Could air fares eventually drop to zero?
Once free, checked bags bring in a huge amount of money for airlines.
Years ago, airlines didn't really count on "ancillary revenues;" almost every dollar they took in came from the sale of tickets. But that has changed dramatically in recent years, to the point where ancillary revenues (a.k.a. fees) now account for almost half the total revenues at some airlines, and the numbers keep growing every year. As a matter of fact, 50 percent of one US airline's income is now from fees, not ticket sales.
"Michael O'Leary has remarked throughout his tenure as CEO of Ryanair (Europe's largest low-cost airline) that fares could someday be zero; consumer air travel cost would be limited to a la carte fees and other ancillary revenue," notes the IdeaWorks Company in its latest annual study of the subject,
IdeaWorks started compiling statistics on airline revenue sources back in 2007, and since then, "ancillary revenue has grown every year," the new report noted. "Ten years ago, the top 10 airlines, as rated by total ancillary revenue, generated $2.1 billion. For 2017, the top 10 airline total has jumped to $29.7 billion...Passenger fares may dip and climb, but ancillary revenue has grown steadily in its contribution to the industry's bottom line."
The company defines ancillary revenue as "revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the air travel experience." Much of that comes from checked baggage fees and the sale of frequent flyer miles to affiliated credit card companies and program partners, but it also includes an ever-larger universe of other fees for things like in-flight food and beverage sales, preferred seat selection, advance seat assignment, lounge memberships, in-flight Wi-Fi, upgrades, priority boarding, and so on.
Besides charging fees for more things, airlines can also boost their ancillary revenue totals by jacking up the prices of existing charges – e.g. major U.S. carriers increased checked bag fees this year by another $5 per piece, and the cost of in-flight alcoholic beverages is now getting near the $10 mark.
During 2017, the largest U.S. airlines continued to rank at the top in terms of total ancillary revenues, led by United at $5.7 billion and followed by Delta ($5.4 billion), American ($5.3 billion) and Southwest ($3.1 billion).
But looking at ancillary revenue as a percentage of an airline's total revenue, the low-cost carriers dominate the field. After all, the ancillary revenue concept is central to their overall business model of keeping per-seat prices to a minimum. "Ancillary revenue is the elixir that enables airlines to offer headline grabbing low fares while maintaining a predictable revenue flow from the sale of optional extras," IdeaWorks notes.
Topping that list is Spirit Airlines, which in 2017 took in a whopping 46.6 percent of its total revenue from ancillary activities, according to the study. That comes to a total of $50.97 per passenger – an increase of 174 percent from Spirit's 2008 figure of $18.61 per passenger. Mexico's VivaAeroBus ranked second on the list with 43.6 percent of its revenue from ancillary sources, followed by Frontier Airlines at 42.4 percent. IdeaWorks notes that since 2008, Frontier's per-passenger ancillary revenue shot up by 1,200 percent, from $3.70 to $48.33.
In fact, the whole ancillary revenues trend has been driven by low-cost carriers, IdeaWorks said. Most recently, this has been evident in the adoption and spread of "basic economy" fares among traditional carriers, and the spread of those fares from domestic to international markets. Those lower fares allow network airlines to compete on price with low-cost carriers, but also allow them to bring in more ancillary revenues from the sale of things that are no longer included in the fare – or to sell the customer up to a higher fare that covers more things.
As IdeaWorks explains it, "You can visit a movie theater and walk past the snack bar...but most patrons don't. You can order a cheese pizza and skip the extra toppings...but most people don't. Likewise when buying an airline ticket—it's hard to skip the extras. The basic economy fare is an oh-so-inviting offer which places a traditional airline on par with a LCC (low-cost carrier)."
What do you think of this fee for all? Does it work for you as a consumer, or do you feel taken? Please leave your thoughts in the comments.
Read all recent TravelSkills posts here
Get twice-per-week updates from TravelSkills via email! Sign up here
Chris McGinnis is the founder of TravelSkills.com. The author is solely responsible for the content above, and it is used here by permission. You can reach Chris at email@example.com or on Twitter @cjmcginnis.