Extra airline fees could mean better service! This is the FUTURE

airline feesSoon, airlines could make all their profits on the extra fees you pay. Seriously. Yesterday, the Department of Transportation revealed that airlines have had their most profitable year since it started tracking the data back in 2002. And, a good chunk of revenue came from baggage fees, reservation change fees and ancillary fees. In the third quarter alone, it was good for more than $2 billion. So, the foundation is in place. All the airlines need to do is build on it.

And, it looks like some are trying to do that.

According to MSNBC, US Airways President Scott Kirby said that baggage fees and ancillary fees could add up to 100 percent of the airlines profits this year. We’re not talking about some future development, here. This is now. We’ve been talking for a while about how airlines are coming to rely on these fees. Last year, it was an issue of surviving the recession; this year, it’s been about driving profits. Regardless of prevailing economic conditions, it’s clear these fees aren’t going anywhere. It would stand to reason, therefore, that they’d become a larger part of airlines’ profits over time.

But, 100 percent? How would that work? Let’s take a look.First, think about the trend in reduced amenities, putting aside the weird stuff you read about this morning. Food isn’t free, and you’re paying for bags and premium coach seating (think exit row and bulkhead). This lowers airline costs on an available seat mile basis.

Now, what does it mean to lower costs? Well, it provides the elbow room to compete more effectively on fares – translation: cheaper tickets. So, in theory at least, this puts more butts in seats. The lower cost, however, erodes profit per available seat mile, because there isn’t as much revenue assigned to it.

This is where the fees come in.

If all you buy is a seat, you score! You’ll have the chance to get it for less than you would have paid otherwise. If you’re the kind of person who goes to the movies and sneaks in your own snacks, you’re all set. But, the minute you need something else, you’re going to have to pay. This is where the airlines can make their profits. Essentially, getting you into a seat becomes a marketing opportunity for everything you sell. Going back to the movie theater example, it’s equivalent to the previews you see that implore you to go out to the lobby and grab some popcorn. And, they can pump up the prices on food, liquor, bag-checking and so on to make up what they’re effectively giving away on a break-even seat.

Of course, this is a bit oversimplified, but you get the idea. The future of airlines may be to turn a cheap seat into an opportunity to up-sell you on everything else. Frankly, it isn’t a bad idea. In addition to making tickets cheaper, the flight attendants will need to sell in order to help the airline turn a profit. Sales without service is usually a fool’s errand, so a shift in strategy of this sort will lead to better passenger treatment. Maybe we’ll actually be treated like customers!

All these extra fees may not be such a bad idea after all. The airlines don’t realize this, but if they make all their money on the amenities, they’ll actually have to deliver an enjoyable experience.

Let’s pay less to pay extra and be treated like human beings in the process.

[photo by Augapfel via Flickr]

Airlines have best quarter ever … thanks baggage fees!

Airlines have best quarter thanks to baggage feesEvery time you pay to check an extra bag you’re making someone’s life better. The latest data from the U.S. Department of Transportation reveals that the third quarter of 2010 was the most profitable for the U.S. airline industry since the department began keeping score in 2002. The industry’s operating profit margin hit 10.5 percent in aggregate. Low-cost carriers, as a class, had an operating profit margin of 11 percent, its best performance since hitting 11.2 percent in the third quarter of 2006.

How did the airline industry pull this off? Recovering economic conditions helped, of course, but so did the stuff that passengers have gotten comfortable complaining about. More than $900 million in third-quarter revenue came from baggage fees, with another $590 million from reservation change fees. Then, there was another $646 million in ancillary fees. It all adds up to more than $2 billion for a single quarter.

So, while we’re all complaining about these extra fees, it looks like many of us are paying them, too.Spirit picks up the highest percentage of its revenue from ancillary fees at 26.9 percent, up from 24.2 percent in the second quarter of 2010 and 20.6 percent in the third quarter of 2009. Allegiant was next at 9.7 percent. Delta and US Airways derived 7.7 percent of their revenues from ancillary fees, with Southwest at 6.7 percent.

Of course, the money isn’t just going into the pockets of airline employees and executives. The six network airlines spent 25 percent of their operating expenses in the third quarter on fuel. United Airlines spent the most on fuel among network carriers – 25.7 percent of total revenue – with Allegiant leading low-cost carriers at 44.1 percent.

Before you feel too sorry for airlines when it comes to fuel costs, remember those profits. Four network airlines had double-digit operating margins, along with four low-cost carriers.

[photo by Tracy O via Flickr]

Airline profits may mean more elbow room for a little while

The airline industry wants to thank you. Last year, it was mired in despair. The post-financial crisis recession left the carriers beleaguered and desperate for a turn of fortune. Corporate and leisure travel had fallen precipitously, and doubling down on extra fees, though prudent for profits, alienated both those considering a flight and the passengers with little choice but to hit the road. The brutality of 2009 was evident, and it seemed as though all there was for 2010 was the hope for something better.

Well, hope paid off.

Three quarters into this year, money is again beginning to flow, as a result of (finally) climbing fares, additional fees and an increase in passenger traffic. United Continental, Southwest and JetBlue have reported strong profits for the third quarter using a variety of tactics, but an increase in sales and higher prices appear to be the universal driver. And, this may translate to a bit more elbow room for you.
According to the Associated Press, airlines are beginning to bring back some of the routes they cut last year, as indicated by decisions at Delta and American Airlines to hire more flight attendants. The challenge, however, will be to increase capacity (and thus headcount) without imperiling this year’ hard-won profits.

The business of satisfying pent-up demand isn’t easy for the airline sector. After all, capacity can’t be added one seat at a time. Restoring a route to handle more passengers comes with it the obligation to fill the plane (to the extent possible) each time, in accordance with revenue per available seat mile (RASM) targets.

Nonetheless, the carriers seem ready to rise to the challenge. JetBlue is amping up fourth quarter capacity by up to 10 percent, with Delta looking at an increase of 5 percent to 10 percent. This follows even faster growth in September, according to the Associated Press:

Still, most of the airlines saw traffic rise even faster than capacity in September suggesting they have enough business to support the additional flights. The only exception was Delta, which added capacity slightly faster than traffic rose.

The moves come in anticipation of a strong 2011, according to Ray Neidl, an analyst for Maxim Group. He tells the associated press that the growth in capacity “is a little more long-term,” adding that “[d]espite the lackluster economy, it’s going to be a big year for airlines, especially as consolidation kicks in.”

So, what does this mean for the flying public?

Well, you may not have to occupy that middle seat for a little while, and the odds that someone else will be in it may be improving. The increase in capacity necessarily precedes an increase in sufficient demand to make it profitable, so enjoy it while you can! If the airlines can’t fill those new seats, a return to austerity could send you back to sharing an armrest.

[photo by Joe Shlabotnik via Flickr]

Five reasons airline fees up 50% year-over-year

Does your wallet feel a little bit lighter? A new USA Today analysis reveals that airline fees are on the rise, with some up more than 50 percent relative to a year ago. The study compares the extra fees (not to be confused with fares) of 13 airlines and shows just how important this revenue source is to the airline sector.

According to USA Today, “The numerous fees are a sore subject for many fliers, but their dissatisfaction hasn’t deterred airlines from bringing in record revenue from additional fees.”

The fees were good for $2.1 billion last quarter, with $893 million of it coming from checked bags and $600 million from changed reservations.

So, where did all this money come from? Here are five ways airlines have turned those extra charges into a big business:

1. First checked bag: most airlines in the United States hit you for up to $25 for the first bag you check, with only Southwest and JetBlue abstaining. Most charged $15 a year ago, according to USA Today, with four not playing this aspect of the fee game.

2. Change fee spikes:
a year ago, the most expensive coach change fee was $250, charged by Continental, Delta, United Airlines and US Airways. This year, it surged to $300, an increase of 20 percent, charged by American Airlines for some international flights.

3. Pay to call: still resisting the internet? Booking by phone costs an extra $35 on US Airways, while Allegiant Air hits you for a $29.98 round-trip booking fee and another $14.99 for “convenience.”

4. Preferred seating: United asks for up to $159 for preferred seating, which can give you up to five more inches of leg room. A year ago, it would have set you back only $119.

5. Get a receipt: Continental (for which this isn’t new) – along with American, Hawaiian and US Airways – have an extra fee for passengers who want a receipt after they have taken their flights.

[photo by Deanster1983 via Flickr]

Airline extra fees: $2 billion in three months

Airline fees are definitely not going away anytime soon – not after the second quarter it gave the airline industry. Carriers in the United States raked in $2.1 billion in fees and extra charges in the second quarter of this year, a 13 percent year-over-year surge. And, it was good enough to deliver the sector’s first profitable quarter since 2007.

Well, here’s the worst part for you: most of it came from checked baggage fees. This annoyance was good for $893 million in the second quarter of 2010, a gain of 16 percent from the second quarter of 2009. Reservation fees were good for $594 million, with ancillary revenue (e.g., frequent flier mileage sales and pet fees) reaching $618 million.

Delta benefited most from the fees that passengers hate most, at $682 million. American Airlines and US Airways were next.

[photo by cliff1066 via Flickr]