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  • Flying Too High On Airline Fees
    Posted by Andrew Compart 5:18 AM on Dec 08, 2009

     As airlines continue their enthusiastic embrace of fare unbundling and new fees as a revenue-raising savior, they had better heed some warning signs – or at least keep in mind some recent history.

    As it stands, airlines seem to be viewing the new fees not only as a cash cow, but as a cash cow on steroids. Stock analysts love them, too, because they produce hard numbers.

    U.S. airlines collected nearly $670 million in baggage fees in the second quarter of this year, up from about $178 million in the second quarter of 2008, which is when most of them began charging a fee for the first and second bag. United reported a 13% year-over-year increase in ancillary revenue per passenger in the third quarter, collecting a total of $289 million. Low-cost carrier AirTran expects to end the year having collected $340 million in 2009, about double the amount it collected in 2007. Ancillary revenue – which also can include income derived from items such as hotel bookings, car rental bookings, travel insurance sales, advertising and other non-fare-related services and merchandise – accounts for about 20% of total revenue at Ryanair.

    It is difficult to argue against such concrete data, and there are not that many airlines that seem concerned about a customer backlash. On some carriers the fees for a second checked bag have spread to transatlantic flights – longer trips for which people pack more. Airline executives insist that new fees are not driving customers to competitors, and a recent survey indicates customer concerns are not at top of mind when adopting new fees.

    In that recent global survey of about 60 carriers, ancillary revenue consulting company Collinson Latitude asked airlines what “one key metric” they use to assess the performance of their ancillary revenue strategy.  Nearly 60% said the amount of revenue created, and another 28% said profit per customer.

    Only 8% selected “customer satisfaction.” Only 13% considered “customer satisfaction” even as a secondary metric.

    This is putting the airlines on a collision course with reality. Warning signs are popping up everywhere that make the case for airlines to place some limits on their ancillary revenue expectations. I’m talking here about ancillary revenue related to those unbundled fees, and not to ancillary revenue from other sources such as hotels, car rentals and travel insurance.

    In Europe just a few months ago, some airlines at a global low-cost carrier conference in Barcelona fretted  that carriers like Ryanair will go too far with those fees, prompting a consumer backlash and government intervention to limit what airlines can do. They were particularly concerned about what might happen if airlines start charging fees for services or items that customers feel they cannot avoid, and urged their fellow carriers to exercise some caution.

    Airline Information, which organizes global airline conferences on ancillary revenue, has begun pushing  for airlines to endorse its proposed passenger bill of rights on a la carte fees. Under some of the proposed rights, airlines would agree to lower their bases fares when adding new fees, provide customers the total, fee-inclusive cost of a journey before they purchase a ticket, and make fees transparent to any customer via any distribution channel.

    The Business Travel Coalition and the Institute of Travel & Meetings announced about a month ago that they are trying to form an industry group to create standards for bundling, because they are worried that the unbundling trend is putting corporate managed travel “on a certain path toward mass confusion and disruption.”

    Corporate travel, of course, is the source of the industry’s highest-yielding customers.

    In the U.S. Congress, Sen. Robert Menendez just reintroduced legislation that would require airlines and ticket agents to show consumers their potential fees for checked baggage, seat assignments and optional in-flight services in fare listings and as part of the online booking process, before the consumer purchases the ticket. That is not something the New Jersey Democrat likely would be doing if he did not believe that there is some resentment among his constituents about the way a la carte fees have been implemented.

    Another potential warning sign is provided by Southwest.

    U.S. airlines – and stock analysts – are quick to disparage the country’s biggest low-cost carrier for its insistence that, by shunning the fees for a first or second checked bag, it is retaining current customers and winning new ones. In some respects it is easy to understand why: It is difficult –and perhaps impossible – to produce figures to prove that the number of passengers Southwest attracts by not charging the fees adds more revenue than it would get by charging them. Number-crunchers have a hard time working with an abstract idea.

    It is even relatively easy to disregard Southwest’s surveys of its own customers, which it says show they are well-aware of the difference in Southwest’s fee policy – thanks in large part to a big Southwest ad campaign on its free checked bags – and that many of them book Southwest because of it. An independent study of a broader set of airline customers would be more conclusive.

    Here are some concrete numbers, however, that could prove more compelling: Southwest’s unit revenue was up 1% year-over-year in October and 12% (that is not a typo) in November. That is coming at a time when everyone else is pleased just to see their unit revenue decline lessening, and should at least give them some pause that maybe Southwest is onto something.

    If that is not enough, however, then the airlines should consider some recent history.

    In the late 1990s and early this decade, airlines were making the most of their ability to create a huge spread between their lowest and highest fares that leisure and business travelers were paying. Restrictive rules and aggressive yield management created the gaps and chasms. The lack of fare transparency helped, as customers usually did not know what the travelers sitting next to them were paying.

    This all came crashing down when the Web took root and pricing became transparent. Airlines even encouraged the consumer move to the Internet with their Web-only fares.  But the pricing transparency laid bare the huge fare spread, as well as other fare differences – and also opened the door for low-cost carriers to take advantage of the consumer resentment the transparency engendered.

    There are differences with the a la carte fees, of course. For one, low-cost carriers led the charge on many of them. Those fees for a first checked bag, for example, started in the U.S. with airlines such as Spirit and Allegiant and in Europe with Skybe, Ryanair and EasyJet.

    But here is where it might be similar. In creating all of these fees, airlines have managed once again to take away the transparency for the total price of a ticket – and the ability of consumers to easily compare them. That, in turn, makes it tempting to make the most of the ability to charge such fees, and find new ones. Only a handful of airlines have been following the Ryanair model, under which it lowers fares in conjunction with adding new a la carte fees.

    AirTran, hosting an investor conference this month, noted that customers are very competitive when selecting a fare, but much more willing to open their wallets after they have purchased the ticket. For example, when AirTran tried to incorporate seat assignments into a fare category, consumers would take the lower fare instead. But given the option to pay for an early assigned seat for $6, which is what AirTran does now, many of them do it, and AirTran is getting more than $30 million in annual revenue from seat assignment fees.

    Here’s the rub.

    First, the airlines are kidding themselves if they think consumers are not resentful of some of these fares; I am thinking of the fee for the first checked bag in particular, since it often is unavoidable.

    Second, and more importantly: The Internet – and the consumer expectation it has created – hates opaqueness. Instead, it drives relentlessly toward pricing transparency no matter what the producers desire, which is one reason why Airline Information is trying to push airlines to get ahead of the curve with its proposed bill of rights. Whether airlines want it or not, that transparency is on the verge of being created for at least some of those airline fees in a widespread way.

    Tripadvisor.com already has a “fees estimator” as part of its flight search process. Sabre already debuted the demo of the attribute-based shopping tool it is creating, which would make it possible for global distribution system (GDS) users and online agencies to show and compare prices that include some of those “discretionary” fees. All of the major GDS companies, and other Internet booking engine suppliers such as ITA, are planning to have a similar functionality ready to go by the end of 2010.

    If it works, customers through multiple distribution channels will be able to compare total prices if they know they will be checking a bag or two and want to pay for an assigned or preferred seat.

    That does not mean airlines will have to eliminate the fees. But they will have to make sure their total price is competitive, which means they will have to lower some of their fees or their base fares. .

    That means airlines should be adjusting their ancillary revenue expectations, at least when it comes to those a la carte fees. Transparency will force them to – even if, it seems, they are not seeing the future that clearly right now, or just do not want to.

    Tags: AWCOL, ancillary, fees, Southwest, Ryanair, AirTran

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