Travelers hate them – fees for everything. Change your mind? That will be $50 please. Got bags? A fee. Spirit even charges for carry on bags. Is there no end to the nickle and diming? The short answer is no.
Using 2005 as the base year, take a look at how the airline industry is mainlining on fees. It is quite remarkable. Virgin America has taken to fees with a fervor (and they have a great way to gather these on their IFE system) – but in total revenue terms, Delta is the biggest fee gatherer. Delta alone accounted for a third of the US airline industry’s 2010 ancillary revenues as the table illustrates.
Take a look at how much Delta managed to gather in reservation cancel fees through September 2011. Delta managed to charge 36% more than United and Continental combined and 57% more than American.
The US airline industry is dependent on these fees. Without them profits would disappear. The next slide shows just how crucial these fees have become to the industry’s revenue.
MIT Airline Data Project research shows that in 2010 the industry averaged a loss of $19.47 per ticket. Adding back ancillary revenue of $8.70 per ticket cut the loss to $10.76 per ticket. Between 3Q10 and 3Q11 we have seen average US airfares rise 6.2%. With capacity constraint and rising fares, and more importantly those fees, the US airline industry looks set to be profitable in 2012.
Very nice presentation. I’m struggling to come up with new ideas for ancillary revenue that these guys haven’t thought up yet? Any ideas other than toilets and charging for breathing cabin air?
I note the proliferation of LCCs in the Asia-Pacific region. How long until cut throat competition and fuel costs drive those carriers to this model?
Don’t you think given the airlines’ bankruptcy, volatile fuel prices, and high competition among airlines have created this situation. what else option do they have?
Airlines could develop a method that allows them to share the fuel hedging risk with customers. Since fuel costs are so crucial it would be logical to split this risk with customers.
You’re right there are no other obvious options.
An umbilical string to the aircraft’s cargo holds (from checked-in luggage) means minimum 8′ extra time @ the check-in counter (vs direct walk-in) plus another 12′ @ the luggage redelivery belt upon arrival (vs direct walk-out), total 20′ or more extra time door-to-door (plus the extra stress), so here is definitely a source for ancillaries : full carry-on “two items” convenience, eg 1 roller bag plus 1 rucksack or a laptop, with a nice fee charged for the second item ?
Maybe they could charge you for priority boarding if you know you’re going to have to fight for the (free) overhead space.
I wonder if they could save on weight if their push carts could carbonate syrup on the fly, then they wouldn’t need to carry as much total water weight.
The question asked is not necessarily the right one. The issue is how to deliver a value package which raises gross and net revenue from the customer.
If you take the silo approach of trying to get more for less or even the same then that is not necessarily a winning strategy.
If you want examples of how to extract that last cent/penny etc then look at Ryanair.
However rethink the problem and look for ways to add value – perceived or real – to the customer for which he is prepared to divert revenue or increase revenue to you.
That in turn can inspire you to think of other solutions.
Please feel free to contact m directly if you are interested in direct ways to generate this additional revenue
Cheers
Timothy
Sell high value electronics on board. An iPhone might get you more profits than 100 cans of cola and weights much less.
You are right, saving weight is important. To avoid loading water, one could use the condensate water with the syrup to make soda… Isn’t the space station doing this?
OK me again. I think what you should do is to look at the GDS cost and see what would happen if that cost was reduced. Right now the numbers are $6 for 2.3 pax per PNR. Reduce that to say $2.50 per PNR – then see what would happen to the bottom line of the airlines…
Post American’s new formula for fare families and the back end upgrades going on at various airlines, I think we are starting to see that the line between ticket and ancillary will become blurred. We need to find a way to deal with airlines as the rest of the world deals with a frequent purchaser.
In retail for example loyalty measures the frequency of use and the life time value of the customer. So do airlines but … the notion of the product is what is changing.
How this pans out will be interesting, but it is largely driven by the fact that airlines are back in the command seat. Within the US Domestic market – there will be no meaningful competition for the next 5 years at least. Shrinking capacity and tight market controls have created a radically different marketplace from even 5 years ago.
Thanks DoT!
For evidence i submit the rising price of transatlantic tickets for the past 4 years peak summer travel. I further submit that the raise in yields is not a temporary phenomenon. Delta has managed to get 10%+ over consecutive quarters. Probably the dog quarter being Q1 2013 but that is to be expected. Looking at the savage cuts in the Winter12 schedule followed on from a similar set of cuts in WInter11 it is not hard to see how they are doing this.
I wonder if anyone is calculating the cost to the US economy of this steep rise in an essential part of the business cost equation.
Cheers