Baggage essentials in airline RM
Tom Bacon reviews Spirit Airlines’ ancillary performance and sees where there may be some upside for other carriers
The recent 2015 Ideaworks compilation of airline ancillary revenue sheds some light on airline practices, not least that of Spirit Airlines. According to the report, Spirit is once again recognised for achieving the highest ancillary revenue. Spirit reported $51 in ancillary revenue per passenger or 43% of its total revenue.
With Spirit’s financial success – among the highest margins in the industry – what keeps other airlines from matching its ancillary strategy?
Let’s review Spirit’s performance by ancillary fee to see where there might still be upside for other carriers:
Spirit charges a ‘fee’ for booking online or through reservations – it’s hard to avoid this ‘service’. Since potentially 99% of their passengers are subject to this ‘option’ I don’t actually regard it as a real option and would argue that it shouldn’t be included in the ancillary calculation. Excluding this fee, Spirit’s ancillary is $34 per passenger and less than 30% of total revenue. In fact, excluding this fee, many US carriers post equal or higher revenue per passenger than Spirit, including United ($44), allegiant ($50), and Alaska ($34).
If online fees are excluded, Spirit reports 62% of its total ancillary from bag fees; thus, bag fees represent by far the largest ancillary revenue stream for Spirit. Spirit receives $21 per passenger in bag fees while the large legacy carriers each report less than $5. Spirit’s higher bag revenue is the result of three factors:
Carry on fees. In the US, only Spirit and Frontier are charging for carry-on; most carriers still do not. Not charging for carry-on probably reduces legacy carrier ancillary revenue by $10 per passenger.
Fee exemptions. Other airlines’ offer bag fee exemptions for many credit card holders and frequent flyers. While this may reduce bag revenue by another 50% or $5 per passenger, there is an offset in credit card revenue (see FFP below).
Higher fees for checked bags. The fee for the first checked bag on most airlines is $25 while Spirit charges $30 and up for many flights.
Indeed, legacy carriers are potentially leaving a lot of ancillary bag revenue on the table. However, their current policies are aligned with each other and each is realising similar average bag revenue per passenger. On Spirit, most passengers must pay for bags - either a checked bag or a carry-on or both. Bag revenue on the legacy carriers reflect the fact that most passengers do not pay extra for bags -- either because they carry-on their bag or because, for various reasons, they are exempt from checked bag fees.
Interestingly, Spirit has stated that a carry-on bag fee helps them with airplane turn-around time (less time needs to be allotted for passengers’ boarding or deplaning with their carry-on bags). Some experts refute this, however; a recent study across airlines concluded that the checked bag fee imposed by most carriers has helped reduce aircraft turn around times, allowing airlines to allot less time to loading and unloading checked bags. Probably, more work needs to be done to understand the full operational impact of these fees.
Legacy carriers, in particular, can pursue highly successful ancillary strategies without mimicking the less service-oriented ‘ultra-low cost carriers’ like Spirit.
Frequent Flyer Program (FFP) revenue
According to Ideaworks, United totally offset its shortfall in bag fees versus Spirit with higher FFP revenue; Spirit indeed receives little FFP revenue while United reported $21 per passenger. Legacy airlines’ large networks and their relationship with business travellers allows them to realise a huge revenue stream from credit card companies who pay for “miles.” This is a built in advantage for large legacy carriers versus a Spirit.
After online fees, bag fees and FFP, Spirit reports just $10 per passenger in ‘other ancillary’. Thus, Spirit is not the leader in ‘other ancillary’ – United reports $18 in other ancillary, for example. In fact, ‘other ancillary’ is where the legacy carriers are properly focusing. Large carriers sell premium seating, priority boarding, seat assignments, (United’s) FareLock, and onboard meals, among other services. Most of these amenities are truly options, and value-added options at that.
Although Spirit speaks of ancillary as a way to reduce the base fare (the carry-on bag fee, for example), many legacy carriers are offering true upsell amenities that add value above a base fare. These add-ons probably appeal to service-oriented passengers, not the highly price-sensitive passengers inclined to fly Spirit.
United’s success suggests that, potentially, higher fare passengers including business passengers, international passengers, frequent flyers, and others, not only tend to pay more for tickets but are also willing to pay additionally for certain ancillary perks. In fact, Ideaworks’ 2015 ancillary profile demonstrates that ancillary can be value-added for customers. Legacy carriers, in particular, can pursue highly successful ancillary strategies without mimicking the less service-oriented ‘ultra-low cost carriers’ like Spirit.