Who knew that the hotel minibar would serve as such an
inspiration to an entire industry? Saddled with rising fuel costs
and the demands of recession-weary consumers that fares not
skyrocket, airlines have taken to add-on charges in a big way.
And it's not just fees for baggage checks anymore. Inspired by the
a la carte
concept of the hotel minibar, airlines of every stripe are finding
new and creative revenue streams. Last year, 53 of the world's
airlines reported a whopping $27.1 billion in ancillary revenues,
according to a new report by the consulting firm IdeaWorks Co.
That's a significant rise from the $2.45 billion in add-on revenues
that 23 airlines reported in 2008, back when sales from ancillary
items were relatively new.
"I think the ancillary revenue movement - or shall I say
a la carte
fees - goes beyond mere revenue," says Jay Sorensen, CEO of
IdeaWorks. "It offers the potential for an airline to better tailor
service to the needs of individual customers. They can click and
buy the amenities they want rather than the airline deciding what
is bundled in the base fare."
For years, discount carriers like Ireland's
) and the United Kingdom's
(OTCMKTS:EJTTF) have relied on ancillary fees for a large portion
of their overall revenues. Last year alone, RyanAir racked up
nearly $1.4 billion in add-on revenues, some 22% of its annual
revenues that account for more than $17 per passenger. This year,
the title of Grand Poobah of Ancillary Revenue goes to
), whose half-billion dollars in add-on sales accounted for more
than 38% of its annual revenues. Spirit got each passenger to fork
over nearly $49 in extra fees last year.
Baggage-check fees marked the beginning of the add-on trend. But
passengers quickly responded to those fees by refusing to check
their bags. In turn, airlines tweaked the add-on business model to
make customers perceive many of the new fees as adding value to
their trips, says Sorensen. IdeaWorks estimates that "economy
comfort" seating, for example, contributed some $88 million to
(OTCMKTS:AFLYY) transcontinental routes in 2012.
What surprised Sorensen most in this year's revenue survey is the
extent to which full-service airlines in America and even Europe
have embraced the
a la carte
trend. "Air France/KLM is rapidly going down this path and offers
many optional extras, such as fees for better seats, premium meals,
and holding - but not buying - a reservation," he says.
According to IdeaWorks, America's largest airlines like
) generated most of their ancillary revenues (more than $6 billion
worth) by selling frequent flier miles, especially in conjunction
with credit card companies. Baggage fees still account for 20% of
their add-on sales. European carriers are following suit. In the
case of Norwegian Airlines, the company owns a portion of Bank
Norwegian, which paid the airline commissions of $6.9 million from
) card fees last year.
The major US and European carriers are offering an ever-growing
list of products like food, drinks, Internet access, and
commissions from hotel bookings. Plus, they're monetizing things
like priority security screenings, exit row seats, early boarding,
and even one-time access to booze-filled airport lounges. The
"EarlyBird" boarding program made
(LUV) more than $160 million last year.
The cost of jet fuel rose by more than $0.25 per gallon this
summer, prompting many non-discount airlines to join the race for
add-on fees. Some high-end carriers, like the UAE's Emirates and
(OTCMKTS:DLAKY), however, continue to make less than 1% of their
annual revenues from ancillary fees.