Airline add-ons: The extras costing passengers billions

Detailed analysis of airlines’ ancillary revenue finds the bumpy recovery from the pandemic worked in their favour to help sell extra services.

Research into 65 airlines shows Air New Zealand made close to a fifth of its revenue from charging for add-ons and its loyalty scheme last year.

The annual study for business-to-business rental vehicle aggregator firm CarTrawler was done by IdeaWorksCompany and finds the rapid recovery in air travel has changed passenger behaviour.

As airports and aircraft became more crowded, consumers became more inclined to spend money on comfort and conveniences such as extra leg room, assigned seats, early boarding, checked bags and priority screening.

“This reactive spending to crowding was heightened by the pandemic; it wasn’t a significant factor before,” the report states.

IdeaWorksCompany has worked with airlines on ancillary revenue strategies for the past 27 years. The analysis of financial documents and airline announcements in their reporting periods for 2022 – when the recovery took hold - found those 61 carriers in the study reported extra revenue of US$69 billion ($116b) from the total of $407b.

The airlines in the study included the big United States carriers, which are the main earners of ancillary revenue, and the European low-cost carriers, as well as Air New Zealand.

Airlines have a multitude of ways of making money from passengers beyond ticket sales, and IdeaWorks details ancillary revenue-raising tactics:

Frequent flyer programmes: The frequent flyer category largely consists of the sale of miles or points to programme partners such as hotel chains and car rental companies, co-branded credit cards, online malls, retailers and communication services. Miles or points sold directly to programme members also qualify.

A la carte features: The list continues to grow, and the following are typical activities: on-board sales of food and beverages, checking of baggage and excess baggage, assigned seats or better seats such those in as exit rows, call centre support for reservations, fees charged for purchases made with credit or debit cards, priority check-in and screening, early boarding, on-board entertainment systems and internet access.

Commission-based products: Includes the commissions earned by airlines on the sale of hotel accommodations, car rentals and travel insurance. The commission-based category primarily involves the carrier’s website, but it can include the sale of duty-free and consumer products on board aircraft.

Advertising: This category includes any advertising initiative linked to passenger travel, including revenue generated from an in-flight magazine, advertising messages sold in or on aircraft, loading bridges, gate areas and airport lounges and fee-based placement of consumer products and samples.

Fare or product bundles: Airlines may allocate a portion of the price associated with a fare bundle or product bundle as ancillary revenue. This is determined by assigning a revenue value to the extra services included in the bundle, such as checked baggage, early boarding and seating with extra leg room.

CarTrawler chief executive Peter O’Donovan said it was clear airlines are looking beyond ticket sales to ensure their business models are supported by diversified and resilient revenue streams in a post-Covid travel era.

"As passenger demand increases, so too do opportunities for additional revenue generation, and we expect to see ancillary revenue as a percentage of overall revenue continuing to increase over the next few years," he said.

The key trend to watch into 2024 was loyalty.

"While low-cost carriers have always had the edge on driving ancillary revenue streams, many of the top US airlines are catching up and seeing real returns from their loyalty programmes and frequent flyer benefits," said O’Donovan.

How Air NZ performed

The New Zealand airline racked up big losses during the 2022 financial year as closed borders and tight restrictions meant it was behind many others in the survey. However, ancillary revenue made up an estimated 18.8 per cent or NZ$514 million of total revenue of NZ$2.7 billion. This equated to $70 per passenger. The top earner per passenger was US carrier Jet2.com, which earned twice that.

"Air New Zealand has described ancillary revenue activities in its investor documents in the past, without disclosing a specific revenue amount," IdeaWorks says.

During the 2022 year, Airpoints membership topped 3.76 million.

The programme was valued at $389m, which included revenue in advance. Other revenue of $125m included lounge revenue, Koru membership, commissions and fees.

Before the pandemic, ancillary revenue in 2019 was $406m.

The report points out that next year, the airline will have a new way of raising extra revenue; its Skynest bunk beds that will be fitted in the economy section will be available in new planes late next year for $400-600 for a four-hour stint.

Grant Bradley has worked at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.