Revealed: The billions airlines make in extra charges

Author: NZ Herald,
Publish Date: Wed, 18 Jul 2018, 4:09PM

Some airlines are making nearly half their income from ancillary revenue rather than ticket sales.

One ultra-low-cost carrier in the United States makes 47 per cent out of ''dynamic pricing'' of seats, bags and bundled offers, according to new research.

The top 10 ancillary earners among all airlines made $29.7 billion (NZ$43b) last year, 13 times what it was a decade ago.

Research by IdeaWorksCompany, an airline consulting firm based in the US, says passenger fares may dip and climb but ancillary revenue has grown sharply in its contribution to the industry's bottom line.

US airlines lead the pack on raking in extra charges, defined as beyond ticket sales including bag and food charges and the significant income generated by frequent-flyer schemes.

United Airlines tops the list for total ancillary revenue on close to $5.75b, followed closely by other big US carriers Delta and American Airlines and then back to Southwest Airlines on $3.01b.

The Irish-based Ryanair is the leader outside the US, making $2.3b last year out of extra charges.

The survey reviewed 146 airlines, half of which revealed ancillary charges. Air New Zealand is among those which doesn't.

''They do have robust financial documents but they seem to consciously avoid this topic,'' said the report's author Jay Sorenson.

Air New Zealand now puts more emphasis on ancillary charges, introducing charges for bags with some fares a decade ago and fees for meals and choosing seats on flights as part of a ''seats to suit'' charging regime.

In the past six months, it has twice put up some domestic and excess bag charges - by as much as $50 apiece - in response to increased operating costs.

The IdeaWorks report finds that when ranked as a percentage of total revenue, low-cost carriers dominate.

Florida-based Spirit makes 46.6 per cent from ancillary charges, Mexico's VivaAeroBus 43.6 per cent, Denver-based Frontier 42.4 per cent and fast-growing Hungarian airline, Wizz Air on 41.6 per cent.

The report says 50 per cent seems to be the ceiling for ancillary revenue, noting Ryanair boss had often remarked fares some day could be zero.

''Over time that objective eluded Ryanair, with other airlines doing much better.''

Low-cost carriers had become ''low-fare champions'', competing with bus services in some countries and providing an economical lifeline for many workers in Western Europe to travel to former Eastern Bloc countries.

Fares on Iceland's WOW Air were as low as US$99 from the US to Europe.

Low-cost carriers also dominate the top 10 list of ancillary revenue per passenger.

Spirit leads on $51 (NZ$75) — nearly 200 per cent up on a decade ago. Qantas also makes the list, at $42 per passenger, mainly because of its frequent-flyer programme. Its loyalty programme earned more than $1.1b last year.

Sorenson said earnings from that programme were the envy of airlines around the world. About 35 per cent of credit card spending is on Qantas co-branded credit cards.

''That's a stunning achievement. They have more banks involved in their frequent-flyer programme (in a home market) than any airline on the planet. It all works to create per member revenue that is the envy of all airlines.''

The data is gathered from disclosures of financial results annual reports, investor presentations and financial press releases.