Network carriers in the USA, prompted by a tough operating environment, have been taking a leaf out of their low-cost competitors' book when it comes to chasing ancillary revenues. So-called full-service airlines have begun charging for the things passengers used to take for granted and a la carte pricing is starting to become the norm.

Published: 29 Jan 2009

Network carriers in the USA, prompted by a tough operating environment, have been taking a leaf out of their low-cost competitors' book when it comes to chasing ancillary revenues. So-called full-service airlines have begun charging for the things passengers used to take for granted and a la carte pricing is starting to become the norm.

But will this trend start to catch on with network carriers in other parts of the world? And how will the low-cost carriers respond to this blatant encroachment on to what has traditionally been their turf?

One US carrier that seems to be taking great strides to blur the line between the traditional, full-service network airline and the no-frills, pay-for-all-your-extras carrier is US Airways. The Arizona-based airline aims to generate $400 million to $500 million from its ancillary revenue programme in 2009. US Airways chief executive Doug Parker said at the recent Credit Suisse Global Airline Conference in New York that the carrier's ancillary revenue strategy, which includes charging for checked baggage and on-board food sales, has been "more aggressive" than its competitors, and the results have so far been better than expected.

United Airlines has also been boosting its ancillary revenue streams through a number of measures traditionally associated with its low-cost competitors. By increasing fees for changing tickets and charging for extras that used to be complimentary, United expects its ancillary revenues to reach $1.2 billion in 2009, a 140% increase over 2005 and up a third on 2008. Broken down, the carrier expects to raise $600 million from ticketing fees, $250 million from first and second bag fees, $250 million from up-selling seats and $100 million from additional travel options, such as its door-to-door baggage service.

One US carrier that seems to be taking great strides to blur the line between the traditional, full-service network airline and the no-frills, pay-for-all-your-extras carrier is US Airways. The Arizona-based airline aims to generate $400 million to $500 million from its ancillary revenue programme in 2009. US Airways chief executive Doug Parker said at the recent Credit Suisse Global Airline Conference in New York that the carrier's ancillary revenue strategy, which includes charging for checked baggage and on-board food sales, has been "more aggressive" than its competitors, and the results have so far been better than expected.

United Airlines has also been boosting its ancillary revenue streams through a number of measures traditionally associated with its low-cost competitors. By increasing fees for changing tickets and charging for extras that used to be complimentary, United expects its ancillary revenues to reach $1.2 billion in 2009, a 140% increase over 2005 and up a third on 2008. Broken down, the carrier expects to raise $600 million from ticketing fees, $250 million from first and second bag fees, $250 million from up-selling seats and $100 million from additional travel options, such as its door-to-door baggage service.

Alaska Airlines vice-president finance Brandon Pedersen has described ancillary revenues as "the holy grail" for airlines, and says Alaska wants to look into more options "in ways consistent with our brand". In 2009, Pedersen sees opportunities for in-flight connectivity services, buy-on-board initiatives and "other things we might sell on our website". The carrier already charges for checked baggage.

"I'm amazed at how quickly a la carte pricing has been adopted by US legacy carriers, and I'm also amazed that there hasn't been a passenger revolt," says Jay Sorensen, president of US consultancy Ideaworks' partnership and marketing practice. "With unbundling, the indications are that the base fare should drop, but what's odd in the US was that the product was unbundled and the overall price went up. Passengers were asked to pay a higher fare and to pay for things that were once included."

As a result of the success US carriers have had with their domestic ancillary revenue strategies, Sorensen believes the trend will catch on with airlines in other regions of the world. "The world has been watching with tremendous interest what's been happening in America with the major carriers and waiting to see if they were able to pull it off. We will see more of this activity worldwide," he says, adding that Ideaworks "has had contact with some surprising airlines that are not normally involved in this activity".

Mike Cox, managing director and head of corporate advisory at Seabury Group in New York, agrees that airlines in other regions of the world are taking notice of what the US network carriers are doing.
"US carriers have found that [charging for ancillaries] is a good source of revenue and it hasn't dampened demand. Airlines are studying it and watching the fine balance between what certain fees do to demand and whether there's resistance," he says, adding that airlines will "exempt their best customers from these fees".

Discount and unbundle
Sorensen says neither Europe nor Asia is "immune" from the ancillary revenue phenomenon because "airlines have a need for the revenue and consumers have more or less accepted their fate". However, he does not see higher fares combined with paying for extras as something that will continue to be tolerated: "With a la carte pricing, airlines are going to have to face a word they don't want to face: discounting. Smart airlines will take the opportunity to say 'we're going to discount and unbundle'. This will help airlines live with the discounting that will occur in 2009."

Boosting ancillary revenues could be a valuable strategy for airlines as they head into what IATA is calling "the toughest revenue environment in 50 years". Tim Jeans, managing director of UK scheduled and charter carrier Monarch Airlines, says that in the current climate ancillaries are "absolutely central to the ability of airlines to make a meaningful margin". He adds: "While there is still significant downward pressure on fares and many upward pressures on the cost base, it is imperative that the gap is filled by ancillary revenues."

For the full article published 19/12/2008 visit - http://www.flightglobal.com/articles/2008/12/19/320363/network-carriers-jump-on-the-ancillary-revenue-bandwagon.html

For more information about Ancillary Revenue strategies visit www.eyefortravel.com/arev
End