Did you ever wonder about how those non-ticket airline fees always seem to creep up year after year? Well if you did, then the following data will confirm your worst fears. Airlines are making more and more money from non-ticket,or ancillary fees, and it's now become an integral part of their business model—for budget airlines and traditional airlines alike. It's time to look more closely at which airline is making what from ancillary fees.
What is ancillary revenue?
Ancillary revenue is defined in the CarTrawler Yearbook of Ancillary Revenue by IdeaWorksCompany as coming from four main revenue streams:
- A la carte features such as onboard food and beverage sales, baggage and checking in fees, seat assignment fees, onboard entertainment, and priority services
- Frequent Flier Programs comprising of sales of miles/points to program partners and/or members
- Commission-based products, for example, commissions earned for travel insurance, hotel accommodation or car rentals
- Advertising sales, typically involving things like in-flight magazine advertising, and signage and airports
The first source listed contains some of the most controversial fees, and readers can get a flavor of how important each source is from a breakout of the ancillary revenue sources of budget operator, Spirit Airlines (NYSE:SAVE), the leading ancillary revenue generator by percentage of sales with 38.4%.
By way of comparison, traditional operator United Airlines (NYSE:UAL) --14.9% of total revenue from ancillary revenue—generates a far larger percentage from the sale of miles on its frequent flier program. As defined above, United Airlines generated $5.7 billion in ancillary revenue in 2013 with 51% coming from miles sold. The remaining 49% comes from what it calls ancillary revenue (checking in bags, meals, onboard entertainment and premium services).
The top 10 ancillary revenue generators by revenue
In terms of revenue:
|Airline||Ancillary Revenue ($bn)||Share of Total Revenue||Per Passenger|
|Delta Air Lines||$2.53||6.7%||$15.4|
It's not surprising that discount airlines like Ryanair (NASDAQ:RYAAY) and easyJet generate a large part of their revenue from ancillary sources. However, in terms of revenue per passenger, airlines like Air France/KLM, American Arlines (NASDAQ:AAL), and Delta (NYSE:DAL) are generating almost the same as the budget airlines. However, the standout numbers come from United Airlines, because excluding for the frequent flier program miles sold, United is still generating around $20 from its ancillary revenue. In fact, it's total ancillary revenue has gone up 9.5 times since 2007.
The top ten airlines by share of total revenue
There will be no surprises here, as budget/discount airlines dominate the top 10.
|Airline||Ancillary Revenue as a % of Total Revenue||Per Passenger|
While budget airlines dominate the top 10, it's notable that United Airlines comes in 12th with 14.9%. Moreover, the former kings of the budget airline industry (easyjet and Ryanair) actually generate far less per passenger than newer discount airlines like Spirit Airlines or Wizz Air.
Whether you look at traditional or discount airlines, the conclusion is the same. Ancillary revenue has increased strongly in recent years. For example, United Airlines has increased its ancillary revenue by 9.5 times since 2007, a figure that dwarfs the increases of 3.2 times and 5 times at budget airlines, Ryanair and easyjet. Ancillary revenue is now a significant part of budget and traditional airline revenue.
While the figures seem startling, it's not necessarily a bad thing. On the contrary, customers who are willing to pay many of these fees are helping keep ticket prices down for passengers who are not so keen to pay for premium services. Moreover, for the airline industry, it's become a major source of revenue. Investing Fools already know why this year is shaping up to be a great year for North American airlines, and ancillary fees are helping to keep airline capacity utilization (the percentage of passengers on miles flown) high by being able to keep ticket prices low. A win-win for passengers and airlines.
Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.