Airlines' $57 billion question: Is there anything left to charge passengers for?
Posted On: Sep 08, 2018
Blankets, checked luggage, seat assignments, early boarding, Wi-Fi. Is there anything else airlines can charge passengers for?
U.S. carriers began charging passengers to check their luggage about a decade ago, as fuel costs surged. Since then airlines started charging for other things, such as seat selection, which once came with the cost of a ticket, along with add-ons like early boarding.
Airlines are now shifting their focus on how to generate more from the existing fees and products beyond the base fare of a ticket than coming up with brand-new things to charge for, industry members say. Some airlines remind travelers throughout the booking process about more expensive seats that offer more legroom, while others sell bundled perks like early boarding and lounge access.
American Airlines' president, Robert Isom said at an industry conference on Wednesday that add-ons are a "unique opportunity for American that, quite frankly, our competitors are ahead of us on, and this is our ability to really attract business after the purchase of tickets."
"It really amounts to being able to allow a booking to happen and then offer amenities that customers want and want to pay for as we go forward," he said.
The ancillary revenue is key to airlines' bottom lines they struggle with a profit-crimping rise in fuel costs. Ancillary revenue, including that from lucrative frequent flyer programs, are close to 11 percent of airlines' revenue, up from about 5 percent in 2010, according to IdeaWorks.
"The magic is retailing and not creating new [fees]," said Jay Sorensen, president of IdeaWorks. "When you retail better, the profit margin should be higher."
Where airlines could improve is in changing fees based on demand for a certain service, said Ben Baldanza, who led low-cost carrier Spirit Airlines for a decade through early 2016 and last month was named to JetBlue Airways' board.
He said airlines could consider more dynamic pricing, charging more to check a bag during peak travel times like Christmas and less when planes are emptier.
"There are planes full of bags and [airlines] probably could have charged a $1 more [to check] bag and everyone would have paid the fee," he said.
Another issue that airlines need to tackle is "fee leakage," he said, when employees don't enforce certain policies such as baggage fees, particularly if staff are rushing to get a plane to depart on time.
When asked whether Spirit could add new types of fees, Chief Executive Robert Fornaro told reporters at an industry conference last month that the carrier could instead do a better job of increasing revenue from its credit card and frequent flyer program and better sell its Big Front Seat, seats with 36 inches of pitch that can cost an additional $12 to $175, depending on when the seats are booked and how long the flights are.
The airline has also started sending travelers emails to alert them about declining availability of these larger seats as their travel dates approach and is working with gate agents to try to sell these more expensive seats to travelers about to board the aircraft.
Spirit generated close to $51 per passenger in ancillary revenue last year, the most worldwide, IdeaWorks report said in a July report.
Several airlines are increasing existing fees or adding fees that other airlines already have. United Airlines last week raised the price to check a bag by $5 to $30, a move that followed the same increase by JetBlue, which also increased ticket-change fees. In June, Alaska Airlines raised ticket cancellation and change fees.
United is planning later this year to charge for seats closer to the front of the plane, something American and Delta already do on some flights. The airline, as well as Spirit, offer bundled packages to get passengers to pay for other services such as early boarding and access to lounges. That began in early 2016 with two add-ons and last summer they increased that to 14 options.
Butairlines have to tread carefully to avoid a backlash from travelers who can opt to fly on a more lenient airline.
"There's obviously the idea of charging for a carry-on," said Brett Snyder, who writes the Cranky Flier airline blog. "It seems like the third rail."
American on Tuesday started allowing passengers on its most restrictive tickets to bring a full-size carry-on bag that fits in the overhead bin, bringing it more in line with Delta's competing product.
Last month, Southwest Airlines started to charge passengers between $15 and $25 to check in for their flights early, depending on demand and flight length, up from a rate of $15. CEO Gary Kelly said on an earnings call in July that the airline is not thinking about adding fees for checked baggage, to change a ticket, or assigned seating.