U.S. airlines took in some $2 billion in fees for ancillary services in the third quarter, a 36.4% increase over the same period in 2008, and Delta Air Lines clearly was the most aggressive carrier in its fee-collection activities.
The details, from a report by the U.S. Bureau of Transportation Statistics, show that Delta’s ancillary revenue efforts, which brought in $447.5 million, had no serious competition. American Airlines came in second at $261.2 million for the quarter.
Plus, when you take into account that merged airlines Delta and Northwest Airlines reported their numbers separately, then their combined $670.8 million in ancillary-fee revenue stands out as even more impressive — or notorious, depending on your perspective.
At times lost in the discussion about ancillary revenue is the fact that the category takes in much more than bag fees. In fact, the above numbers also include change fees and charges for pet transportation, standby and sale of frequent flyer miles to the carriers’ business partners.
Delta also topped the other airlines in the ancillary fees it took in per passenger at $24, but the airline was far less dependent than other major U.S. airlines in getting that revenue from bag fees, according to the DOT numbers. So Delta collected $7, or 29.2%, of that $24 from bag fees. [About $6 of the $24 in fees that Delta collected per passenger came from change fees.]
In contrast, airlines such as United Airlines, Continental Airlines and AirTran Airways took in roughly half of their ancillary revenue from bag fees.
Clearly, ancillary revenue is a category in the process of undergoing a radical transformation, one with far-reaching implications for travel technology, distribution and customer service.
Two years from now the pecking order among airline fee-collectors may be substantially different.
And, certainly the types of fees collected will be much broader.
I just hate paying extra for things that they can/ should just roll into the price of the ticket.
Sounds like wooden money to me. Drive down airfares, increase fees, still make a loss.
Stavros: Yes, Delta’s profit margin for the quarter was a whopping 1.4%. However, what the impact of fees was on that, I can’t tell you.
Interesting – that DL only gained a little amount from their bag fees. easyJet (U2) claims (in most recent quarter) that 60% of their ancillary revenue came from Bag Fees. Remember that U2 and FR only allow 1 onboard carry on – strictly enforced by the BAA and other airport authorities’ storm troopers.
As an anecdote – Ryanair’s (FR) Self Service terminals allow you to pay for your bag overage separately. While horrendously expensive (40 pounds for 2 kilos), I could do it in an automated fashion.
What I can see is easily that there is a lot of leverage for things that people would like to pay for. (Like a better seat). However as I have opined before – better not make it too complicated. Southwest is making money by offering free bags. This holiday season that is huge.
Cheers
Timothy
Hey Planes Guy: You gotta lot of company in that sentiment.:)
This article and Timothy’s article yesterday have several good points. From the perspective of this writer’s humble retail background, however, what we’re seeing is promising, but missing the inflection point of opportunity to deliver incremental revenue AND a better flight experience.
Bag fees are a great example. Don’t current fees seem knee-jerk? It seems more like penalty revenue, like bank overdraft fees and old video rewind charges. They can drive share away. How much of Delta’s ancillary revenue was generated from fliers who weren’t aware of the fees – and who won’t voluntarily incur them again?
BUT – charging for cost-intensive elective services like baggage and pet transport is perfectly justified. IF transparency enables consumers to make decisions and IF pricing and service meet consumers’ utility, airlines can certainly generate sustainable income, but they need to take a slightly longer-term view.
Forcing bag fees, excess food charges, pillow fees, zoo tours, seat upgrades, and Elton John tickets (yes, one airline said that to me) through a fire hose is not merchandising.
There’s a difference between selling stuff and merchandising. Think Target vs. Kmart. Best Buy vs. Circuit City. iPod vs. Zune.
Airlines that look from the traveler’s perspective (the proverbial seat) – not the distribution technology perspective, will do well. Good merchandising drives an emotional connection and desire to spend.
To be fair, airlines are having to approach it in reverse order of a true merchant or CPG – having to figure out what and how to sell long after distribution systems, stores (eg, planes), vendors, and staff (flight attendants) is already in place.
Worse, they seem to be preyed on by opportunistic onboard POS vendors (including one I shouldn’t name here) dramatically overstating a “selling bonanza” because airlines can “lock their doors with their shoppers still inside” and use commissioned flight attendants to hawk product from the aisles (quotes from the firm’s literature).
Show me a retailer today with this attitude toward customers, and I’ll show you one that will be out of business tomorrow.
And please, don’t tell me SkyMall is a solution. If airlines can engage experienced resources to complement their internal marketing folks to help develop true merchandising approaches and execute them, everyone can win.
Timothy: And, even Southwest is introducing lots of fees, but just not for first bags.
Jonathan: I agree that airlines largely are not engaged in true merchandising. Insteaad, it mostly is of the ram it down their throats variety. How they can make a switch to real merchandising is the several-billion dollar/pound/euro question.
The capability to merchandise has a long way to catch up. This will improve in 2010. The ability to provide true value will be there eventually. There are a lot of moving parts to this – not all of them necessary. We are dealing with antiquated business processes going back nearly 50 years (and mind sets that are even older). The end state will be a more a la carte method of buying the product. Still some will not like it. So the airlines better figure out ways to bundle consistently or someone else will.
Cheers and Merry Crimble
Timothy: It’s the 50-year-old mindsets that have me worried. You say the ability to provide true value will be there eventually. Let’s hope because the airlines have not gotten off to a good start on that front. Keep hope alive:)
Denis… I am more optimistic than perhaps I sounded before. And yes we share the same concerns.
Fortunately this is where some airlines have allowed some smart people into the mindset. Without naming names at least two US carriers have the right mindsets and are actually driving the innovation that is required.
A further benefit here is that one size does not have to fit all. We will see solutions emerge that will require the channel(s) to do things they have never done before. The haves and the have nots are going to be replaced by the smarter and the dumber.
I think we can safely bet that the latter category will be the Luddites in the community complaining about change. The trick will be how to provide the choice without over complexity (which is an airline habit) and confusion. Obfuscation should not be confused with choice.
Cheers