Four ways airlines are making billions out of charging for extras

Airlines are making money from extras at record levels. Photo / 123RF

Airlines are on track to make record levels of ancillary revenue, despite air travel not yet returning to pre-pandemic levels.

The industry is forecast to make US$117 billion ($198b) worldwide out of added extras in 2023, up on the previous record of $109b in 2019, before the pandemic.

Research by IdeaWorksCompany for business-to-business car rental company CarTrawler finds the increase is built largely on passenger growth and market share gains by low-cost carriers (LCCs).

CarTrawler chief commercial officer Aileen McCormack said ancillary revenue continues to be a consistent and predictable revenue driver for airlines in the face of unpredictable fare price fluctuations.

“Low-cost carriers continue to have the edge on driving ancillary revenue streams, accounting for approximately 31 per cent of market share in this area. However, we are increasingly seeing US airlines gaining momentum with the successful rollout of loyalty programmes and frequent flyer benefits,” she said.

“I expect airlines in Europe and the rest of the world are taking note of this development and evidence of the real returns it’s bringing in terms of yield.”

Ancillary revenue is generated by activities and services beyond standard airfares.

This wide range of activities includes commissions gained from hotel bookings, the sale of frequent flyer miles to partners, and a la carte services. It’s the a la carte portion, which includes baggage and seat assignment fees, that represents the share directly paid by consumers.

Earlier this year, CarTrawler and IdeaWorksCompany reported the ancillary revenue disclosed by 65 airlines for 2022. These statistics were applied to a larger list of 125 airlines to provide a global projection of ancillary revenue by the world’s airlines for 2023.

The record result this year was built on solid fundamentals, and the big jump on last year was because:

• Many more people are flying. IATA predicts an increase larger than 28 per cent for global airline traffic in 2023 compared to 2022, with an amazing gain of more than 800 million passengers.
• Low cost carriers are grabbing travellers. For 2020, IdeaWorksCompany calculated the global low-cost carrier market share at 25 per cent. By 2022, the LCC share jumped above 31 per cent. Simply said, coming out of the pandemic, the best ancillary revenue producers are carrying more passengers than ever.
• Assigned seat fees are being adopted by more carriers. Once largely limited to LCCs, fees for assigned seating now appear in the booking paths of global network carriers. For many airlines, the revenue rivals that of checked baggage. The trend has become so widespread that some carriers now are charging fees for “better” seats in business class.
• Co-branded cards deliver billions of dollars more. Fifteen top-performing airlines disclosed a year-over-year frequent flyer programme revenue gain of $8.3 billion for 2022, a 41 per cent increase. The carriers include American, GOL, Latam, Qantas and United. Continuing growth of this activity is also expected in 2023.

Airline traffic and fares have fluctuated sharply since 2019. Traffic has been restored unevenly across the world, and airfares have dipped or jumped as determined by demand and capacity fluctuations.

Airline revenue is directly driven by this often unpredictable activity, and CarTrawler says it is fortunate airlines have been able to increase ancillary revenue in good times and in bad.

It says airfares are forecast to fall in 2024.

Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.