Why airlines will make $11 billion from fees this year

Hold on to your wallet. North America’s airlines will charge almost $11 billion in so-called a la carte fees for everything from seat reservations to luggage this year — a 24 percent increase over what was collected in 2014.

That’s according to a new survey by IdeaWorksCompany, an ancillary fee consulting company. The results suggest that despite an outcry from airline passengers, the sky remains the limit for new fees.

How did airlines, which are expected to achieve record profits this year, do it?

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According to the research, domestic airlines placed emphasis on “comfort-related services such as premium economy seating, buy-onboard food, and priority screening and boarding.”

For example:

  • Alaska Airlines, American Airlines, Delta Air Lines, Hawaiian Airlines and United Airlines offer “premium economy” zones for extra fees. Economy class airline seats have been shrinking in size.
  • They also offer other creature comforts. “Delta Comfort+” includes early boarding, front-of-cabin seating, extra leg room, snacks, beer, wine and cocktails, and premium Wi-Fi entertainment. Again, most of these amenities (except the Wi-Fi) used to be included in a ticket. They were removed — and then resold to passengers.
  • Baggage fees continue to be big revenue drivers, too. Two no-frills airlines, Allegiant and Spirit, even raised some of their fees for the holidays to take advantage of high demand. The baggage earnings are so successful that they are spreading in other regions of the world such as Asia and South America, according the survey.

Other sources suggest ancillary revenues are headed into record territory, though not as dramatically. For example, airlines are required to report their baggage fee revenue to the federal government. For the first six months of 2015, U.S. carriers collected $1.8 billion in baggage fees. For the same period a year ago, they’d reported $1.7 billion in baggage fees.

Loyalty programs drive profits

Factor in loyalty programs, and the overall ancillary revenue picture becomes even brighter for airlines. In 2015, North American carriers are expected to collect $11.2 billion from their frequent flier programs, up from $10.5 billion a year before.

Indeed, research suggests that airlines rely on the sale of frequent flier miles to generate more than half of their total ancillary revenues. As a standout, IdeaWorks cites Delta, which generates more than 62 percent of its ancillary revenue from its SkyMiles frequent flier program.

Delta’s latest annual report reveals its most important contract to sell mileage credits relates to its co-branded credit card with American Express. All told, Skymiles accounted for an eye-popping $4.2 billion in deferred revenue, leading some to observe that Delta is more of a loyalty program that happens to run an airline, as opposed to an airline with a loyalty program.

The recent loyalty program reforms, which link elite status to the amount of money paid, as opposed to the number of miles collected, will only make these programs more profitable — and keep the ancillary revenue rising.

American Airlines, which this week became the last of the legacy airlines to reform its loyalty program to make it revenue-based, will only accelerate the trend.

Customers don’t like

These changes are likely to be unwelcome to consumers, who are used to receiving most of these benefits as part of their ticket. And there’s more ahead: European carriers are now pioneering the idea of “branded” fares which allow airlines to present distinct product options to consumers.

“In effect, they can choose a fare that meets their needs, such as seat-only without a checked bag, or a fare packed with all kinds of extras,” says Jay Sorensen, president of IdeaWorksCompany. “Look for this retail style to be adopted by airlines all over the world, which should boost ancillary revenue even higher for 2016.”

Airlines all over the world “rely now upon ancillary revenue,” the report concludes. In other words, like it or not, this trend appears to be irreversible.

20 thoughts on “Why airlines will make $11 billion from fees this year

  1. This year i’ve flown NYC to Puerto Rico for $225, NYC to LAX for $299, NYC to SIN for $800 and NYC to TPA for $179. My credit card lets me check a bag for free and board early while TSA precheck lets me go through security pretty quickly. I pack a snack or eat when I land for short flights.

    With base fares like this, bring on the fees.

  2. If the airlines weren’t collecting this money as fees, there’s no reason to think they wouldn’t just make it up with fares instead.

    1. I ran the numbers and the fees are highly profitable. Whether it’s for the legroom or the checked bag, the airline makes a killing. It reminds me of paying for a bottle of wine at most restaurants. The stuff they charge $20 for is rotgut I bought for $2 as a teenager (inflation adjusted. 🙂

      It’s a game. Saavy consumers are avoiding the bag fees by carrying on and the airlines are starting to make it tougher to do so. Spirit recognized this early and charged MORE for carry on bags. But at Delta, United, and American (and even now Jetblue), the gate areas are besieged with a mob of yokels standing in line an hour early to get that coveted overhead bin and avoid “gate checking” the bag.

      But yeah, I suspect that if the airlines just rolled back the amenities into the fare and raised the fares a little, they could still be just as profitable. The airline’s profit margins are due not to fees but rather cheaper fuel prices (say thank you to domestic oil production!), consolidation (the airlines charge more for fees and base fares because they CAN), and packing the planes better than 15 years ago. Oh, in the old days, I could see usually about 10 empty seats. For deadheaders and standbys and “buddy pass”, it was possible to go nearly anywhere. Now, those flights take off full.

      Consider mobile phone plans. Oftentimes, people can save money by debundling. I did this with my wife and she hated it because even though it was cheaper to just pay by the minute, it drove her nuts being reminded how much every call cost. So I got her unlimited service for about $5 more. She paid MORE for “bundled” service. Many people do. Even as people gripe about their cable bill and having to pay for channels they don’t want, wait until they pay a dollar per TV show and see how much fun it is to think carefully before watching anything.

      But yeah, after the race to the bottom is reached (and congratulations to Spirit because you can’t go to the bottom faster than they can!), then airlines will have little to differentiate each other. When United is little better than flying Spirit, even I might consider giving Spirit a try for the right price and then, and only then, will the United executive peer out from under his bags of millions of dollars of money and say: “Hmmmmm, I’ll have to do something if I want to appear like I’m earning all this cash” and maybe come up with raising the bar a little.

  3. “These changes are likely to be unwelcome to consumers, who are used to receiving most of these benefits as part of their ticket.”

    Well, maybe those of us who have been flying since the 80’s and fly often for work might not welcome the “changes”, but I don’t think the average flyer remembers those days any more. These items have not been part of the ticket for about a decade now. You don’t miss what you never remember having.

    And do we really want to pay more for our tickets if these extras are rolled back into the basic ticket? I would bet the majority of the traveling public would not.

    1. I did the math and it turns out that the free checked bag included in the fare is a fraction of the price most airlines charge for it. So yeah, I’d be happy to pay more for a fare if I’m saving in the long run.

      I make these decisions all the time as a consumer when considering a bundle. With a mobile plan recently, I had the choice to pay more for a plan than ala cart. Heck, it’s the most popular choice most cellular consumers seem to make. They hate being nickel and dimed.

      1. Yes, if you take the total income for a given flight that comes from checked bag fees and spread it out equally among all of the ticket holders, it amounts to considerably less than what each of those checking the bags pay individually.

        But that is not how airlines and most passengers look at this. The airlines seem to be claiming that you are saving the full checked bag cost if you don’t check a bag. And the passengers are willing to fly a different airline to “save” a single dollar. The somewhat incorrect idea that you should not have to subsidize the other passengers by having the cost of a checked bag included in your ticket price has been so beat into the public train of thought that most can’t see the other option. But enough do see it that way in some cases — just look at the success of Southwest.

        1. I think I see where you’re going with the calculation you made and that wasn’t what I was up to but it’s good enough for government work. My point is that the profits or net from baggage fees (take your pick) averaged out over the base fare savings certainly is significantly less than what the consumer should expect.

          But as I said elsewhere, it doesn’t really matter. Airlines are charging more BECAUSE THEY CAN whether in fees or base fares. Don’t like the airlines? Go on USAirways, Braniff, or Continental. Oh, wait, you can’t anymore. And with fewer planes and most of them full, be glad you can get a seat on ConAir. 🙂

          So people are given the ugly choice of schlepping their carry on through TSA to fight for overhead bin space OR giving even more profits to the airlines. Same with the tiny seats. But here’s the thing:

          When all airlines are ConAIR, then sure, it will be down to the base dollar, right? And this is where it will get interesting because competition will kick in: Spirit, despite being evil, does offer some low fares. So why wouldn’t most of us take them if they’re treating us little worse than a legacy such as Delta?

          And this is where it will get interesting because I think that as the market adjusts, competition will kick in again. Airlines can and need to add capacity and orders will go in for more planes. When capacity grows, and consumers vote with base fare, then SOME airline will start to lose money. Or at least not make as much as the others.

          So Joe CEO sits in his big office on a bundle of money and despite this, he won’t be happy. BigLegacyAir is still profitable, but not as profitable as the others. And shareholders are leaving in droves because hey, if they can make 1 dollar more per share with the others, why shouldn’t they? And there goes his bonus! Instead of 50 million, the guy will have to survive on 40 million.

          And that just won’t do.

          So he’ll ask himself: How to get more people to fly his airline? Lower capacity? Sure, he saves more money but his cost per seat is still the same and he’s in the lower rung.

          And that is when he’ll have to go with service.

          But first, I think the way the market works is that EVERY airline will have to STINK first. And only then, after every other choice has been made…

          will they do the right thing. 🙂

          1. What many folks should do is this: START DRIVING. Anything under 500 miles is time effective, compared to the time used by driving to the airport, waiting, etc…..and if it’s a “family of four”, you can drive a lot farther than that for the cost of 4 tickets and 4 sets of fees.

          2. Agreed and I do driving vacations as well (or even take the bus.) A few notes: Not every person in a family of 4 needs to check a bag. We have a bag big enough to store a body in (but still complies with the airline size requirement) and pack that thing to the gills. Then we carry on to the max: Wear jackets on board (even if it will be sunny at our destination, stow it in the overhead bin onbard), and everyone has a full-size carryon bag packed full.

            I’m apparently not the only schmoe who had this idea based upon what I see at the gate at airports. The overhead bin space goes fast so I go to the gate agent and volunteer to check our carryons TO THE DESTINATION (if transferred.) We then leave someone to watch the coats and gate while everyone has a civilized cup of coffee away from the crowds.

            Welcome to the 21st century!

  4. I like this paragraph “They also offer other creature comforts. “Delta Comfort+” includes early boarding, front-of-cabin seating, extra leg room, snacks, beer, wine and cocktails, and premium Wi-Fi entertainment. Again, most of these amenities (except the Wi-Fi) used to be included in a ticket. They were removed — and then resold to passengers.”
    When were airlines giving away free early boarding, front of cabin seating and extra legroom? Those were always sold as business class tickets, no? Wi-fi obvioulsy is new technology. So are we really complaining that we no longer get free meals and booze onboard? As far as i’m concerned airplane food isnt very good and do we really need a free meal on the 90 minute NYC to CHicago flight anyways. Also, if booze was free we’d have teatotalers complaining that they’re subsidizing the habits of those who might knock back 5 beers on a flight. (plus with all the complaints of passengers behaving badly on this blog should we really want to start giving away lots of alcohol?”

    1. Note that front of cabin seating refers to front of ECONOMY class. That used to be “free” if you got your reservation in early.

      Wi-FI is currently a bit of a joke. It doesn’t work most of the time and some people who are really addicted to their facebook feed pay for the premium. Demand pricing often is $20 an hour. One guy downloaded a spreadsheet and was paying per megabyte and wound up paying something like $1000 for a document he was working on.

      Anyhoo, the extra legroom also was larger in economy class before (and not just before deregulation but rather 10 years ago.) I think when United offered their “more space in economy” promotion 10 years ago or so, it flopped because things were better back then. The seats were large enough even for me on most legacy flights.

      About the food. A meal service costs about $6 bucks on average from Gate Gourmet and other services. The food is actually pretty good, or tries to be, with these challenges. The noise and canned air sucks the smell away from food and hence, taste (try tasting with your nose blocked to see how much it matters.) Also, they don’t “cook” the food inflight but just heat it up or maybe cook the rest of the way and this presents challenges. Steak is hardest. Cooking and reheating steak toughens it up. Think of which TV dinner tasted best from your childhood and that’s what works on planes. Nonetheless, a meal onboard is a luxury and many people I know blog out their photos. I do myself.

      Beverage service was “free” in the old days, but not necessarily alcohol on domestic flights. Heck, I remember getting impatient for the beverage service back in the old days and I brought cans of diet soda on board with me. The good ol’ days.

      But yeah, I’m amused at the “delta comfort” slogan or “united friendly” where you pay more because it shows that their REGULAR service is uncomfortable and unfriendly.

      1. “One guy downloaded a spreadsheet and was paying per megabyte and wound up paying something like $1000 for a document he was working on.”

        Source please? None of the major carriers charge by usage. A Gogo all day pass is $16 if you purchase it in advance, and is well worth the money for my regular SEA-BOS trips.

        1. Google “1,171 wi-fi bill singapore airlinesJeremy Gutsche “. There was an option to pay for overages and he took it.

          This is also why I will not go with a mobile service that charges for overages whether data or talk/text. You touch the wrong tower or something goes crazy on your phone and you’ve got a thousand dollar bill on your hands. This is what keeps the major carriers flush with cash.

  5. Here is another thing to ponder, take it for what you will.

    All these extra fees added to the base fare are not part of the actual airfare and therefore are not taxed as such (mainly the federal excise tax.) We still have to pay airport and 9/11 charges. And of course, travel agents do not get a commission either.

    Think of all we save in taxes by paying these things as ala carte fees. ;-P

    1. Yes, the tax advantages encourage carriers to shift towards a la carte fees. Which highlights that these changes are not driven purely by ‘free market’ forces.

      Yes, there is a resulting tax “savings” to the carriers and to frequent flyers.

      However, overall, general taxpayers, including non-flyers and infrequent flyers subsidize those “savings.”

  6. “In other words, like it or not, this trend appears to be irreversible.” I beg to differ. Not that the well-paid industry shills and stooges…er.. our elected representatives or appointed watchdogs would ever DO such a thing BUT… if the price you saw when you fare shopped had to include ALL ancillary fees and taxes. One Price. Fare is quoted as $99? That’s exactly what you get charged. Crazy, right?

  7. No wonder their service sucks!
    And that, after the fat bonus, golden parachute payment and huge salary to the management!
    That’s why I chose European, Gulf and Asian Airlines first while traveling internationally!
    Of course, not many choice for North American!

  8. My Chinese Traveling companion has to return to china in December to see a doctor, and it will cost about half as much to get her from ABQ to LA, not counting the baggage fees. I have circumvent the globe four times and the one thing I have learned is to stay off US-based airlines.

  9. Customers are used to ridiculously low fares too. The airlines are allowed to make money, this is America and making money is OK. Not so long ago we were complaining that the airlines were declaring Chapter 11 as a way of life. It seems they can’t win either way.

    Also paying for better seats is not new. As an American Airlines Gold and Platinum customer I’ve been paying for upgrades for years. Yes they are cheaper than if were not Gold or Platinum but it’s still $30 (soon to be $40) per 500 mile segment.

    As for luggage, I previously felt that the airlines should be charging for carry-on not checked bags but in fact I think it’s right to charge for luggage. If you kerb check a bag, or ask a porter to take your bags to the kerb when you land, you’ll pay them a tip, let’s say $5 per bag. That’s for one person’s work. When you check a bag, you are getting the services of the agent that checks in the bag (which is an employee that is paid and thus costs money – otherwise you’d walk straight to the gate and it wouldn’t cost anything), the people that handle the bag at both ends, which is at least 2 people, probably more. It saves you having to carry the bag to the gate which I know can’t do anyway, but it’s just as well because it would be a huge inconvenience and burden if you could.

    Or you could fit everything in carry-ons as I do and save all that work for other people, and not pay anything.

  10. All of this goes to a question I still can’t answer: If unbundling leads to the lowest prices and all passengers want are the cheapest seats, why/how can Southwest continue to succeed? Just asking….

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