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A low-cost, low-fare carrier such as Spirit Airlines Inc. makes its living on passenger fees. That those fees, known as non-ticket revenue, dropped by more than $2 per passenger in the first quarter, compared to a year ago, might suggest a shift in travelers’ tolerance for additional charges.
Spirit blames its sagging fee tally on low fares: Travelers seeking out the lowest fares have had plenty of choices, with a raft of bargain flights, some below $50, departing from cities nationwide. Those price-sensitive travelers enticed by the lowest of low prices tend to avoid racking up additional fees.
Fare skirmishes have extended to the full spectrum of pricing, aided by the collapse of advance-booking windows for tickets once aimed solely at business travelers. In many cases, buying a ticket to fly the following day is no more expensive than buying one a month early. What’s more, lower fuel prices have boosted airline seat supply beyond demand in many markets, curbing fares for both corporate and leisure travelers.
The industry refers to this narrowing as “fare compression.” It has played a central role in airlines’ unit revenue declines and reduced stock prices. Five of the six largest airlines, excluding only Southwest Airlines Inc., have experienced share declines of 12 percent to 19 percent this year due to the negative revenue news.
“In this current fare-compression environment we are seeing consumers who previously wouldn’t fly, now choosing to fly because fares are so low,” Spirit spokesman Paul Berry said in an e-mail. “Many of these consumers are foregoing purchasing optional items.”
Some of this decline relates to ticket-change fees. Pay $41 for a ticket, and no one of sound reasoning would pay an airline $110 to $200 for a change, plus any fare difference. You just buy a new ticket. Other ancillary items are also experiencing “a slight degradation,” Spirit Chief Executive Officer Bob Fornaro said in an April 26 conference call with analysts. “I just think it’s continued downward pricing creates the—let’s call it—adverse selection, or whatever that is,” he said.
Falling fee collection at Spirit hasn’t been mirrored in the U.S. airline industry as a whole, which collected $6.82 billion last year in fees for checked bags and ticket changes, according to the Bureau of Transportation Statistics, which reported the fourth-quarter tallies on Monday. That’s a small uptick from $6.5 billion in those fees collected in 2014. Altogether, checked-bag and change fees accounted for roughly 26 percent of the industry’s $25.6 billion net income and more than 4 percent of total revenue last year.
Given the fare bargains, non-ticket sales have become even more important for most airlines. These fees are largely consistent, regardless of the fares in a market, and they are ripe for innovation.
Still, even if fee fatigue isn’t yet widespread, some observers think the industry might struggle to wring new baggage fees from travelers. “This initiative is largely played out,” Airline Weekly warned on Monday, pointing to the lack of price increases for checked luggage and a populace of bag-checking travelers that has now been tapped.
Selling upgrades to a premium-economy cabin—staples of long-haul Asian and European carriers—is the next hot thing at American Airlines Group Inc. and Delta Air Lines Inc., which plan to introduce spiffier economy sections with such amenities as further legroom and better meals in coming years. Prices will fall somewhere between economy and business class.
Spirit’s business plan has always called for low fares (and no frills) to stimulate demand from people priced out of the full-service airlines. The big carriers no longer give Spirit free rein on pricing, and the abundance of bargains—$29, $41, $69—on many routes is now stimulating demand among people who won’t, or can’t, spend beyond the ticket. The airline plans a major overhaul of its website this summer, which will help it to push new ancillary products and services online, during the booking process, and to price them dynamically. That project has left ancillary-revenue initiatives “locked down” for months, also affecting sales, Fornaro said last week.
Variable pricing is one area of promise for most airlines: Virgin America Inc. recently began pricing seat assignments this way, and executives said revenue per customer increased 3 percent, or 64 cents, in the first month.
Beyond the variable pricing, some airlines are starting to test new “ bundles ” of options to avoid the nickel-and dime exasperation that à la carte pricing creates for many travelers. Maybe you want to check a bag and have a vodka tonic (or three) but not pay for a seat assignment? Or you want the seat assignment and a priority slot to board but don’t plan to check luggage. There may soon be a package for that.
Amid all the revenue efforts, one thing is clear: Airline fees aren’t going anywhere.
©2016 Bloomberg L.P.
This article was written by Justin Bachman from Bloomberg and was legally licensed through the NewsCred publisher network.