Analysis: How Far? Industry contemplates ancillary revenue limits

Ft. Lauderdale, Fla.-based Spirit Airlines, among the most aggressive carriers in generating ancillary revenue, is now adding a boarding pass fee for passengers who don’t print their own. “If customers are willing to behave in a way that will save us money, we’ll save them money,” Spirit president and CEO Ben Baldanza told ATW. “A large percentage of customers buy their tickets online from us, but not a lot of them check in online . . .  So what we’ve said is, ‘If you print your boarding pass yourself, you save us money. And if you do that, we’ll take $5 off your fare.’”

Of course, some will charge that Spirit is merely tacking another fee ($5) onto the many it already charges passengers.

Baldanza agreed there may be a limit on what fees can be charged, and pointed out that “not all of the ancillary revenue is paid for by the customer,” adding, “For example, if we sell advertising onboard the airplane [a strategy Spirit has long deployed], that advertiser pays us and that
. . .  helps to cover our costs and allows us to lower our ticket prices. That money didn’t come out of the customer’s pocket. Similarly, if we sell a hotel room on our website and the hotel offers a commission for that sale and we get a piece of that, you’re not paying more for your air ticket, yet we’re getting more revenue. In those ways ancillary revenue can grow without taking more money directly out of our customers’ pockets. And that’s an important way to grow ancillary revenue because that’s a win-win.”

The Popcorn Equation 

But Baldanza noted that, on a relative basis, airlines are still behind other service industries in exploiting à la carte pricing. “If you look at other similar service businesses, like cruise lines . . .  or amusement parks or hotels, it’s not uncommon to see examples where 50% or even a little more of their total revenue comes from something that is other than the entrance price . . .  Right now, roughly 35% of our revenue is from ancillary sources. We believe we can push the percentage to 50% or maybe even 60%. If we do that, the corresponding benefit is that we will be able to lower our fares even further.”

Indeed, a soda and popcorn at the typical US multiplex movie theater is generally around the same price as the ticket. The cost of two beers at US baseball stadiums typically exceeds the lowest-priced game tickets.

US Sen. Charles Schumer (D-NY), a longtime critic of airline industry pricing, has asserted that anything considered a “reasonable necessity” for an air passenger should be off limits to ancillary fees. But one man’s “reasonable necessity” is another’s luxury. Schumer believes carry-on bags are a “reasonable necessity”; Spirit charges $45 for each carry-on bag stored in an overhead bin. When the carrier first announced the fee last year, Schumer threatened to introduce legislation to tax ancillary charges, which he said would force the industry to pull back.

The US Dept. of Transportation is pushing to impose regulations requiring extensive, detailed reporting on ancillary fees, believing this to be another way to constrain airlines.

Ryanair, perhaps the foremost pioneer worldwide regarding à la carte pricing, has always maintained that fare unbundling only makes sense if done in conjunction with rigorous cost control. Spirit has followed the Irish LCC’s model. “The main objectives are, as always, to keep the costs as low as possible,” Baldanza said. “There’s no row of costs that we don’t look at, including the cost of light bulbs in our headquarters. We look at everything. We don’t take anything for granted.”

The Centre for Asia Pacific Aviation (CAPA) estimated that airlines worldwide generated $58 billion in ancillary revenue in 2010.

“A sizeable figure; $58 billion, however, represents just 12% of total airline revenues, suggesting we are just at the start of the movement to monetize services and products passengers used to receive as part of the ticket price,” CAPA said. It noted that such charges “have quickly become a flashpoint for airline differentiation and a catalyst for marketing innovation.”

—Aaron Karp