Airline extras costing passengers close to $100 billion

Airlines are finding more ways to charge for extras like baggage fees and on-board food. Photo / 123RF

Airline ancillary revenue is nearing $100 billion this year, according to a global survey.

In the airline industry, ancillary revenue is from non-ticket sources, such as baggage fees and on-board food and services, and has become an important financial component for low-cost carriers (LCCs) in Europe, North America and other global regions.

In this country Jetstar says more than 20 per cent of its revenue comes from extra services and the study says Air New Zealand is now deriving close to 6 per cent of its revenue from ancillary sources such as selling meals, extra baggage allowance and seats with more legroom.

The survey by consultancy on airline ancillary revenues, IdeaWorksCompany, and car rental distribution systems firm CarTrawler, projects airline ancillary revenue will reach US$67.4b (NZ$94b) worldwide this year.

Ancillary revenue can include commissions from hotel bookings, the sale of frequent flyer miles to partners.

Aileen O'Mahony, chief commercial officer at CarTrawler said successful ancillary revenue generation is dependent on offering customers the right product at the right time, often before they have even asked for it.

"Amazon has proven to great effect the positive impact that data science has on its business, with an estimated one third of total sales now coming via their recommendation algorithm. As with Amazon, the unlocking of data-driven insights is enabling airlines to propose ancillary products and services to their customers in an increasingly sophisticated way."

The "percentage of revenue" results associated with four defined categories have been applied to a worldwide compilation of operating revenue disclosed by 178 airlines.

Traditional Airlines
Ancillary revenue activity may consist of fees associated with excess or heavy bags, extra legroom seating and partner activity for a frequent flyer program. The average percentage of revenue increased significantly to 5 per cent from 4.1 per cent last year. Examples in this category include Aerolineas Argentinas, Air New Zealand, LOT Polish Airlines, and Royal Jordanian.

Major US airlines
US-based majors generate strong ancillary revenue through a combination of frequent flyer revenue and baggage fees. The percentage of revenue for this group jumped to 12.3 per cent for 2016 from 11.3 per cent due to more bundled fare offers and improved frequent flyer revenue. Examples include Alaska, Delta, and United.

Ancillary Revenue Champs
These carriers generate the highest activity as a percentage of operating revenue. The percentage of revenue achieved by this group dropped slightly to 25.5 per cent from 26.1 per cent for 2015. The decrease can be attributed to lower Ryanair ancillary
revenue results which have a sizeable impact on the average for this category. Other airlines in this group are Allegiant, Eurowings, Flydubai, Hong Kong Express.

Low Cost Carriers
LCCs throughout the world typically rely upon a mix of a la carte activity to generate good levels of ancillary revenue. The percentage of revenue for this group remained unchanged for 2016 at 11.8 per cent. Low cost carriers include AnadoluJet, Cebu Pacific Air, and VivaAerobus.

The study finds traditional airlines, which includes global network carriers outside the US, achieved a US$6.9b ancillary revenue leap for 2016.

This was due to increased activity in the areas of branded fares, checked baggage, premium seating, and seat assignment. In particular, new a la carte options have become prevalent among Europe's largest airlines. Baggage fees are nearly universal for travel within Europe.

Branded fares, which link amenities to the choice or two or three fares, are now offered by Austrian, Lufthansa, and SWISS. Seat assignment fees for extra leg room seats on traditional airlines have become standard, with a growing number of carriers charging for any seat assigned before check-in. These changes have also been occurring all over the world.

Even Emirates - a premium carrier - implemented a seat assignment fee for its lowest priced fares. The fee varies by distance with US$15 assessed for short-haul flights from Dubai and US$40 for long-haul destinations such as the US and Australia.