For Airlines, Fees Become Lifelines

With travel demand sagging, charges for checked baggage, food, staff assistance, and anything else carriers can think of are becoming key revenue sources

By Esmé E. Deprez

Just a decade ago, air travel was simple: Buy a ticket, fly.

That model has begun to disappear as many U.S. airlines struggle to adapt their businesses to the recession by finding new revenues. Increasingly, the airlines' goal these days is to have the fare be just one piece of the travel experience and to segment every other aspect, from drinks to baggage, HBO to legroom. Whether it's a fleece blanket and travel-pillow set (US Airways) or extra frequent-flier miles (United), the airline cabin has become a virtual bazaar. And nearly every carrier, low-cost or legacy, is getting in on the action.

"As airlines emerge from just transportation businesses into retail businesses, they need to think more like retail businesses," says Henry Harteveldt, a travel analyst at Forrester Research (FORR). That's why at JetBlue's (JBLU) Web site you can now purchase a $15 "doggie hoodie" for your pooch or a $225 model of a company Airbus A320. Nok Air, a Thai budget carrier, gives those who book online the choice of reserving an extensive menu of Thai dishes for the equivalent of $2.65 each.

Just as Amazon.com (AMZN) tracks purchases and then uses the data to market specific items based on a customer's history, an airline that similarly knows you like to eat a fruit-and-cheese plate on mid-afternoon flights could begin offering that online when you buy your next ticket. Allegiant Air (ALGT), a pioneer in the U.S. unbundling movement, knows that most of its customers are on leisure trips to Las Vegas, Florida, or Arizona. As a result, the company peddles a $79 Pink Jeep tour of Arizona or a 100-page photo book for $59.99 midway through the online ticket-booking process.

a growing share of airline income

Ancillary revenues—products and services airlines can unbundle from the fare and sell à la carte—are increasingly boosting bottom lines. A leader in the unbundling movement, Dublin-based Ryanair Holdings (RYAAY), reported that ancillary revenues made up nearly 20% of its total revenues in 2008 and outpaced overall revenue growth by a wide margin—35%, vs. 21%. At Allegiant, one of the few profitable U.S. airlines, nearly 23% of total 2008 revenue came from ancillary sources. Worldwide, ancillary revenue totaled $10.3 billion for airlines in 2008, a 345% jump since 2006, according to a study by IdeaWorks, a Wisconsin market research firm. "If it weren't for ancillary revenue, we probably would have seen at least one of the major airlines fall, given the recession," IdeaWorks President Jay Sorensen says. He predicts that in the next five years, "the entire domestic coach travel experience will be very similar" to low-cost carriers as legacy carriers continue to unbundle products and services. While most frequent fliers and those in first class will be exempt, food, checked baggage, staff assistance at check-in, and even paying with certain credit cards for free will all but disappear, Sorensen predicts.

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