Airlines around the world, and especially in the United States, are succeeding in milking billions of additional dollars from their customers for ‘extra’ services that used to be included in their fare prices. But in the process they have frustrated more than half of their customers and left as many as 75% of them dissatisfied with their airline experiences. Globally airlines are poised to rake in almost $110 billion in revenue this year from the sale of so-called ‘ancillary services’ such as the ability to check one or more bags, select seats together and/or in advance, to get reduced ticket change fees or additional frequent flier mileage points, or to get preferred check-in and security clearance treatment.
Above: Raimond Spekking
The five large U.S. airlines - American, Delta, United, Southwest and Alaska – alone are forecast to bring in a record total of around $29.1 billion in ancillary revenue this year. That’s according to a new forecast from IdeaWorks, a consulting firm that has tracked ancillary revenue activity in the travel industry for more than a decade and which advises travel companies on ways to increase those ancillary revenues. Yet evidence is mounting that while airlines clearly have established the practice of charging more for services that historically were included in the price of a ticket, a large segment of travellers – both leisure and/or less frequent travellers and high mileage business travellers and/or very frequent fliers – are frustrated or dissatisfied with the kind and composition of the various fare price options they are being offered by the airlines.
Above; Kevan James
Tom Bacon, an expert in the field of revenue optimisation (how companies adjust prices up and down to obtain, ideally, the maximum amount of revenue each customer if willing to pay for a service or product), says that most consumers now are generally comfortable with buying travel services a la carte rather than as a ‘bundled’ or all-in traditional fare. But a majority of travel consumers – 52% according to a recent survey by travel sales technology firm Travelport - remain frustrated with how airlines present their fully-stripped down, seat-only Basic Economy fares as well as how they present various higher-priced branded fares that include various combinations of additional services. While very price sensitive travellers will sometimes select the lowest-priced Basic Economy fare offer and pay only for services like checking a bag if they actually need it, Bacon says airlines for the most part haven’t yet learned how to use data effectively to present a few fare options specially tailored to the wishes of individual customers.
Left: Walter Siegmund
“Typically the traveller is presented three fare choices up front; one is the standard or Basic Economy fare, and then couple of others are branded fares, each with two or three different ancillary services bundled into them at somewhat higher fares,” says Bacon, who spent more than 25 years working in pricing and revenue optimisation for major U.S. airlines before launching his consulting practice. “But what they need is to have like 30 or so different ‘up-sell,’ or branded fares, each with a different set of extra services bundled in,” he added. The airline initially may only show the customer three or four such offerings, but it would choose to show those based on the information it already knows about the customer. “And I’m not talking about really deep, hard-to-get data or historical or frequent flier data on each customer; just data the customer shares when he starts his fare search,” Bacon explained. “Like when he tries to book a trip to Orlando in March for five people in a travelling party, and three are under age 15 the airline should be able to know immediately that it’s a family going to Disney World and then present a selection of fare choices that are most likely to meet a family’s vacation needs.” In such a case that likely would include a still somewhat low price per seat with one checked bag per person and the ability to get five seats together. But it likely would not include trip insurance or a reduced ticketing change fee, which are extras typically only purchased by busy corporate travellers. Unfortunately, Bacon says, too often leisure travellers get offered branded fares more suited to business travellers, while corporate fliers have to choose between branded fares larded up with services they don’t need or want, or bottom-dollar fares aimed at the most price-sensitive travellers and which provide none of the extras business travellers typically want.
jetBlue have capitalised on the low-fare revolution started by Southwest in the USA
The Basic Economy fare, increasingly referred to these days as the ‘standard fare,’ may not be seen as a great value, Bacon wrote this week on his blog site Make Airline Profits Soar, “since it may lack critical features for many travellers. On the other hand, the higher (priced) branded fares may also not be perceived as ‘value’ for those seeking just one or two extras.”
All that contributes to the almost pervasive sense of dissatisfaction across the spectrum of airline customers. But despite that frustration with the still-not-well-defined approach to unbundling and re-bundling services in their variously priced fares, airlines’ efforts at boosting ancillary revenues is setting records each year. According to the new IdeaWorks report sponsored by online rental car sales technology provider CarTrawler Worldwide:
Airline ancillary revenue is on track to reach $109.5 billion this year, up almost 18% from $92.9 billion in 2018, and up almost five-fold from $22.6 billion in 2010, the first year in which IdeaWorks tracked that figure. Note: much of that growth has come from reclassification over the years of revenue previously credited to the sale of seats. But airlines and supporters of unbundling various services from the base fare argue that the rise in ancillary revenue more than offsets the corresponding drop in the average price of a fare on a per-mile-travelled basis, showing that the change to unbundled and partially re-bundled fare pricing system is producing more revenue overall.
Ancillary revenue now equals 15.2% of the five largest U.S. carriers’ total revenue, up a full percentage point from 14.2% of their total revenue in 2018.
The five biggest U.S. airlines are forecast to bring in $29.1 billion in ancillary revenues, including $19.8 billion from their frequent flier programs (primarily the sale of mileage points to the banks that issue airline-branded credit cards and award those mileage points to card holders typically at the rate of one point per dollar charged). Another $9.3 billion will come from the sale this year of a la carte services such as bag check fees, service upgrades to seats with more leg room and the ability to select seats in advance.
The average passenger globally will spend $23.91 per flight for ancillary services in 2019. That’s based on the $899 billion that the International Air Transport Association forecasts will be spent by 4.6 billion passengers this year. In 2010 the average passenger globally spent just $8.42 per flight for ancillary services.
Ancillary revenue now represents 12.2% of global airline revenue. That’s more than double, in percentage terms, the industry’s forecasted 5% operating profit margin this year, means ancillary revenues are having an outsized impact on airlines’ profitability.
The global industry’s $109.5 billion in ancillary revenue now covers more than half of the industry’s total fuel bill, which this year is expected to total about $206 billion. That means fast growing ancillary revenues have become a significant hedge against rising fuel prices.
© Dan Reed/Forbes
And in Europe…
Aer Lingus revised its short haul model to reflect competition from airlines like easyJet
Reported separately in Europe, EasyJet's annual net profit jumped by almost a fifth on strong sales and record passenger numbers, the British no-frills airline announced on Tuesday. Profits after taxation jumped 17 percent to £385 million ($460 million, 400 million euros) in the 12 months to September, EasyJet said in a statement. The total number of passengers rose 10.2 percent to a record high of 88.5 million. Pre-tax profit surged 41.4 percent to £578 million, as revenues rose 17 percent to £5.9 billion. The carrier made a smaller-than-expected loss on its purchase of Berlin's Tegel Airport from bankrupt German carrier Air Berlin.
“EasyJet has delivered a great performance during the year,” said chief executive Johan Lundgren, who has been in the job since last December. “Our financial success and increasing customer loyalty demonstrate the resilience of our operations, the underlying strength of our business and our unrivalled customer experience.” EasyJet added that it was continuing to prepare for Brexit, operating via three airline divisions based in Austria, Britain and Switzerland, in order to be able to continue flying in Europe. It expressed confidence that flying rights would continue as normal despite turbulence over Brexit talks. “Both the EU and the UK have said that their objective is to maintain flights between the EU and the UK, whatever the Brexit outcome,” the group said. “This gives EasyJet confidence that flying rights will be maintained, and it continues to work with EU institutions, EU member states and the UK to ensure that this is achieved.”
EasyJets’ big rival Ryanair said improvements in getting passengers to buy priority boarding and reserved seating drove growth in its ancillary revenue. And if the airline is getting adept at squeezing more money out of passengers, it also intends to accelerate airline consolidation in Europe by putting more pressure on weaker competitors this winter. The Irish airline reported a 27 percent jump in ancillary revenue as it continues to work out different ways to sell services to passengers. Ancillary revenues hit $1.5 billion (€1.3 billion) for the six months to the end of September and made up 26.6 percent of total revenue, which increased 22.9 percent from the prior year. With the improvements in conversion for priority boarding and reserved seating, the airline said it will continue to come up with ways to raise extra revenue from passengers through its digital development hub, Ryanair Labs.
Above: Tyler McDowell
“We will and we’ll continue to use Labs, though, to exploit and identify other means of boosting ancillary revenues,” CEO Michael O’Leary said in a conference call with analysts. “And I think if you look at the 27 percent jump in ancillary revenues in the first half of the year, you can see the kind of job that Labs are doing.”
Ryanair has already implemented a baggage policy restricting non-priority customers to one carry-on bag. Although O’Leary expects plenty of rival airlines to struggle this winter — including Norwegian — he insists that Ryanair is unlikely to play a part in any consolidation. “But as for being a player, I mean I think our contribution to consolidation this winter is, we would expect to speed up the consolidation process by being very aggressive on pricing, driving down airfares in markets where, in particular, our competitors are not able to compete with us on price and they’re essentially unhedged on oil.”
Ryanair has spent the period since 2016’s Brexit vote warning of the risk to airlines and it is not giving up yet. Concerns still linger that without a workable withdrawal agreement there could be widespread problems in the UK. “Brexit remains a big challenge for us,” O’Leary said. “The risks of a no deal or hard Brexit have risen materially. That transition period will last at least to December 2020 and probably be extended thereafter.” The Ryanair CEO is concerned about political instability in the UK. “But the real challenge and the concern for us is that the UK government may fall,” he said. “There [is] be a degree of political uncertainty. What is clear is that if there is hard Brexit that will be or may be a disruption to flights.”
If flight disruptions take place, O’Leary doesn’t believe UK citizens would tolerate that for long. “We suspect that disruption will be for a very limited period of time because I think it’s politically unacceptable to the UK population that they would not be able to access flights to holiday destinations in Spain, Portugal and Italy next year,” O’Leary said.