The global airline industry is expected to clear a $12.7 billion profit this year, about 67 percent higher than in 2012. More tightly packed planes are the major factor for the income growth, but part comes from the dramatic surge in ancillary fees airlines are able to extract from their customers. Extra payments for checking bags or changing flight times, apart from the basic ticket cost, jumped to $36 billion last year, according to a report released today (PDF) by the International Air Transport Association, and are expected to “grow significantly” this year. The industry group estimates that 3 billion people will fly in 2013—the first time that mark has been reached—as more people in developing markets migrate into the middle class.
More airlines have been tinkering with fees and testing their ability to turn flights into more of a retail experience. Just five years ago, revenue from ancillary fees amounted to just $2.5 billion for the global airline industry, or 0.5 percent of all revenue. By the end of 2013, IATA projects extra fees will be 5 percent of the industry’s worldwide revenue. “It is clear that airlines have found new ways to add value to the travel experience and to shore-up the bottom line,” Tony Tyler, IATA’s managing director and chief executive officer, and former chief of Cathay Pacific Airways (293:HK), said in today’s release.
While American travelers may by now be inured to the $25 dun for checking a suitcase, or even the newer $200 hit to change a ticket, much of the world remains virgin territory for fee expansion and experimentation. More than one-third of global ancillary revenues in 2012 were collected by just six airlines, all of them based in the U.S., according to an October 2012 report (PDF) by airline-distribution provider Amadeus (AMS:SM) and IdeaWorks, a Shorewood (Wis.)-based consultancy that specializes in travel revenue.
For U.S. airlines, frequent-flier miles comprise about half of these revenues; onboard food and other retail items account for 25 percent, and baggage fees make up 20 percent, according to IdeaWorks. U.S. airlines collected $3.49 billion in bag fees last year: Delta Air Lines (DAL) led the group with $865.9 million, according to U.S. Department of Transportation data, followed by United (UAL) at $705.5 million. Change and cancellation fees totaled $2.55 billion, again led by Delta and United with $778.4 million and $660.9 million, respectively.
Beyond the bag fee and extra-legroom charge that are now common, the next phase of ancillary revenue growth is likely to come from airlines expanding the types of marketing they do on their own websites to global distribution networks, such as Amadeus and Sabre Holdings, that sell the vast bulk of airline tickets, especially in the corporate travel field. To that end, IATA is spearheading an effort it calls New Distribution Capability to migrate its various products to travel agents and “close this merchandizing gap, providing consumers with the same shopping experience regardless of how and where they do their travel shopping,” the group said in a statement today.
The initiative is being reviewed by the U.S. Department of Transportation and has been opposed by some consumer groups concerned that airlines are attempting to reduce fare transparency for shoppers, aiming to compete more on products and services and less on price. That commodification, spurred by the Internet, has historically hampered the industry’s ability to increase its margins.