Airline revenue from ancillary fees projected to rise 18% in 2013

By Danny King
Global airline ancillary revenue will jump 18% this year, according to a study released by IdeaWorks and CarTrawler late last month.

The data suggest that increased ancillary revenue could marginally improve profitability prospects for one pending merger and substantially improve prospects for a pending carrier acquisition.

Based on its research, IdeaWorks and CarTrawler predicted that ancillary revenue will reach $42.6 billion this year, up from $36.1 billion in 2012 and almost double the $22.6 billion collected in 2010. Ancillaries will account for 6% of total airline revenue in 2013, up from 5.4% last year.

IdeaWorks President Jay Sorensen estimated that the 2013 growth rate of a la carte revenue likely will exceed the overall 18% average growth rate in total ancillary revenue.

In recent years, airlines have combated rising fuel costs by breaking out many services that were once bundled with the airfare and charging for them as a la carte services.

The overall growth numbers also suggest that low-cost, fee-heavy carriers like Spirit Airlines and Ryanair are taking a larger chunk of global market share.

Companies such as Spirit, Ryanair, Allegiant and Air Arabia will derive about 22% of their revenue from ancillary services this year, according to the survey.

Earlier this year, IdeaWorks issued a report estimating that almost 40% of Spirit’s annual revenue derived from ancillary fees, while Allegiant derives about 30% of its sales from ancillaries.

Moreover, that revenue model is gaining popularity. Last month, the investment firm run by former Spirit Chairman William Franke agreed to acquire Frontier Airlines from Republic Airways for $145 million in cash and assumed debt.

Analysts said that Franke would likely have Frontier adopt Spirit’s pricing strategy in order to undercut United and Southwest in Frontier’s Denver home market.

The trend also reflects how a broader array of a la carte services can boost the bottom line of more traditional airlines and improve the dynamics of the American-US Airways merger approved last month by the U.S. Justice Department.

IdeaWorks/CarTrawler estimated in September that each of those companies derive about 8% of their annual revenue from ancillary services.

“Airlines are increasingly making their profits from fees, not from tickets,” said Scott Hamilton, managing director at Seattle-based aerospace consultant Leeham Co. “They will continue to find new fees to impose or increase fees that already exist.”

With the FAA’s recent approval of the use of personal electronic devices (PEDs) below 10,000 feet, widespread use of Kindles, iPads and laptops could have an effect on the airlines’ revenue from in-flight offerings such as movies, games and TV programs.

Still, how great an impact PEDs will have on overall ancillary revenue remains an unknown, according to both Hamilton and Sorensen. While PEDs could push up demand for WiFi, in-flight Internet access currently accounts for a relatively small percentage of total ancillary revenue.

“Onboard entertainment and WiFi is not a significant factor in the numbers and most certainly is not a profitable endeavor,” Sorensen said.

Follow Danny King on Twitter @dktravelweekly.
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