Airlines Rake in $31.5 Billion in Ancillary Fees
by Michele McDonald /The airlines have come a long way in their pursuit of ancillary revenues.
In 2007, they earned a barely noticeable $2.07 billion through the sale of optional services. Among the top U.S. airlines, only United was a player back then, by virtue of its early adoption of “unbundled” fares.
The following year, ancillary services became critical to the airlines, given the spike in fuel prices and the deep, dark recession that some observers predicted would cripple business travel forever.
In 2008, American introduced a fee for the first checked bag, and the major U.S. airlines were off and running.
Last year, ancillary revenues mushroomed to $20.4 billion for the top 10 ancillary earners, according to analysis by IdeaWorksCompany, sponsored by the Irish car rental aggregator, CarTrawler. Total ancillary revenues for industry topped out at $31.5 billion.
The growth of ancillary products and services is playing a role in two key issues now in play.
Critical industry issues
One is IATA’s New Distribution Capability, which aims to create technical standards to ease the distribution of innovative airline “offers” through third parties.
Much of the fuss over NDC has died down since IATA and Open Allies for Airfare Transparency smoked a peace pipe in January, but some observers predict that changes in the current distribution business model are inevitable.
The other is the battle over whether the U.S. Transportation Department should require airlines to make their ancillary products visible and even available for sale through all sales channels, including the GDSs.
Ryanair was No. 1 . . .
IdeaWorks found even more stunning figures when it looked at ancillary revenue as a percentage of total airline revenue.
In 2007, Ryanair was the undisputed champion of ancillary sales, which accounted for 16.2% of its revenue. Everyone thought that was a lot at the time.
Today, Ryanair has been bumped down to the No. 5 spot, even though ancillary sales now account for almost a quarter of its revenue. Ryanair has been supplanted by even more aggressive players.
. . . but not anymore
The reigning monarch of ancillaries is now Spirit Airlines, a carrier so pugnacious that it makes Ryanair look warm and fuzzy. (Spirit currently is running a “Tell Us How Much You Hate Us campaign.)
Spirit tops the ancillaries-earnings chart, deriving 38.4% of its revenue from optional services.
Some of Spirit Airlines optional services are just barely optional.
Passenger usage fee?
For example, 30% of Spirit’s ancillary revenue comes from the “passenger usage fee.” The passenger buys the ticket, then pays a fee to use it.
“This ‘optional fee’ qualifies as ancillary revenue only under the most liberal interpretation,” IdeaWorks said. “Consumers must scroll through the small print at the bottom of the booking page to learn it can be avoided by booking at the airport.”
When it comes to ancillaries as a percentage of airline revenue, the U.S. majors are nowhere to be found among the Top 10.