Ancillary Revenues Now Vital to Airlines' Financial Health

 - July 30, 2012, 3:49 PM
United Airlines collected $5.2 billion in ancillary revenue in 2011, leading all other airlines, according to IdeaWorks research. (Photo: United Continental Holdings)

Ancillary revenue collected by airlines for products and services ranging from checked bags and extra legroom to co-branded credit cards continues to grow in size and importance to the industry. Fifty world airlines that disclose proceeds from such activities reported $22 billion in ancillary revenue last year, marking a 66-percent increase over 2009 results, according to a new report.

Airlines’ ancillary revenue has increased ninefold since consulting company IdeaWorks of Shorewood, Wisconsin, issued its first report in 2007. At that time, financial disclosures available from 23 airlines revealed $2.45 billion in ancillary revenue, the company said. Amadeus, a travel industry transaction processing firm based in Madrid, Spain, sponsored the latest report. “We’ve seen the industry move swiftly to grasp some clear opportunities for providing ancillary services,” said Holger Taubmann, Amadeus senior vice president of distribution.

The 10 airlines earning the largest amount in ancillary revenue represented 75 percent of the total amount disclosed by airlines in 2011. United Continental took in the most, at $5.2 billion, followed by Delta ($2.5 billion), American Airlines ($2.1 billion), Qantas Airways ($1.4 billion), Southwest Airlines ($1.2 billion), easyJet ($1.1 billion), Ryanair ($1.1 billion), US Airways ($1.1 billion), TAM Airlines ($667 million) and Alaska Air Group ($610 million).

Southwest is a new member of the top-10 list. Although the Dallas-based low-fare carrier has distinguished itself by not charging for first or second checked bags, it generates considerable revenue from “convenience-adding services.” Its EarlyBird check-in service, which allows early boarding for a $10 fee, generated $142 million in 2011, according to the report. Most other airlines now charge for checked bags. Assessing baggage fees “was a huge, fundamental change in our business model, but one that makes sense,” US Airways chairman and CEO Doug Parker said during a July 18 National Press Club luncheon in Washington, D.C.“Those of you who avail yourselves of the service of handing over your bag to us and then having us hand it back to you at the end of the trip require a set of infrastructure. If you do that, there’s a cost to it.”

Low-fare airlines drew the most ancillary proceeds as a percentage of total revenue. Spirit Airlines, whose ancillary revenue accounted for 33 percent of its total, led the category, followed by Jet2.com (27 percent), Allegiant Airlines (27 percent), easyJet (21 percent) and Ryanair (20 percent). “With 15 to 33 percent of revenue produced through these methods, ancillary revenue success is a matter of financial survival for these low-fare airlines,” said the report.