What You Need to Know About Airline ‘Ancillary Revenue’

What airlines look on fondly as “ancillary revenue” hits you in the form of pesky—and often outrageous—fees and charges. A new report from the meticulous folks at IdeaWorks tells airline-industry professionals what they need to know about ancillary revenues, but it also illustrates some of what you, as consumers, need to know, and how best to game the system.

Baggage is king. For that, you needed a study? Baggage fees are by far the most important source of beyond-the-fare revenues for airlines. At fee-happy Spirit, baggage fees generate almost $20 per passenger. That’s close to a quarter of the line’s total income. At the giant legacy lines, it’s more like 2 percent to 4 percent of total income—not as big, but still important. In this thin-margin business, financial analysts are prone to misinterpreting income data in terms of “almost all the corporate profit comes from fees,” but they are important.

One result is that those financial types keep looking at those fee figures and speculating that sooner or later—more likely sooner—Southwest is going to have to abandon its “two free bags” policy and JetBlue will have to give up on “one free bag.” Maybe. But look at it another way: Yes, adding baggage fees might generate an extra $5 or $10 per passenger (typical legacy experience) but not if adding a $25 baggage fee would drive away a traveler who would otherwise buy a$200 to $400 ticket. As far as I can tell, Southwest and JetBlue track that question very thoroughly, and, at least for now, they’re finding those no-fee policies are paying off in ticket sales and market share. Don’t assume that will change any time soon.

Consumer take: Avoid the baggage fee by flying JetBlue or Southwest whenever you can. JetBlue is the country’s best airline for other reasons, as well, and Southwest tops most others in consumer satisfaction.

Branded fares work both ways. “Branded” or bundled fare packages seem to pay off for airlines, but they can also pay off for you, too. As I’ve noted before, American’s second-level-up fare brand, Choice Plus, is a good deal for any traveler who likes to check a bag on each flight and also is vulnerable to the possible need to exchange a nonrefundable ticket. Frontier’s similar program also works.

Consumer take: If you’re at all likely to need to change your itinerary, buy a Choice Plus ticket package on American.

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Subscription programs bind you tightly. When you pay upward of $400 to buy a year’s worth of checked baggage, access to extra legroom in semi-premium economy, or access to airport lounges, you’re much more likely to stick with that airline than when you just earn miles in its frequent-flyer program. That paid-for “loyalty” may be great for an airline, but it can lock you into making less than your best airline choice on any given trip.

Consumer take: Don’t buy into a subscription plan on any airline unless you’re already spending as much or nearly as much as the subscription price on the particular service—baggage, extra legroom, or whatever—on that airline.

Frequent-flyer programs are cash cows, not consumer benefits. Again, this isn’t news to anyone who follows the business. Yes, you can accumulate miles for free flights, but seats are often so hard to get as to make the miles virtually worthless. By now, you know that exalted-status upgrades are the real benefit, and even that pull is weakening as more and more airlines (1) cut the number of first-class seats and (2) start auctioning off upgrades to people who will pay. But frequent-flyer programs remain about the only way ordinary travelers can ever escape the economy-class cattle car.

Consumer take: If you use miles for upgrades or award trips in business or first class, stick with the airline miles. But if you’re willing to fly economy, forget about “loyalty,” buy the cheapest tickets you can find, and use a credit card that pays off in cash rather than miles.

Ed Perkins on Travel is copyright (c) 2014 Tribune Media Services, Inc.

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