fees for travel awards issued through the Dividend Miles frequent traveler program, marketing revenue earned from selling mileage credits to partners, and its co-branded credit card agreement with Barclays.
US Airways earned more ancillary revenue this year via business partner mileage sales, checked bag fees, and the PreferredAccess program.
While Spirit didn’t make the top 10 earners list, they took the top spot worldwide for earning the highest percentage of total ancillary fee revenue. They displaced the previous top-spot earner, RyanAir, once dubbed The Godfather of Ancillary Revenue. Spirit’s total ancillary revenue comes in at about $636 million, but made up 38.4 percent of Spirit’s total revenue. At a price of $51.22 per passenger, Spirit has one of the highest ancillary fees per passenger, even more than United. Spirit had a total of over 12 million passengers in 2013. While the average ticket price for Spirit came in at a very low $79.43, the average total fare with ancillary fees ranked in at $133.27.
Ancillary revenue derived from baggage fees (almost $276 million), passage usage fees (almost $189 million), advance seat selection (over $59 million), and “other” ancillary revenue ($118 million), which may be call center or travel agent fees, advertising revenue, $9 Fare Club subscriptions, revenue from the Free Spirit affinity credit card program, as well as on-board products and services, such as food and drink.
As a note, IdeaWorksCompany does not consider ticket change fees or revenue from ancillary businesses to be ancillary revenue, so the real numbers for ancillary fees are actually higher.
The moral of the story here is simple. The airfare you pay is the starting point, and it is rarely the total amount you will pay. So be careful when budgeting your trip, and since the airlines often like to call these ancillary fees “a la carte” charges, then beat them at their own game, playing by their new set of ancillary fee rules. Pay for ONLY what you actually need.
For more information on fees charged by airlines, check out:
By Brittany Malooly for PeterGreenberg.comSource: petergreenberg.com