How airline charges really add up
Travellers are paying an average of $31 per flight, on top of the ticket price
Airlines are raking in almost US$93 billion ($136.7b) in ancillary revenue — four times as much as they did eight years ago.
Travellers are now paying an average of US$21.32 — or $31 — per flight for extra services.
Ancillary revenue is generated by activities and services that yield cashflow for airlines beyond the simple transportation of customers from one point to another. This wide range of activities includes commissions gained from hotel bookings, the sale of frequent flyer miles to partners, and the provision of “a la carte services” such as charging extra for food and bags.
The CarTrawler worldwide estimate of ancillary revenue was calculated by applying figures disclosed by 73 airlines and applying them to a longer list of 175 carriers to provide a global projection.
Not all airlines — including Air New Zealand — break out figures for ancillary revenue, but many apply extra charges on top of ticket prices which have fallen markedly in real terms in the past decade.
Low-cost carriers make a higher proportion of their income from ancillary revenue, while others such as Air New Zealand use a hybrid model — in its case, “seats to suit” — where on a typical transtasman flight passengers pay another $40 for food, movies and bags than they do for a seat alone.
This hybrid model is becoming more popular and CarTrawler says it is now “prevalent” among the carriers that fly transatlantic routes, as well as flights within North America and Europe.
United Airlines has disclosed that the lure of upgrading beyond basic economy is going “exceedingly well”, with 60 to 70 per cent of passengers selecting the higher priced product over basic economy when given a clear choice.
However, on the Tasman, airlines are taking different approaches. Since breaking up with Air New Zealand, Virgin Australia has joined Qantas in offering all-inclusive fares covering food and bags to differentiate itself from the Kiwi airline.
Chief commercial officer at CarTrawler, Aileen McCormack, said most of the more than 4.3 billion travellers a year had little choice but to pay for extras.
“Nearly $93 billion in revenue indicates that good merchandisers are selling products desired by a vast number of customers.”
Applying the global ancillary revenue estimate to International Air Transport Association (IATA) overall revenue figures shows that on average passengers spend US$21.32.
IATA estimates the airline industry will spend US$188b on fuel during 2018, which is up substantially from US$149b last year.
That means ancillary revenue now equals almost half of the industry’s annual fuel bill.
CarTrawler, a business-to-business technology firm, says individual sales of seat assignments, checked bags and frequent flyer points provide a “solid hedge” against fuel prices.
Representing 10.7 per cent of global airline revenue (which removes the contribution of frequent flyer programmes and commissionbased activities), ancillary revenue continued to contribute heavily to industry margins, which the association forecasts will be 6.8 per cent for this year.
“It’s startling to recall that ancillary revenue as a percentage of industry revenue was just 4.8 per cent in 2010,” said CarTrawler.
Total revenue then was US$564b. “Economic fluctuations can quickly alter the health of the global airline industry and lead to higher fares. The results described in this annual estimate represent good news for airlines and consumers.
“The connection between ancillary revenue and financial health for airlines is now clear and is a solid component of the industry’s financial profile.”
At traditional full-service airlines, ancillary revenue averaged 6.7 per cent of total revenue this year, unchanged from 2017.
Ancillary revenue activity may consist of fees associated with excess or heavy bags, seats with extra legroom, and partner activity for frequent flyer programmes.
United States-based major airlines generate strong ancillary revenue through a combination of frequent flyer mileage sales and baggage fees. The percentage of revenue for this group remains unchanged from last year at 14.2 per cent.
CarTrawler describes a third group as being ancillary revenue champions. These carriers generate the highest activity as a percentage of operating revenue.
The percentage of revenue that this group achieved from ancillary revenue jumped to 33.9 per cent from 30.9 per cent last year.
The increase can be attributed to higher results from the big carriers in this category, and the addition of VivaAeroBus, Volotea, and WOW air to the list of carriers which disclose ancillary revenue for 2018.
Other examples in this category include: Allegiant, Pegasus, and Scoot.
Low-cost carriers’ ancillary revenue percentage has increased to 12.4 per cent from 11.8 per cent.
Low-cost carriers which disclose their ancillary figures include Air Arabia, JetBlue, SpiceJet, and Transavia.