Coffee or tea? Cash or credit?

United Airlines reported a disappointing $150M net loss for the 1st Quarter. FMV could type all day and not fully capture how troubling we find this, so instead we'll grab our half-full lens and focus on the "so-called-solution" (or at least part of the solution) as suggested by United, ancillary revenue.

In addition to trying to charge more to business passengers - United suggests they may consider charging passenger fees for baggage handling and seat selection. United is already on pace to make $100M from upselling EconomyPlus seating to non-elite passengers, so they believe it also makes sense to peek under other rocks. The pessimist would note that with $3.3B in 1Q07 passenger revenue, there's no fast track to UA profits through ticky-tack fees. However, consultant Patrick Murphy (Tralliance Coaching & Consulting) estimates that fees and advertising can generate up to 35% incremental revenue! That's real money.

Word from the UATP Conference is that AirTran, Frontier, and US Airlines are among other carriers considering similar strategies. That's no shocker, considering the industry is dedicating a conference to the topic of ancillary revenue this fall. But FMV wonders, can any carrier's top line revenue actually grow if everyone follows the same service fee playbook? We think the answer is yes, but only for those carriers that can effectively market their repositioned products and we believe that doesn't include most of the legacy carriers.

For example, will UA be able to win new business travellers with high restricted business fares AND a seat selection charge? It may work to some degree for lesuire customers, but we can't see it working enough to make a huge difference overall. Business travellers, who already make up a large majority of their revenue, will either be exempt from these fees, or will resent paying them and perhaps pop to another carrier.

The marketing and loyalty efforts are going to have to heat up - and just add it to the fuel charges.