On Ancillary Revenue

Yesterday, the US DOT released its statistics on baggage fees, and reservation change fees. The total revenue figure of $5.7 billion combined for the two groups of fees was met with predictable uproar from the news media. Considering that the US airlines cumulatively made just $958 million, it’s safe to say that these types of fees will be around indefinitely.

In terms of the individual fees; Delta collected the most; raking in $952 million in baggage fees, and $699 million in change fees. Their net annual profit; $593 million. American Airlines? Same story, with $581 million in baggage fees and $471 in change fees. They managed to eke out a nice net loss of $471 million.

If you read through the article linked above, the author, Scott McCartney of the Middle Seat Terminal claims that, “Without the change to the fee frenzy, a la carte pricing model at airlines, base ticket fares would no doubt be higher and airlines still might have been profitable last year.” But that assumption is misguided at best. Even at the height of the credit bubble (2007/early 2008), airlines were barely making a profit. Because passengers often shop with a lowest advertised price mentality (without taking into account added costs for food, bags, and even drinks), airlines were often unable to tap into a large segment of fliers. And while passengers may not love it, FY 2010 was the first profitable year for airlines since 2007, and their most profitable since the 90s.

There were a couple of interesting trends in the data that really caught my eye; the first, was that baggage fees as a whole have really plateaued this year. 4th quarter baggage fees were up just 11.8% year over year; the lowest growth rate since the beginning of the recession. Also, the change in change fee revenue was a bit shocking; it actually decreased on a year over year basis; suggesting that passengers may be thinking more carefully about how they approach the reservation process.

Amongst other carriers; Southwest, who has been riding their “no baggage fee” claims to huge growth, still collected $30 million in baggage fees. A much smaller amount to be sure, but definitely not “no baggage fees.” *Ancillary revenues* represented 6.7% of Southwest’s revenue in 2010 (as opposed to 7.7% of Delta’s revenue), and 9.6% for Air Tran . Yet you don’t hear anywhere near the level of vitriol against Southwest that you do towards the legacies. Perhaps the legacy carriers are not framing the discussion or brand image of their ancillary products properly.

One thing is for sure however; that as fuel continues to rise, ancillary revenue will become more and more important to the airline industry’s bottom line.

*To the DOT: “Ancillary revenue includes baggage fees, reservation change fees and miscellaneous operating revenue, including pet transportation, sale of frequent flyer award miles to airline business partners and standby passenger fees.”

Baggage Fee Data