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Airlines Are Mastering the Upsell

By Alexander MacLennan – Mar 22, 2014 at 2:41PM

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Tight seats make buying extras even more attractive.

In a previous article, I discussed the latest airline trends in shrinking and changing seats to give passengers less space and airlines more revenue. But this strategy has one more benefit for airlines: It's helping them grow ancillary revenues.

Fees for everything
In my last article, I noted the ultra discount nature of Spirit Airlines (SAVE -0.30%) and the lack of passenger space ready to compete with any other carrier on the basis of cramped conditions. But Spirit has found ways to offer passengers more... for a price.

To fix your cramped seat problem, you can purchase larger seats and get another eight inches of pitch and two inches of seat width. If you'd rather not pay for bigger seats, you can make your economy seat better by purchasing snacks or bottled water, again, for a cost.

Alongside carry-on bag fees and boarding pass printing fees, Spirit Airlines has mastered the generation of ancillary revenues. But that doesn't mean other airlines can't benefit as well.

Creating a new seating class
As airlines turn up the pressure on economy class passengers, they are rushing to provide opportunities to upgrade. The two airlines installing slimmer seats that I mentioned in the last article, Delta Air Lines (DAL -1.71%) and Southwest Airlines (LUV 0.03%), also provide options to purchase larger seats for an additional cost.

A similar way to upgrade can be found at United Continental (UAL -0.72%) with its Economy Plus option. Besides being able to charge additional fees for these seats, airlines often use them as ways to reward frequent flyers without having to give away even higher revenue business class seats.

In some cases, airlines are now charging extra for exit row seats by lumping them in together with the other extra legroom seats. What was once a way for economy class passengers to get more legroom by booking early has turned into another way for airlines to persuade lower paying passengers to upgrade.

Are airlines just giving us what we want?
Like many things in life, travelers want low prices and the best of everything. But like pretty much everything else, customers cannot have both while preserving a viable business. So airlines are making us offers, and we have tended to favor the lowest-price ones with less space rather than higher-priced ones with more space.

Since deregulation of the industry, airlines have been fighting to drive down costs to please travelers searching for the best price. Perhaps the biggest change for the modern airline industry is the realization on the airlines' part that there is a great potential for ancillary revenue generation by selling extras to otherwise uncomfortable economy class passengers.

The retail model
Airlines have historically been a lower margin industry, but by offering new products to travelers and charging fees for whatever they can, airlines are boosting revenues while growing margins. Overall, the shrinking of standard economy seats is not only serving to lower unit costs, but also gives airlines the ability to increase revenue from the retail side of their business.

Alexander MacLennan owns shares of Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, and long January 2015 $30 calls on Delta Air Lines. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned.

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