Unbundled Fares Drive Europe & Russia’s Ancillary Revenue Up 122%
Taylor Rains February 19, 2020
Since the birth of the a-la-carte business model, ancillary costs have become a norm in the airline industry. It is typical to pay for amenities, such as an assigned seat, food, drinks, and bags, on budget airlines; however, the competition is now forcing legacy carriers to unbundle their product as well and charge for ‘extras’ in order to maintain competitive fares. Because of this, Europe/Russia has seen a dramatic 122% spike in ancillary revenue since 2015.
Spike in Ancillary Costs
According to a report by IdeaWorks and CarTrawler, European/Russian airlines have been seeing a significant increase in ancillary revenue year over year, leading the global market with $31.5 billion in total revenue in 2019. This accounts for 11.8% of all operating revenue on the continent, with low-cost carriers bringing in 27%. As ancillary costs prove to be more and more profitable, budget airlines will continue to use them to remain competitive with traditional carriers.
In comparison to Europe, Asia/Pacific came in second in ancillary revenue with $21.1 billion, but were most improved with a 158% growth since 2015. North America came in third with $14.8 billion but had the lowest growth, with only a 38% increase since 2015. Although Africa/Middle East and Latin America all earned only $5 billion or less in a-la-carte revenue, they still saw percent increases of over 100% (147% and 112%, respectively).
The Chief Commercial Officer at CarTrawler said, “The pace with which ancillary revenue has transformed the airline industry has been exciting to observe. Carriers which prioritize extensive choice architecture and a superior customer experience are significantly increasing their chances of reporting healthy profit margins. The adoption of a sophisticated ancillary revenue strategy must now be seen as a necessary step for all airlines that want to stay relevant as we enter a new decade.”
Why North America Fell Short
It is obvious many European airlines, especially Ryanair, easyJet, and Eurowings, are relying on the a-la-carte business model as a solid strategy for profit, but why is North America trailing? The report claims that because LLCs in Canada and the U.S. have had less penetration into the market, there is less intense competition. It further explains, “Canada/USA has lower LCC penetration (at 9.8%) which is reflected in the dominance of the big 4 airlines: American, Delta, Southwest, and United. The a la carte efforts of the global network carriers get a big boost by using basic economy fares (no checked bag, no advance seat assignment, and last to board) as an effective tool to check the threat of domestic LCCs and to bolster a pricing advantage on international routes.”
"They are the only carrier, may be in the world to offer 2 free bags and no change fees." Southwest's claim that they have no change fees is highly misleading, especiallly for people who don't fly that much and would conclude that they can change to another flight for no fee. Yes, they allow you to cancel a ticket and apply the full amount to a future ticket. At the same time, if you bought your LGA-DAL ticket 2 months in advance for $72 and then miss your flight due to a traffic jam, you are going to find out the hard way that you'll have to pay the walk-up fare, in the vicinity of $500, to take the next flight.
Among the big 4 in US, Southwest, which is the largest domestic carrier in US, does not have a basic economy ticket yet. They are the only carrier, may be in the world to offer 2 free bags and no change fees.