Posted by Ajay Kelkar on Sun, Feb 28, 2010
During the second quarter of 2009, the largest airlines in the US collected $669.5 million worth of baggage fees from the nation's hapless passengers. That's a huge 275 percent increase from the second quarter of 2008.
Ancillary income or revenue from sources other than the ticket price is categorized by the industry as a la carte features, commission based products and frequent flyer activities and today account for a substantial portion of revenue for airlines. Today, these features comprise as much as 10-15% of most airlines’ revenues. United Airlines, for example, has estimated that baggage fees and other add-on charges for meals and seat selection will generate $700 million in additional revenue in 2009. Asia is a bit different and possibly only Air Asia shows this kind of ancillary income percentages!
In an article by Joe Brancatelli, he states “But here's an indisputable truth: The more baggage fees that the big airlines pile on their customers, the faster their overall revenue is collapsing. In fact, the only carriers that escaped a double-digit revenue decline in the second quarter were the two that still allow all passengers to check at least one bag for free”
To me this conclusion is “so wrong” …airlines lost revenue for a whole bunch of reasons and you cannot attribute “cause & effect” here. In fact look at the facts, in many businesses like Airlines, Banking, Credit cards & Hotels,
you actually do not mind paying small amounts of money for a variety of services.
This “small amount of money” contributes substantially to the other income line for these marketers. In the case of credit cards when you use your card internationally, you pay a “not so small” markup and that is very profitable for the card issuer. Credit card loyalty programs are among the best examples of programs that allow Ancillary revenue (e.g. membership fees, point sales, partner payments). Even banks have developed sophisticated ways of charging you for all sorts of services which slip under your radar! At an individual level it may not hurt so much-as an example debit card fees may be just Rs 100-150($ 2 to 3) per customer but the Debit card portfolio makes a healthy pile of profit because of this innocuous line item!
Interestingly Analytics can play an important role to gauge pricing power amongst customers and finding segments that may find more “value” in a specific service offering and therefore not mind paying for it. I wonder how many companies actually have a specific executive or function tasked with uncovering “ancillary income” opportunities. A strong analytics based program to uncover these opportunities will more than pay for itself.
Read more about the Airline baggage charges here:
http://www.portfolio.com/views/columns/seat-2B/2009/09/29/baggage-fees-hurting-airlines-bottom-line/