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
"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
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
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
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.