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Why Are Airline Ancillary Charges Increasingly Common? What Business Travelers Should Know

January 18th, 2017 /

 

airline ancillary charges

I really hate feeling nickeled and dimed by airlines. A ticket might once have included your seat, a bag or two, your boarding order, and a meal—but those days are never coming back. Sometimes I expect to be charged just for breathing. What’s to blame? An airline business model that’s become heavily dependent upon ancillary charges.

If you travel frequently, you’re probably familiar with hidden fees for everything from bags to legroom, but you might not realize just how predominate they’ve become. So today we’re taking a look at exactly how the back end of airline revenue works, why a la carte service is unlikely to disappear anytime soon—and what you can do to play the game better.

airline ancillary charges are on the rise

Airlines are making more money each year from “little extras” than we might realize. Image by Flickr user Bernal Saborio (CC BY 2.0)

The Airline Industry Trends Toward Higher Ancillary Charges Every Year

The industry-wide trend has been to increase ancillary revenue by all means possible—in all airlines but one. Southwest has developed a business model (and incredibly popular marketing campaign) around their lack of “extra fees.” Claiming that “bags fly free” means that Southwest’s ancillary revenue per passenger runs only about $4.

Compared to this, it’s startling how much other airlines are earning. According to the same research, Spirit is projected to make more than $50 in ancillary revenue per passenger in 2016—a way to offset their incredibly low fares. Among the other “Big Four” airlines, a range of $15-20 per passenger is average. Delta comes in highest at roughly $22 in “miscellaneous fees” per passenger, words no traveler wants to hear.

And the numbers seem worse, somehow, when you look at how ancillary revenue contributes toward total industry profits. In the early 2000s, these charges only made up about 3% of total revenue. Today, at the end of 2016, that number has increased to roughly 12% for US carriers.

southwest offers the lowest airline ancillary charges of the big four

Co-branded credit cards and frequent flyer miles actually turn a huge ancillary profit. Image by Flickr user Ed Ivanushkin (CC BY-SA 2.0)

How Ancillary Charges Relate to Frequent Flyer Miles

What’s driving the shift? The “reward miles” system is at least partly to blame—and I know it seems counterintuitive. How could a program that gives away free flights and upgrades actually provide additional revenue?

It works like this: airlines sell frequent flyer miles at a certain value to credit card partners, to hotels, and elsewhere, using set rates that differ per airline. But this conversion rate can be as high or as low as the airline wants, which means, in essence, that they control their own currency inflation. And at the end of the year, when most of these rewards points are not actually redeemed, the airline comes out ahead.

According to one 2016 report, United made more ancillary revenue than any other airline this past year. More than half came from their MileagePlus rewards program and their co-branded credit card.

why are ancillary charges so high? airline profit

If you fly with United, you’re contributing to the highest ancillary revenue in the country. Image by Flickr user Bernal Saborio (CC BY-SA 2.0)

The Benefits and Risks of an a la Carte Business Model

The studies above noted that, in general, average consumers don’t object to paying more on-site because they care most about a low base fare. In essence, they’re being fooled into thinking they’re getting a better deal. The issue for business travelers is that we spend too much time in airports to be misled by this tactic.

But while I would much prefer bundled rates, the airlines’ clear aim is to make the flight experience as inexpensive as possible on the surface. This will (theoretically) entice more leisure travelers to take the plunge and buy a ticket for the first time. Business travel is already set to increase in 2017, which means that our segment of the customer base is locked in. There’s little profit to be made right now in catering to our needs.

Can You Avoid Ancillary Charges?

Ancillary charges aren’t all bad—unbundled fares do allow those on shoestring budgets to purchase tickets without any additional frills. But business travelers looking to improve their flight experience are likely to find that, as the years pass, they’re paying more for the comfort, convenience, and amenities they’ve grown to depend on.

Now is the time to start perfecting your credit card rewards strategy so that your own bonus miles, at least, aren’t contributing to the pool of unredeemed points that make up such a large portion of airline profits. This is also a good time to finally become an airline rewards member, if you haven’t already, so that you can hold onto amenities like seat upgrades regardless of how fee structures change. In short, loyalty and a little strategizing seem like the best workaround.

If you’re paying more for airfare, you might also want to save money on other expenditures, like your hotel room. And contrary to what the airline industry might suggest, that doesn’t mean you have to lower your standards. A membership with JetLux gives you access to corporate rates at luxury hotels throughout the US, and instead of extra fees, you can get perks like free WiFi or room upgrades. It might not make your flight easier, but you’ll have something to look forward to when you land.

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