Ancillary revenue is low-lying fruit for struggling airlines. We take a look at fees and the frequent flyer.
Whether you love 'em or hate 'em (and we know you hate 'em), airlines fees are a lucrative business for the airlines. In the first quarter of 2012, the 17 largest airlines in the U.S. collected $815.8 million dollars from bag fees alone, according to the Department of Transportation. Reservation change fees brought in another $631 million during the first quarter. IdeaWorks, a company that specializes in ancillary revenue, analyzed the financial reports of 50 airlines and reported that they earned a combined $22.6 billion in ancillary revenue in 2011, which includes all fees and other types of ancillary revenue, such as the money earned from selling frequent flyer miles to partners.
But all fees are not viewed equally by flyers. J.D. Powers and Associates conducted a survey where they polled 14,000 airline passengers who flew on U.S.-based airlines between May of last year and April of this year. Of those polled, a mere 28 percent think that baggage fees are reasonable, compared to 70 percent who approve of fees charged to board the plane early. And 65 percent think fees to upgrade to a better seat are justified.
The Early Days of Fees
Most travelers can still remember when they could check two bags for free. Spirit Airlines was the first airline to start charging for checked luggage when it introduced a checked bag fee of $10 for the first two bags in March 6, 2007. It took the legacy carriers a year to implement baggage fees and they first started charging flyers a $25 fee to check a second bag in May of 2008. In June of 2008, when American Airlines started charging $15 for a first checked bag, many airlines followed suit. Since then, baggage fees have increased and Spirit Airlines now charges travelers to place a bag in the overhead bin space. For now, only Allegiant has introduced a similar fee to carry on a bag.
For travelers who travel light and don't need to check bags or elite flyers who can check bags for free, the baggage fees are inconsequential. But for those who regularly check bags, having to pay for something that used to be free is irritating. Add to the checked baggage fee the cost to purchase a sandwich, get a seat assignment in advance, make a change to your reservation or watch a movie, and you may be paying as much in fees as you did for your airline ticket.
Furthermore, the airlines continue to come up with new add-ons they hope passengers are willing to pay extra for. While no airline in the U.S. has proposed to charge a fee to use the loo, which Ryanair suggested and then dropped, Spirit Airlines has been the leader in coming up with new fees for travelers. The airline charges to stow a bag in the overhead bin, and if you forget to check-in online or aren't able to print your boarding pass before you get to the airport, expect to pay $5 to have an airport agent hand you your boarding pass or $2 to print your boarding pass at an airport kiosk.
Fees and the Airlines
While customers may not like paying extra for fees, the practice is a lifesaver for struggling airlines. And the airlines are able to pay less in taxes by having passengers pay more in fees, and less on fares. Gary Leff of View from the Wing explains, "I personally have predicted that they [fees] would arise in air travel, not because those fees will net more money from consumers to airlines (my guess is that the airfare plus fee will equal what airfare would otherwise have been) but because the surcharges will be revenue that isn't subject to the 7.5 percent federal excise tax on air transportation." He concluded, "Already that's a big driver of ancillary fees--taking money out of 'travel' and into 'other' buckets to reduce the tax burden on airlines, which is substantial."
The biggest fee-loving airline in the U.S., Spirit Airlines, has a business model that is based on offering a number of optional services that will cost extra. The airline earned 33 percent of its revenue from ancillary revenue alone in 2011, the highest of any U.S. airline. Spirit Airlines included the following statement in its annual 10-K financial report issued earlier this year. "Our ultra low-cost carrier, or ULCC, business model allows us to offer a low-priced basic service combined with a range of optional services for additional fees, targeting price-sensitive travelers." Spirit Airlines' average base fare in 2011 was $81 and has decreased since 2007, when their average fare was $98. Spirit Airlines is able to offer rock-bottom fares because "... we have unbundled components of our air travel service that have traditionally been included in base fares, such as baggage and advance seat selection, and offer them as optional, ancillary services for additional fees (which we record in our financial statements as non-ticket revenue) as part of a strategy to enable our passengers to identify, select and pay for the services they want to use." And Spirit Airlines passengers pay nearly $50 on extra services for each flight segment. Spirit Airlines' "unbundled strategy has enabled us to grow average non-ticket revenue per passenger flight segment from approximately $5 in 2006 to $45 in 2011."
In an interview with Brett Snyder of the Cranky Flier blog, Spirit Airline's Chief Marketing Officer, Barry Biffle, says that the airline doesn't nickel and dime customers, but rather, they allow people options. He says that Southwest will "tell you bags are free, but what they really ought to say is that you're subsidizing people who want to check bags. It's like when you go out to dinner with friends and someone orders a really expensive bottle of wine. When you split the bill, you're paying for it whether you drank the wine or not."
Another reason fees have caught on is because they provide a way for the airlines to make more money without raising fares. On its website, Virgin America includes this disclaimer: "We're not big fans of fees. But they do help us fly you in the award-winning, mood-lit style to which you're accustomed."
While low-cost carriers were the first to embrace extra fees, they are now the norm for legacy carriers as well. In their annual 10-K financial report published earlier this year, United Airlines reported that, "In order to remain competitive and to maintain passenger traffic levels, we often find it necessary to match competitors' discounted fares. Because we compete in a dynamic marketplace, attempts to generate additional revenue through increased fares oftentimes fail." Charging for extra services can provide additional revenue without increasing fares and the trend is likely to continue. United Airlines goes on to say that, "We offer, and intend to offer additional goods and services relating to air travel, a portion of which will come from 'unbundling' our current product and a portion of which will come from goods and services that we do not presently offer ... the 'unbundling' of our current products and services, as well as our additional value-added products, offer customers flexibility and choice in selecting the products and services they are willing to purchase."
Passengers who want to upgrade to a higher class of service are charged an upgrade co-pay in addition to the miles. US Airways, United and American all have co-pay fees. The co-pay varies according to the airline, fare class and route and can be as high as $300 to $500 on long-haul routes. Delta does not charge a co-pay, but the airline also restricts mileage upgrades to more expensive booking classes.
Even Southwest Airlines, who widely advertises its "no fees" policy, has added a couple of optional fee services. Southwest does not charge for first and second checked bags, flight changes, advance seat selection and booking reservations over the phone, but they have introduced EarlyBird Check-in for $10 one way. In 2011 the airline earned $142 million from passengers who purchased the EarlyBird early boarding option and $96 million for Business Select, which offers priority airport screening, early boarding and an in-flight cocktail. And there are fees to bring pets onboard and for minors to travel unaccompanied by an adult. But the airline plans to continue its policy of not charging for bags and flight changes. In its annual financial 10-K report, the airline stated that it intends, "upon full integration of AirTran, to have a consistent product offering without first or second bag fees or change fees." AirTran also charges fees for advance seat assignments and a priority boarding option for $10. If the airline eventually adopts the boarding procedure of Southwest, the advance seat assignment charge will disappear, but the $10 priority boarding fee will continue.
Fees and Frequent Flyers
We understand why the airlines are charging fees for services that used to be free, but how do frequent flyers view fees and what is the best way to navigate the new a la carte environment?
Fees aren't limited to passengers on paid tickets. Fees for award tickets have grown too. While not exactly a fee, Delta imposed a penalty last year where members who cancel their award flights within 72 hours of traveling lose all of their miles.
According to our recent AirPoll survey, just over half of respondents (55 percent) said they wished airlines would include all fees in the posted fare, including checked baggage and advance seat assignments. A good number of flyers, 35.4 percent, prefer unbundled fares where the fare is lower and they can choose which services they want to pay for.
Brett Snyder has no problem with airlines charging fees and has posted often on the topic. In one of his posts, he explains that fees are a way for the airlines to "keep prices in check without killing demand." While he frequently defends airline fees, he doesn't like how airlines disclose fees. In the New York Times opinion page, he says, "While the idea behind a la carte pricing is a good one, the implementation has been rocky at best." The problem isn't the existence of fees, but whether the airlines and online travel agents fully disclose fees in a transparent way before you purchase your ticket. Snyder explains, "On some airlines, you can pay for bags when you purchase the ticket. You can also pay for priority boarding, a better seat assignment, etc. That's how it should be--you don't pay until you know the full picture." And it's not just the airlines who need to spell out the fee structure; third-party travel companies that sell airline tickets should prominently disclose any fees as well.
A new rule went into effect in January of this year that requires airlines to be more transparent about the cost of air travel. Airlines and ticket agents are now required to include all mandatory taxes and fees in advertised fares and baggage fees must be disclosed to customers. Orbitz was fined $50,000 by the DOT last month for not displaying potential baggage fees clearly and prominently on its website. The online travel company was ordered to fix the problem immediately to avoid additional fines. While Orbitz did have the fees posted online, the DOT said that customers had to scroll down to the bottom of the page to view the baggage fee information. Mexican airline Volaris was fined $130,000 in June for violating the same rule.
While baggage fees are currently the only fees required by law to be disclosed, the DOT reported in a press release that it is considering "requiring that all airline optional fees be disclosed wherever consumers can book a flight." While most savvy flyers are well aware of the optional fees, occasional flyers may not be as well-informed about the additional costs they may incur. And, as David, a frequent flyer from Florida, wrote to us in an email after taking our recent AirPoll about fees, "I really dislike the fees, as it makes it impossible to judge how much a trip will cost." He says the cost becomes outrageous if you are traveling with several family members and, "with respect to luggage, how can you know, if booking months in advance, how much your suitcase will weigh at flight time, or how many bags you will have if you are bringing gifts?"
Top Six Ways to Avoid Fees
While baggage fees get the most media attention, they aren't the most expensive fees. You can check six bags for the same $150 you'll have to pay to make a change to your award ticket. We've listed some of the fees that airlines charge frequent flyers in the chart accompanying this article, and below, we take a look at a few of the ways that frequent flyers can pay less in fees.
Don't check a bag
Most legacy carriers charge $25 one way for the first checked bag and $35 for the second checked bag. Check two bags roundtrip and you'll pay a hefty fee of $120. Many people choose to carry-on their bags not only to avoid the high fees but also because it's convenient and you know exactly where your bag is at all times. Once you check a bag, you can only hope that it arrives at the baggage carousel around the same time that you do. According SITA, a leading air transport communications and IT company, 25.8 million bags were mishandled in 2011. Bring a carry-on and you can ensure a timely arrival for your luggage and avoid baggage fees. And if you must check, one larger bag within the weight allowance is a much smarter decision than checking two small bags. You might have to go out and buy a new piece of luggage, but you'll save money in the long run.
Make Award Reservations Online
It's not always possible to book a flight using online tools, especially when redeeming miles for complicated itineraries that include partner airlines, but before you pick up the phone, search for flights using the airline's online booking engine first. United Airlines includes award inventory for many Star Alliance carriers and you can even book an award with a stopover using the Multiple Destinations option. If you are redeeming US Airways Dividend Miles, however, you can only book flights on US Airways flights online and will have to pay the $30 to $40 phone booking fee plus their $25 to $50 award processing fee. Unless you are elite with Dividend Miles, there's no way to avoid those fees, but you can credit the miles earned on US Airways flights to United and earn MileagePlus miles.
Maintain Elite Status
There is one group of travelers who don't have to pay many of the fees imposed by the airlines. Flyers who have elite status get many, but not all, fees waived as a benefit of elite membership. And the higher the status, the more fee waivers you'll get. One free checked bag is now a basic benefit for all elite members and waived change fees are generally reserved for higher tier elite members. In the recent past, Silver members of Delta, United Airlines and US Airways could check two bags for free, but no longer. Now, they have to pay to check that second bag.
Delta SkyMiles members who have Gold elite status and above don't have to pay the $25 phone booking fee but are responsible for the $150 fee to make changes to award tickets. Executive Platinum members, however, can make as many changes as they want and not incur additional fees. With United MileagePlus, Silver and Gold have reduced change fees and change fees are waived for Global Services, 1K and Platinum members.
Aquire the Airline's Co-branded Credit Card
Fee waivers for items such as checked bags and priority check-in and boarding are becoming increasingly common benefits of mileage-earning credit cards. The Citi Platinum Select AAdvantage Visa comes with a free first checked bag for the member and up to four traveling companions and priority boarding. The US Airways Premier World MasterCard offers first class check-in, Zone 2 boarding and one complimentary US Airways Club day pass every year. The United MileagePlus Explorer Card offers a free first bag and a free bag for one traveling companion along with priority boarding and Delta offers American Express co-branded credit cards with a free checked bag.
The annual fees for credit cards offering these types of benefits tend to be around $90 and much higher, but if they offer benefits you would otherwise pay for, the annual fee may be worth it.
Fly an Airline with Fewer Fees
While most airlines are fee-friendly and have adopted fees for just about everything that isn't part of simply transporting customers safely from point A to point B, Southwest continues to allow passengers free checked bags, no change fees or fees for booking over the phone. Other airlines, like Frontier Airlines, have no change fees if changes are made earlier than seven days prior to flying. But if you wait until the week prior to your flight, you'll have to pay $50, which is still much less than other airlines that charge $150 to make changes. JetBlue still offers the first checked bag for free but charges $40 for a second bag. Become familiar with the different fees charged by airlines and take those into account when purchasing a ticket. You may find a fare that is $50 cheaper on a legacy carrier that charges $25 for the first checked bag, but if you know you are checking a bag, factor in the $50 baggage fee when deciding which airline to fly. You can refer to our chart or use the online bag fee calculator at http://www.iflybags.com
to help you calculate the bag fees.
Pay More for Your Flights or Join the Army
One way to avoid additional fees is to pay for a ticket in a higher fare class. Airlines do not charge those paying full-fare coach or business or first class fares to check bags. And airlines give special fee waivers for luggage and early boarding to our men and women in the armed forces. We are not suggesting you sign up for the Marines to escape fees, but it's good to see that even fee-hungry airlines are willing to make concessions for some flyers.
More to Come
There is no end in sight to the fees airlines are coming up with to nickle and dime customers. As of the first of this month, Spirit Airlines is raising all of their fees to check or carry on luggage and the fee to check a bag at the gate is rising from $45 to $100. Fees are only limited by the creativity and innovation of the airlines and the willingness of customers to pay for additional services. Alaska Airlines even has a "Left on Board Item Return Fee". If you forget an item on the plane, Alaska Airlines will mail the item back to you for a $20 fee, waived for MVP Gold and 75K elite members. The best strategy for frequent flyers is to stay informed about the airlines' fee policies and learn how to avoid them, or, learn to love them because we suspect they are here to stay.
|Airline|| Domestic coach first / second checked bag|| Phone booking fee|| Award booking <21 days prior to travel|| Award origin / destination changes|| Canceling award and reinstating miles|| Award processing fee|
|Air Canada||$25 / $351||$30 CAD||$0||$90 CAD||$90 CAD||$0|
|AirTran||$20 / $251||$15||$0||$7511||$7511||$0|
|Alaska||$20 /$201||$156||$0||$75 at alaskaair.com, $100 through call center6||$75 at alaskaair.com, $100 through call center6||$25 fee for partner airline award|
|American||$25 / $351||$257,8||$758||$1509||$1509||$0|
|Delta||$25 / $352||$252||$0 - no changes are allowed to award tickets within 72 hours of the flight||$15012||$15012,13||$0|
|Frontier||$20 / $201||$0||$0||free but $50 if changes are made within seven days of flight||$501||$0|
|Hawaiian||$25 / $351||$15 interisland flights / $25 all other flights||$0||$0||$150||$0|
|JetBlue||$0 / $401||$20||$0||$100||$100||$0|
|Spirit||$30 / $40 at booking, $35 / $45 at online check-in and $45 / $55 at the airport3,4,5||$25||$75 / $100 within 7 days10||$110||$110||$0|
|United||$25 / $352||$2514||$75 for non-elite, $50 for Silver, $25 for Gold14||$75 for non-elite, $50 for Silver, $25 for Gold14||$150 for non-elite, $125 for Silver, $100 for Gold14||$0|
|US Airways||$25 / $352||$30 for U.S./ Canada; $40 all other regions18||$7515||$15016||$15016||$25 continental U.S./ Alaska/Canada, $35 Latin America/ Caribbean, $50 Hawaii/Europe/ Middle East/South America15|
|Virgin America||$25 / $252||$201||$0||$10017||$10017||$0|
1. Waived for all elite members
2. Waived for Gold and above; Silver members get first checked bag free
3. Carry-on fee is $35 at booking, $40 at online check-in, $50 at the airport and $100 at the gate
4. Fees listed are effective Nov. 6, 2012
5. Baggage fees are reduced for $9 Fare Club members
6. Waived for MVP Gold or 75K, not for MVP
7. Waived for members who pay the close-in award booking fee for travel booked within 21 days
8. Waived for Gold and above
9. Waived for AAdvantage Executive Platinum
10. Fee is $15 when requesting an award between 21 and 179 days prior to departure
11. One change is allowed at no charge; all change fees waived on business class tickets
12. Waived for Platinum and Diamond
13. Award tickets not canceled at least 72 hours prior to the originating flight departure time are nonrefundable
14. Waived for Global Services, 1K and Platinum
15. Waived for Gold, Platinum and Chairman
16. Waived for Platinum
17. Waived for Gold
18. Waived for Chairman and members booking flights on Star Alliance airlines