Friday, September 11, 2009

Ancillary Services and the Southwest Difference

Travel Weekly's Michael Fabey reports that a new study, sponsored by ezRez Software, found that airlines took in some $10.25 billion in ancillary-services revenue in 2008, a 345 percent increase over 2007.

In that year, 2008, airlines began to get their mojo working in their newly discovered drive for ancillary services.

"As airlines expand beyond their core product, the key is to determine how to best generate more revenue without alienating loyal customers or losing new ones to the competition," EzRez CEO Tina Fitch stated in the study.

Well, it looks like airlines may have to redouble those efforts to avoid alienating passengers.

Case in point: United Airlines just decided to match competitors and charge $50 for a second checked bag on international flights.

Maybe it's just semantics, but I would say that airlines aren't as much concerned with alienating their customers as they are in figuring out how much they can get away with without spurring open rebellion, defections to the competition or legislative action.

Southwest Airlines is bucking the trend in some respects and hoping to take away business from fee-happy airlines.

Splashed all over Southwest's home page today was its pitch that "Bags Fly Free" on Southwest. The airline charges no fees for first- and second-checked bags.

"Fly Southwest and Save $100 in Bag Fees," the home page trumpets. "LUV is saving on fees."

However, Southwest, too, is keen on generating ancillary revenue, but the difference is that the airline at least is giving passengers something extra for the fees instead of merely charging more for existing services.

Southwest recently introduced EarlyBird Check-In. For $10, passengers get to board after Business Select and A-List customers, and can stuff their coats and bags into overhead bins earlier than travelers who don't pay the fee.

Business Select passengers, of course, get early boarding, a free drink and priority access to security checkpoints.

It remains to be seen whether Southwest can successfully differentiate itself on the ancillary services front over the long haul.

While Delta and Continental went deep into the red and United eked out a small profit in the second quarter, Southwest recorded a $54 million profit. Of course, ancillary-services revenue was not a driving force in Southwest's quarterly results.

However, ancillary-services revenue increasingly will become a focus for all airlines when executives and financial analysts convene in quarterly conference calls.

It is clear that we have only just begun to experience what is expected to become crush of ancillary services and fees as airlines and GDSs come up to speed with the trend from a technology standpoint.

I'm beginning to feel a tad alienated.


Anonymous said...

Last year, LUV spent lots of money advertising the slogan "Fees Don't Fly With Us" until this June when they added an unaccompanied minor fee and raised overweight baggage fees! D'oh!

Southwest isn't immune to market realities. I would be willing to bet that sometime in the next 5 years, you'll be paying to check a bag on Southwest Airlines. The revenue potential is just too significant to ignore.

Dennis Schaal said...

I agree that Southwest is not immune to market realities and you could be right about your forecast of five years from now. Hopefully Southwest can get incremental business by not charging fees. No crystal balls here.