2010 Business Travel Survey: Airlines Relish Rise In Fares, Ancillary Revenue Gains - Business Travel News

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2010 Business Travel Survey: Airlines Relish Rise In Fares, Ancillary Revenue Gains

July 07, 2010 - 04:00 PM ET

By Jay Boehmer

Every month last year, major U.S. airlines saw a year-over-year decline in average fare. So far this year, the opposite has held true. Couple that with a growing appetite for ancillary revenues—from baggage fees and change fees to lounge passes and whatever the revenue management department's fancy—and domestic airlines are in a better position to generate revenue than they've been in quite some time.

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"Pricing is still below where it was in 2008, though it's bounced way off the nadir that it hit in 2009," US Airways president Scott Kirby said this month.

Coming off the lowest fares in a decade, airfare analyst and FareCompare.com CEO Rick Seaney said there is hardly anywhere for airfares to go but up, and signs of prices firming continue to build. Whereas yields declined about 12 percent for the full year of 2009, through April this year yield has grown about 8 percent year over year, with the momentum building with each month, suggesting even further pricing power in the airline's hands for months to come.

Even though carriers have been unable to pass through major systemwide fare increases, Seaney said the mix of business has moved steadily to favor higher yield travelers as the airfare fire sale that lured so many leisure travelers to the skies last year has made way for heightened airline pricing power.

"The industry really aggressively discounted last year," Kirby said. "What we've seen this year is the industry is not discounting as aggressively. There haven't yet been large fare increases across the industry. They don't get headline press reports, but there have been some more tactical fare increases across the industry in recent weeks. I'm optimistic that, given the strong revenue environment that we and others are seeing, that we'll start to get some pricing traction."

Seaney said many airlines this year "are closing out all of their cheapest inventory classes for the summer" and, even if fare hikes haven't been met with widespread success, "Southwest hasn't had a systemwide, marketed published sale since November of last year, and last year they were doing at least one a week. That tells you how firm it is for the summer."

As fares themselves firm, airlines also continue to diversify their sources of revenue through a la carte fees, new service charges and other ancillary fees. What started a couple of years ago as a charge to check a second bag has snowballed into a fundamental shift in how airlines price their products and generate revenues. The trend toward unbundling, upselling and other euphemisms for charging more shows few signs of letting up.

"We've recognized the need to transform the revenue model, and we've taken calculated risks as we try to create new streams and revenue," said Kathryn Mikells, CFO at United Airlines, which alone expects revenue generated from ancillary revenues to top $1.2 billion this year.

The ancillary revenue revolution took hold with checked bags, introduced by United more than two years ago, but carriers continue to experiment and build revenue, while giving customers a service option or a new source of frustration, depending on the perspective.

Continental CEO Jeff Smisek this month presented selling exit row seating as a case study in how airlines are finding new revenue in old places. "We have other products to come, but exit row seats have been a homerun for us," Smisek said this month. "In the old days—that is, a few months ago—we used to give away exit row seats."

Though Smisek said Continental's elite status frequent flyers still would get priority, Continental in some cases would have given away such a perk—on a free, first-come basis. "Aunt Erma, who bought on Orbitz and doesn't know she's flying Continental, who gets on board and looks around and says, ‘gee this one's blue and gray,' and paid $69, she gets the exit row seat," Smisek said. Now, Continental sells those at varying prices, depending on length of haul—but still maintains it as a free perk to the most frequent flyers. "We are now generating on average $120,000 a day from this one product," Smisek said this month. "You do the math."

Continental and United are hardly alone, and new optional services and fees continue to expand in the industry. Just this month, American Airlines introduced what it calls its Boarding and Flexibility Package, part of a suite of ancillary services called Your Choice, which AA director of merchandising strategy Cory Garner described as "our umbrella brand for our optional services." The suite also includes such previously available optional services as inflight Internet access, Admirals Club day passes and confirmed flight changes, among others. Garner said AA plans to add many more Your Choice offerings. "This is another step in an evolution that's been taking place for years now, and something we see as giving the customer more choice, more control, more visibility, more ways to personalize their travel," he said. "This is a point along an upward trend."

AirTran CEO Bob Fornaro this month said he sees a law of diminishing returns already at play when it comes to ancillary airline revenues, noting that, at least for his carrier, the biggest moneymakers already have been introduced. "Certainly, it's a good revenue source," Fornaro said on the topic of ancillary revenues. "There are opportunities, but the biggest ones I think are in our numbers now: change fee, cancel fee, the upgrade program and the first bag. Going forward, most of the changes will be modest. You can debate some of the other things—whether to charge for carry-on bags—but I just don't see that happening right now," he said, referring to a Spirit Airlines proposal to charge passengers to carry on luggage.

The industry may be slow to adopt such a move, but there is evidence that consumers have grown to accept the new pricing models. J.D. Power and Associates this month released its annual consumer satisfaction survey for the U.S. airline business, and found that not only did overall satisfaction improve in the past year, but that passengers may have grown to accept the proliferation of ancillary fees levied by carriers. "The fact that overall satisfaction with airlines has improved is particularly notable in light of a difficult economic year, in which add-on fees have continued to proliferate and two major airlines have merged," said Stuart Greif, vice president and general manager of the global travel and hospitality practice at J.D. Power. Among the criteria on which it rates carriers, the costs and fees category saw an increase in satisfaction in the past year.
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