United CEO says middlemen get too much of the pie
United CEO Glenn Tilton wants his airline to get more of its own revenue pie, believing that too many other parties in the air transport value chain are getting more than their fair share.
"Those of us that actually transport passengers from A to B to C to D realize less value from that business than virtually any of those involved in a collateral context," he said. "We actually retain for ourselves very little. It’s time to rebalance the value chain."
In an interview during a gathering of Star Alliance executives at Newark Airport last month, Tilton called it "a distortion of value."
His comments echoed remarks that he and other airline executives made earlier this year that angered travel agents, GDSs and others in the distribution chain.
American CEO Gerard Arpey, for example, said in an April conference call with analysts that he "could see a day" when agents and others acting as an intermediary between the airlines and their customers would have to pay for access to the airline’s product.
The old paradigm where airlines pay distributors has been shifting, Arpey said, because the airlines have been able to cut domestic commissions, domestic overrides and booking fees.
Shortly after Arpey’s comments, Delta CEO Richard Anderson told analysts "the industry has to evolve" to a point where companies are paying for airline content instead of the other way around.
About the same time, United President John Tague told analysts that his airline would work diligently to "manage distribution channels to minimize cost."
"There has been significant progress on GDS expenses, particularly in the international market," Tague said. "We are aggressively trying to move down the fixed commission, especially in Asia. Clearly, this is a very large expense item that doesn’t make any money."
At the Star event, Tilton warned there were no "sacred cows," and the airline would continue to be aggressive in this area.
Peter von Moltke, CEO of UBM Aviation, said carriers seem to be moving against their distributors because they can’t quantify the value the distributors bring to the airlines.
"There’s been very little analysis of the economic benefit they bring," he said. "Airlines have to look at the whole value chain, not just where they can cut."
The historical problem in doing that kind of analysis, he said, is that airlines have been unwilling to share how much it costs to do the kind of distribution and marketing work that outside distributors provide.
— Michael Fabey
United, a leader among legacy airlines in generating ancillary revenue, is marshalling its resources to come up with even more fees and better ways to package and market them.
Looking for new ancillary revenue streams is vital to the airline, CEO Glenn Tilton said.
"It is so important we actually are putting a unit together that is focused solely on ancillary-revenue generation," Tilton said in an interview last month at a gathering of Star alliance executives at Newark Airport to welcome Continental into the alliance.
Tilton said the unit would be named Merchandising.
The new unit’s name reflects the feeling by United and other carrier executives that the new fees represent more than just a bunch of trendy tacked-on charges.
Jay Sorensen, president of the IdeaWorks consultancy, which publishes the "Ancillary Revenue and A La Carte Guide," likes the idea of a new unit and its "merchandising" moniker.
"I think there is much to do in this area," Sorensen said. "For example, you’ve seen airline snack boxes — you know, the ones sold for $7 that have a plain white exterior and the logo of the airline. Can you imagine this very same box in a grocery store? They’d never sell. Why? Because the packaging was designed by the airline brand police and not by a designer who has worked for a consumer products company.
"And how are these boxes sold? Yes, on the very same trolleys that were used for giving away free food," he said. "Basically, it’s a process that has seen zero innovation. This is where merchandising can make all the difference."
How airlines view these charges does matter, said Peter von Moltke, CEO of UBM Aviation. "Ancillary revenue is an extension of the cultural mindset of an airline," he said.
Few airlines have been as active as United in identifying such products.The carier recently started an annual checked-bag subscription, enabling passengers to pay one yearly fee to take care of their baggage charges.
United has been rewarded for its efforts: The airline tallied about $276 million in ancillary revenue for the second quarter, surpassed only by Delta’s $924 million and Continental’s $277 million.
In all, the nation’s nine top airlines reported about $2.4 billion for the quarter in ancillary revenue.
Like United, other carriers are looking for more ways to create new revenue streams, especially in the absence of backlash to the fees. The airlines started charging extra fees last year to compensate for fuel price spikes. The practice continued through this year to help them cope with the recession.
As the airlines started to charge for checked bags, more passengers opted to leave their bags at home, said airline executives.
"What we’re seeing is a behavior change," US Airways CEO Doug Parker said at the Star gathering.
While some passengers complain of being hit with nickel-and-dime charges, airline executives continue to defend the fees as equitable.
"As we seek additional revenues, we can give the customers choice of the product and service they want," said Continental President Jeff Smisek. "The addition of these service fees is more fair."
Asked if Star partners could integrate ancillary revenue plans, Parker cautioned, "It gets really tricky because it gets into pricing the product. When you start messing with pricing the product, certain airlines have different cultures. It’s harder to do across the alliance. Furthermore, we can’t talk about pricing with each other, absent any antitrust immunity."
Sorensen said he doubted alliances could pull it off: "I generally see the alliances as an impediment to innovation, not an inspiration for innovation."
