Airlines have become creative with add-ons, with earnings far above the basic seat price.
Remember the simple days when we tabulated the extra revenue airlines were making beyond the basic fare by mainly looking at fees for checking bags and penalties for rebooking advance-purchase tickets? Those numbers once seemed impressive. In fact, according to Transportation Department figures, domestic airlines generated $3.4 billion in revenue from checked bags last year, compared with a mere $464.3 million in 2007, the year before most airlines started charging most customers to check bags. Domestic airlines raised another $2.4 billion from penalty fees they charge when passengers cancel a nonrefundable reservation and rebook that ticket at a later time.
Big numbers, yes. But really, that’s relatively small change when you add up the total amount of what passengers pay above a basic fare. A report out Monday puts that figure at about $12.4 billion last year — and that’s just from the top six domestic airlines ranked by the amount they raised: United, Delta, American, Southwest, US Airways and Alaska. Other domestic airlines accounted for $1.8 billion more.
Globally, airlines last year raised $22.1 billion in such revenue, according to the report by IdeaWorksCompany, an airline revenue consultant, and Amadeus, a worldwide reservations transaction firm. That is a jump of 66 percent in just two years.
Besides bag check charges and reservations change penalties, the revenue comes from a large, and growing, array of services and products as airlines devise ever more strategies to become “more active retailers of travel,” according to Jay Sorensen, the president of IdeaWorksCompany.
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And you thought airlines were just in the transportation business. The carriers that are most innovative about generating extra revenue “have clearly defined themselves as retailers that sell a base transportation product called a seat, and then have refined the ability for customers to add things to that,” Sorensen said.
The revenue is coming from things like deals with credit card companies that buy frequent flier miles from airlines and award them to customers. Increasingly, though, the credit card companies are paying the airlines for other services that they give customers free with their card, including preferred seating, priority boarding and even free checked bags. On a typical domestic airline, half the extra revenue comes from these deals.
But other airlines — Spirit and Allegiant are prime examples in the United States, and Ryanair and EasyJet are good examples in Europe — have become increasingly creative with add-ons. Spirit, for example, charges extra just to use an overhead bin. Allegiant is one of the leaders in selling airfare-and-hotel packages at a single price.
Several issues arise from the proliferation of airline fees, which, I should add, are generally credited with making the difference between a profit and a loss for some airlines. One is that the revenue is not generally subject to the 7.5 percent federal excise tax levied on all airfares. The federal government gets about $25 million a day in tax revenue on airfares.
Another issue, and one that drives corporate travel managers to distraction, is that the cost of business travel is not easy to budget for, since options that travelers may reasonably choose, like an aisle seat or a Wi-Fi connection, aren’t always posted as part of the total fare.
This was a hot topic Monday at the opening session of the annual convention of the Global Business Travel Association in Boston.
“Travel professionals must be presented with an accurate view of the total cost products,” the group’s executive director, Michael W. McCormick, said in the keynote speech. “To that end, it is imperative that there is full transparency to buyers on fares and fees. This applies to booking, ticketing, billing and fulfilling those services.”
Kevin Mitchell, chairman of the Business Travel Coalition, said in a separate speech that the absence of detailed information about fees “is incredibly frustrating for travel professionals looking to compare the all-in-one price of travel options for customers.”