Airlines eye fees for business travelers

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As business travelers return in greater force to the skies, airlines say they plan to further hone their ancillary revenue models to capture even more money from extra fees.

The a-la-carte fees became increasingly popular throughout 2009 as airlines needed to recoup revenue that was lost as traffic dropped and the carriers offered deeper discounts to lure passengers.

Now that planes are filling up and fares are rising again, airlines are looking to unbundled services as revenue streams.

Airline executives say they will focus more on developing fees for services like priority boarding, seating preferences and wireless access to capture more corporate-traveler cash.

"It is a reflection on the changing types of passengers that we are carrying," Kevin Healy, AirTran senior vice president of marketing and planning, told Wall Street analysts July 21 during a conference call detailing the airline's second-quarter $12.4 million profit.

"It's a different set of ancillary revenues that will come from a business traveler rather than a leisure traveler," Healy said. "We talk about optimizing the offers and getting better at who and when and what you offer. It's a little more technology intensive, and it's the sort of thing we are working on and will be rolling out."

Wall Street analysts noted a recent a decrease in airline ancillary revenue as a percentage of overall revenue. But airline executives said that was because the carriers were taking in less last year for base fares.

"The underlying fares have come up quite a bit in year-over-year growth," Healy said. "That puts it a little out of kilter. Where last year you were discounting heavily to get people on the plane, now you are getting a much, much higher yield and still filling planes."

Globally, though, for all of 2009 major airlines reported a 43% year-over-year increase compared with 2008 for ancillary revenue, with 96 carriers reporting about $13.5 billion, according to a recently released analysis by IdeaWorks, a consultant that specializes in helping airlines bolster their ancillary revenue models.

The report, sponsored by Amadeus, includes revenue estimates for such fees as checked baggage; assigned seats and premium economy seats; charges for in-flight snacks, meals and beverages; commissions from hotels and car rental bookings; sales of travel insurance; and partner revenue generated by frequent flyer programs.

Some of the increase is due to different reporting procedures on the part of some airlines that now better identify revenue from the ancillary sources and make the additional revenue more transparent.

The only airline still cutting against the grain, at least for baggage fees, is Southwest, which reported a $112 million second-quarter profit.

But even Southwest has other ancillary fees, and the IdeaWorks report predicts that airlines are only likely to expand their ancillary revenue programs.

Carrier executives agree.

"There is a lot of stuff out there for us to consider," AirTran CFO Arne Haak told analysts.

In a July 22 earnings call, when Continental detailed its $233 million quarterly profit, CEO Jeff Smisek told analysts, "We have been growing our ancillary revenue streams. Our customers are taking advantage of the additional options we have begun to offer, such as day-of-departure upgrades and premium seating.

"Together, these two initiatives are currently generating over $200,000 per day in additional revenue."

Continental and United will make a combined ancillary revenue strategy a priority when the two airlines merge, Smisek said.

"Ancillary revenue is a significant opportunity for Continental," he said. "And United has done a very good job. There are many issues related to rolling out our ancillary revenue products. There are IT issues, there are global distribution system issues, there are timing issues in terms of where it is in the chain of purchase, whether it's a prepurchase or day of departure or post-purchase."

He added, "Ancillary revenues will be a growing revenue stream for Continental, and I believe will be a growing revenue stream for the combined carrier, as well."

JetBlue's executive vice president and CFO, Ed Barnes, told analysts earlier this month that the airline has lost some potential ancillary revenue during the past quarter by waiving certain fees in this year's transition to Sabre.

Still, the airline reported a profit of $30 million, and CEO David Barger said Sabre technology would help the carrier significantly boost its ancillary revenue stream in the long run, enabling the airline to better capture additional fees for its "Even More Legroom" seats in economy, based on customer demand for a particular route.

Alaska Airlines is eyeing more ancillary revenue by offering additional car and hotel packages on its website.

"We had an initiative this year to improve the shopping functionality for cars and hotels on our website, and we'll be continuing that effort aggressively here over the next few months," Alaska's vice president for marketing, Joe Sprague, told analysts earlier this month when the airline detailed its second-quarter $58.5 million profit.

"We have an existing infrastructure that reaches out and builds relationships with hotels in some of our key leisure destinations," Sprague said. "We've been working that very hard over the last three years. We're excited about the partnerships that we have with hotel properties in Hawaii already and, as we sort of combine those partnerships, with a better shopping functionality, we think we have a lot of opportunity in this area."

The airline has direct and intermediate partnerships, he said.

"We have an intermediary to help with some of the sourcing of hotels for our website and then through our Alaska Airlines Vacations efforts, which is sort of our in-house tour wholesaler," he said.

This report appeared in the Aug. 2 issue of Travel Weekly.

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