IdeaWorks has put out a new study on airline ancillary fees (.pdf). They rank the airlines earning the most in ancillary fees, and explain where the money comes from.
I’m not going to focus on the ultra low cost carriers around the world although the data there is interesting. Instead my interest is piqued looking at the major US airlines and the contribution of their frequent flyer programs to ‘other income’ at each.
Here are the top 10 airlines earning ancillary revenue, and how much their frequent flyer programs contribute to the total:
We can quibble with what numbers to use here, especially because disclosures across airline financial statements aren’t consistent. For instance $2.1 billion looks to be the total of deferred revenue from the sale of miles at American in 2016. My review of American’s SEC 10-K filing suggests $2.51 billion in total mileage sales.
Nonetheless, working with the IdeaWorks figures yields some interesting results. Remember that most of the revenue from US frequent flyer program mileage sales is coming from their co-brand credit card issuing banks.
- While Delta is the only one of the 3 largest US airlines claiming that their credit card acquisitions are meeting or exceeding expectations, the revenue they’re generating from their frequent flyer program appears to be lower than United and United is disappointed in its results which is why United has begun to pitch card products onboard.
- United may feel some leeway to devalue since they’re earning more than their competitors.
- American’s revenue is lower than competitors. That’s not surprising since last year didn’t include a bump from their new credit card deal although that doesn’t explain the full gap with United. As aggressively as they’re selling miles to banks and even consumers there’s quite reasonably less demand for their miles despite more frequent flyer program members than United and a larger airline overall.
- Perhaps shockingly Southwest appears to be generating more from mileage sales than American. 2016 saw a full year of Southwest’s new credit card deal with Chase.
- With a full year of the new American deal this will reverse. Nonetheless the fact they’re even close is telling. Southwest is punching above its weight because while the program is simple it’s relatively more transparent than peers.
There’s some evidence in these numbers that offering a strong frequent flyer program value proposition is key to earning the most possible revenue from that program. United and Delta have new credit card deals, United has a better program, and it earns more. American should take heed.
Air Canada sees a lot of revenue upside potential in its frequent flyer program which is why it plans to sever ties with Aeroplan in 2020 and start its own.
Air France KLM and other European programs have less potential to earn from local credit card partners due to lower interchange rates in Europe, but that’s also why they’re a partner of US bank transfer programs — to get a piece of the more lucrative US card market. (Lufthansa of course has a US-issued card from Barclaycard.)
While my focus in reading the report was frequent flyer programs, the treatment of Basic Economy fares stuck out as interesting as well.
Branded fares, based upon the “good, better, and best” method of retailing, also contribute to ancillary revenue as shown in the Delta and easyJet examples. The entire fare is not counted as ancillary revenue, but rather the premium above the basic economy fare level is measured. Fees assessed for assigned seating are another method for airlines to boost the bottom line. These fees do tread close to the model defined by low cost carriers; adoption of this practice does pose a risk the perceived quality of global airlines.
Bear in mind that ancillary fees aren’t all profit. Some like frequent flyer programs come with costs associated with them (redemptions). And the accounting can be misleading, since at least some of the revenue included as checked bags might otherwise have been part of airfare if the airline hadn’t unbundled. Indeed checked baggage fees encourage more passengers to carry on bags slowing the boarding process and imposing heavy costs on the airline operation.
A key reason to adopt checked bag fees though is massive tax savings to the airline, federal law encourages checked bag fees rather than including free checked bags in the ticket price since the former is exempt from the 7.5% federal excise tax on domestic airfare.