COVER STORY

Fees go up, up — not away — as airline profits grow

 

Baggage fees, first half of ’13

1. Delta$409,058,000
2. United$301,264,000
3. US Airways269,776,000
4. American$255,813,000
5. Spirit$101,240,000
6. Southwest$85,227,000
7. Allegiant$66,632,000
8. Alaska$44,920,000
9. JetBlue$35,756,000
10. Hawaiian$34,316,000
Source: U.S. Department of Transportation, Bureau of Transportation Statistics


More information

   


Beyond the fare

Airlines reported more than $27 billion in ancillary revenue last year. Here’s what that includes:

• Food and beverage sales

• Baggage fees

• Seat selection charges

• Early boarding

Other à la carte fees:

• Commissions from hotel bookings

• Sale of frequent flier miles

Source: IdeaWorksCompany


Reservation cancellation/ change fees, first half of ’13


Which fees wouldn’t you pay?

We asked members of the Public Insight Network what fees bothered them the most, which they didn’t mind paying and which they will never pay. Here’s how their answers shaped up:

Worst offenders: Most were appalled by fees for checked or carry-on bags. No one liked having to pay to select a seat.

Most understood: Some said they understood the need to charge for food; others acknowledged that fees for overweight bags made sense. Paying for a bigger, more comfortable seat also made sense to some.

No chance of paying: Shelling out for bathroom use (which no one charges anyway), nonalcoholic beverages and seat selection all got the thumbs down.


hsampson@MiamiHerald.com

Anyone traveling by air this holiday season can book tickets, choose seats and check bags with confidence that they have a good sense of how much they’ll have to pay — as long as they do their research.

All bets for next year are off, however, with the already lengthy list of airline fees likely to become even longer and more complicated.

Recently, the CEO of Spirit Airlines said the low-cost carrier is considering charging more (or less) for baggage and seat assignments based on demand. And the head of Southwest Airlines, famous for its “bags fly free” policy, acknowledged that “we’d be crazy not to provide our customers with what they want” if passengers prefer to pay à la carte.

Those attention-grabbing discussions follow increases in reservation change fees by major carriers earlier this year and moves by smaller airlines such as Frontier to add charges for everything from soda to carry-on bags for customers paying the cheapest fare. At the beginning of the year, Southwest introduced a $40 upgrade that allows passengers to board early.

Over the past five years, airlines have grown increasingly dependent on non-ticket revenue — including baggage fees, seat assignment charges and food and beverage sales — as a way to turn a profit despite rising fuel costs and consumer resistance to big fare hikes.

And industry observers say they don’t ever expect those fees to disappear.

The federal Bureau of Transportation Statistics reports that airlines collected nearly $1.7 billion just in baggage fees in the first half of the year, and almost $3.5 billion in 2012 — a 654 percent increase from the $464 million collected in 2007.

In addition to $6 billion a year in baggage and reservation change fees, U.S. airlines also collect $9 billion more from selling extras like frequent flier miles, early boarding and seat upgrades, according to The Associated Press. Together, the fees account for 10 percent of U.S. airlines’ revenue and are the reason airlines are profitable, the AP reported; without the fees, experts say fares would be 15 percent higher.

Since 2008, global ancillary revenue reported by airlines has increased more than 164 percent from $10.25 billion to $27.1 billion worldwide last year, according to consultancy IdeaWorksCompany. In the report, ancillary revenue includes bag charges, other à la carte fees, sales of frequent flier miles, advertising sold by the airline and other charges but not change fees. Extrapolating from the reported figures, the company estimates that worldwide ancillary fees will hit $42.6 billion in 2013.

“The game is really changed because global and network airlines are on board with this now,” said Jay Sorensen, the president of IdeaWorksCompany, which helps airlines build frequent flier programs and create á la carte products to sell. “At the point when major airlines begin to rely upon this, it really moves the needle in terms of overall results for the entire industry.”

Legacy airlines in the U.S. started charging checked baggage fees in 2008 “out of sheer desperation,” Sorensen said: Fuel prices were soaring and fares were not able to cover the increasing costs. While airlines had charged for overweight or numerous bags, the first one or two pieces of checked luggage previously had been free.

“Out of that brutal economic need, they scrambled to put together some solution and it happened to be bag fees,” he said. “And that opened the door for them to charge fees in other areas.”

Boosted in part by the addition of a variety of fees, air carriers have steered toward healthier financial results. The U.S. airline industry was profitable in the third quarter of the year although observers warn there is still room for improvement.

“Despite the fact that the airlines are making money finally, they still are a relatively low-margin business,” said Mark Drusch, chief supplier relations officer at the travel site CheapOair and a former executive with several airlines. “The money they generate from the ancillaries are all helping to build those bottom lines. Although the airlines are profitable now, they are still relatively not making a whole lot of money.”

Robert Mann, president of airline industry analysis firm R.W. Mann & Co., said the costs associated with things like checked bags remain in place, so fees allow airlines to “try to make it a quasi profit center and then price that option accordingly so they in effect get a return on having long ago made that investment.”

Fees are also not subject to the 7.5 percent excise tax levied on base fares.

“They are more or less gravy,” Mann said. “So it’s like 99 percent straight to the bottom line.”

While observers believe there’s little left that airlines can charge extra for without risking a passenger revolt, they expect airlines to continue to experiment when it comes to extra revenue.

“There are obviously other things they could charge for,” Mann said, citing Spirit’s carry-on fees. “The question maybe is have they reached a point where the likelihood of pushback exceeds the likelihood of incremental revenue?”

Drusch pointed to upgrades or packages being sold by American and Delta that offer a free checked bag, early boarding and other amenities.

“I think you’re going to see the carriers bundle fees to provide you with more than just the basic services,” he said. “They won’t be onerous; they can be things you…[are] willing to pay more for.”

He also said he wonders if airlines in the U.S. will start charging passengers to use a credit card when paying, as some European carriers do.

Mann said he believes airlines will follow the lead of United, which offers annual subscriptions for baggage and seating with more leg room. And he wouldn’t be surprised to see frequent flier programs offer fewer benefits, which would force even loyal passengers to pay more for extras they used to get free.

Sorensen said he thinks there’s room for growth in the sale of fees through online travel sites and travel agencies that serve corporations. He also believes Spirit’s idea about tying fee prices to demand will catch on.

Spirit Airlines spokeswoman Misty Pinson said the low-cost carrier has been considering varying prices for baggage and seat assignments since the beginning of the year.

“We have some flights that go out with too many bags and we don’t have space for them, and other flights that go out with two bags in the body,” she said.

Some customers flying at slow times could pay less than they would now for bags — and some, traveling during busy days or seasons, could pay more. Pinson could not offer a timeline for putting such changes into practices; the carrier would still need to figure out what kind of technology it would need.

But she said the variable pricing could represent the next frontier for an airline that is already considered a pioneer in the fee world (and charges for everything from printing boarding passes to stowing carryon bags in overhead compartments). According to the IdeaWorksCompany report, Spirit makes 38.5 percent of its revenue from ancillary charges.

There are “not necessarily a lot of new types of options,” Pinson said. “We’ve pretty much exhausted all of them. Now we’re looking at how do we maximize supply and demand during peak and nonpeak times.”

Late last year, American Airlines added new fare categories that added perks such as a free checked bag, no change fee, early boarding and bonus mileage for $68 or $88 more than the lowest fare, round trip.

“Through merchandising, we are enabling our customers to tailor the travel experience based on their needs and budget for the elements that they truly value,” spokeswoman Martha Pantín said in an email. “It also allows us to differentiate our products and services versus competitors and generate incremental revenue growth in the process.”

All of the new, developing and changing charges add up to a muddled situation for air travelers, who have to do serious research to figure out what they will and won’t need to pay for.

“The current environment is not fun for the consumer because it is confusing, there are different methods that are being used, and the airlines are not always getting it right,” Sorensen said. “It’s a frustrating time for the airlines as well. There’s no playbook yet.”

Travelers, for the most part, seem to be coping with the new air travel normal — either by choosing airlines with the fewest costs, planning carefully to avoid fees or just accepting they’ll need to pay for the amenities they once took for granted.

Alan Seidman, 54, who heads The Hospitality College at Johnson & Wales University in North Miami, said he has created a “mental benchmark” for when he’s willing to pay for a seat with extra leg room. Four hours or less, he’ll fold his 6-foot-2 frame into a regular-size seat. For flights of five hours or more, though, he’ll splurge on an upgrade. But he won’t pony up for a pillow, blanket or headphones.

“I understand the business of airline travel and I understand that charging fees works for them,” Seidman said. “I don’t blame the airlines.”

Frontier Airlines gave Clarice MacGarvey, 69, a surprise on a recent flight from Colorado after instituting charges that were new since her last time using the airline. She said she was forced to check a bag (and pay for it) and found that even coffee cost nearly $2.

“There was not one thing that didn’t have a price tag on it,” said MacGarvey, a longtime resident of Miami-Dade who currently lives in Virginia.

If she has to fly that airline again, she said, she plans not to pack a bag full of clothes but rather pick up some items at a thrift store and donate them back before leaving.

“I remember when flying was a little more luxurious; there was more customized personal service. I know those days are gone, so I try not to compare,” said MacGarvey, a freelance writer. “You can pay to get back some of the comforts — and if you’re not willing to pay, I guess you have to put up with the discomfort.”

Travel consumer advocate Christopher Elliott says airlines are deceptive when they advertise a fare that’s lower than the price a customer is going to end up paying. While some travelers can get away without checking a bag or picking a seat, Elliott said many — especially families who need parents and children to sit together — have no choice but to pay for options such as seat selection.

“This is just a pure money grab,” he said.

Still, even Elliott said he believes there are good fees — options that might not have been available in the past, even for a charge — such as in-flight Wi-Fi, movies during a flight, or a meal that actually tastes good.

But he said he anticipates that more bad fees — things that used to be included in the price of a ticket and now cost extra — are to come.

“Every time I say, ‘Now they have gone too far,’… they say, ‘Oh, no, we’re just getting started here,’ ” Elliott said.

John Heimlich, vice president and chief economist for trade organization Airlines for America, said the old model of including everything in the price of a plane ticket just didn’t work anymore — and the result, for travelers, was less air service.

“You cannot grow air service if you are not earning the cost of capital; at a minimum, you can’t be losing money,” he said. “Companies that lose money for every extra piece of output end up producing less or they go bankrupt.”

Heimlich said airlines also needed to be able to appeal to price-sensitive customers, who don’t care as much about leg room or early boarding and just need affordable air transportation. And those who do want extra services are getting a better product, he said.

Said Heimlich: “I think it’s been a win-win.”

The Associated Press contributed to this report, which includes comments from the Public Insight Network, an online community of people who have agreed to share their opinions with the Miami Herald and WLRN. Become a source at MiamiHerald.com/insight.

Read more Business Monday stories from the Miami Herald

  •  
Marcell Haywood

    BUSINESS MONDAY CEO ROUNDTABLE

    Taxi alternatives could improve service

    Today marks the launch of the Miami Herald CEO Roundtable, comprising more than two dozen CEOs and senior executives in companies large and small from the region’s key industries. The goal: To provide a temperature check of local economic conditions and business opinions on current topics. Look for a selection of responses each week in print; to see all responses, go online at MiamiHerald.com/business. And keep an eye out for our live CEO Roundtable event later this fall.

  •  
 <span class="cutline_leadin">FSU LINE:</span> Pictured is Guy Harvey artwork on an athletic clothing line. Artist Guy Harvey has developed his brand into a business empire.

    ENTREPRENEURSHIP

    Guy Harvey fishing new waters

    With more products, a new generation of fans and marketing that focuses on the man behind the brand, marine artist and conservationist Guy Harvey is stretching his cast.

  •  
 <span class="cutline_leadin">WAITING ROOM:</span> A horse waits in the stalls at Thebas Farm, one of a group of Polo horses heading for Amsterdam. Worldwide Livestock, owned by Alex and Tony Alessandrini, is overseeing the shipment of the animals. July 1, 2014 in Miami.

    Company profile

    Worldwide Livestock Services manages import, export of livestock through MIA

    Horses, cattle, pigs and more: World Livestock Services has carefully shipped four-legged creatures and flocks of birds through Miami International Airport to points throughout the globe.

Miami Herald

Join the
Discussion

The Miami Herald is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

The Miami Herald uses Facebook's commenting system. You need to log in with a Facebook account in order to comment. If you have questions about commenting with your Facebook account, click here.

Have a news tip? You can send it anonymously. Click here to send us your tip - or - consider joining the Public Insight Network and become a source for The Miami Herald and el Nuevo Herald.

Hide Comments

This affects comments on all stories.

Cancel OK

  • Marketplace

Today's Circulars

  • Quick Job Search

Enter Keyword(s) Enter City Select a State Select a Category