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.

The American Dream: AA to Try to Turn Distribution Costs Into Distribution Revenue

In AMR Corp.'s first quarter earnings call yesterday, CEO Gerard Arpey spoke of his "long-term vision" to make travel agencies and global distribution systems (GDSs) pay for the privilege of distributing American Airlines' flights rather than the reverse.

And, even short of that goal, the move could be, well, priceless.

Arpey was quoted as saying: "Tom [CFO Thomas Horton] can jump in here, but I think the same approach that we’ve taken here in the U.S. certainly lends itself to the international distribution of our tickets where we’re still paying much higher levels of commission and booking fees, etc., and I think a lot that hinges on the use of technology and the competitive environment because a lot of those commissions or overrides or booking fees are paid in order to stimulate traffic and if we can, as an industry, do a better job keeping the supply of seats in line with the demand, I think that will help us on those fronts."

Warming to the topic, Arpey spoke of his dream: "So I think there are significant opportunities around the world to make the kind of progress that we’ve made here in the U.S. and not to be too dramatic but I can see a day, and maybe I’m dreaming here, where those folks who are the intermediary between us and our customer, have to pay for access to our product rather than us paying them to distribute our product. So that would be my long-term vision."

Any airline, GDS or travel agency executive in the U.S. recalls the distribution dramatics of 2005 and 2006, when the airlines threatened surcharges and radically cut the distribution fees they paid to GDSs and the incentives that Sabre, Galileo, Worldspan and Amadeus passed on to travel agencies.

Well, Arpey is signalling two things:

1) American Airlines, and others no doubt, are set and already are trying to export to the international arena the slash- and-burn distribution tactics that they successfully employed in the U.S. several years ago.

2) In the U.S., the next round of GDS-airlines booking-fee negotiations in a couple of years may make the prior face-off look like amateur night.

Airlines, of course, have every right to trim their distribution costs to reasonable levels. Before GDS deregulation, the GDSs used their clout and virtual monopoly power to tack on excessive fees to airlines that had little bearing to actual costs.

But now, as Arpey's comments show, the airlines are poised to try to force intermediaries to distribute flights to airline customers for free -- or, taking it to dream-like proportions -- to make online travel agencies, traditional agencies and GDSs pay for access to flights, which, of course, the airlines control.

Between Sabre, with its still-sizable distribution grip, terminating its relationship with Farelogix, and airlines poised to wield their hold over flight inventory to pummel intermediaries, it almost -- but not quite -- makes one wax nostalgiac about the days when these sectors were regulated.

The disruption that the travel industry faced in 2005 and 2006 would be considered a tremor compared with the earthquake that would occur if the airlines succeed in forcing through payless distribution in the next round of contract talks.

These days, the brouhaha may not sell a lot of newspapers, but it would drive a lot of traffic to travel news websites.

Meanwhile, another interesting point about American's first quarter results, is that although AMR's revenue declined 15 percent to $4.8 billion, those checked bag fees and other ancillary services indeed are paying off.

American's revenue from change fees, on-board meals and checked bag fees jumped 6.9 percent to $558 million in the quarter.

In the American (Airlines) Dream, those feels increasingly will be in the picture.