Everyone Take a Deep Breath....

So - we bet that the media will be all over the latest news that seems to come straight out of the Onion:

Ryanair is considering charging passengers to use the toilet on its aircraft. According to the Belfast Telegraph - The airline's CEO, Michael O'Leary, is touting the idea of putting a coin slot on the toilet door as a means of raising "discretionary revenue".

OK - we know that's pretty mind-boggling - but we think this is going to be WAAYY overblown. Let's take a look at what O'Leary actually said, as reported by Today in the Sky:

"One thing we have looked at in the past and are looking at again is the possibility of maybe putting a coin slot on the toilet door so that people might actually have to spend a pound (about $1.43)... in future."

Well, that outrageous statement is actually hedged pretty well. Look - we know we joke about how far airlines will go to make an extra dollar (we even have a tag for "25 cents to use the bathroom") - but we just can't get worked up about it that much. We just don't think it'll happen.

However, if it does happen - FMV will be the first to test how water resistant their air sickness bags are...

Nickels & Dimes Add Up

For anyone not on the ancillary revenue and service fee bandwagon, check out this investor presentation from United Airlines (Dec 2008). Yes, maybe United is not the fiscal role model all airlines should aspire to be, but their nickels and dimes may be adding up to real money. $1.2 Billion in 2009 to be exact. We beeline to Slide 14 for a summary of their ancillary revenue growth:





That's a pretty ambitious target for 2009, given the 2008 data and declining capacity in a global economic downturn. Yet the growth of the previous years suggests it's within reality. Keep in mind, over half of the target comes from good old fashioned service fees tied to a captive audience (e.g. ticket change fee, call center fee, etc.), as shown in this table:





Look at it a different way. UA reported 63 million mainline revenue passengers boarded in 2008, a 7.7% decline from 2007. Yet they were able to grow the ancillary revenue 28%. That's pretty good. And if passengers remain flat in 2009 (optimistic?), and UA meets their ancillary revenue target, they'll collect ~$19 per mainline pb in ancillary revenue. That's approaching $50 per ticket sold. Pretty good stuff.

CASMA Panama.... YAWN....

Sigh –

Ok, Ok – A lot of loyal FMV readers have emailed asking us when we'll post our CASMA recap. But, the fact of the matter is that we’ve been lazy to post it because …. Well… there just wasn’t a lot to report.

Yes, there were a lot of panels and workshops, but we bet that you’ve already heard it all. We’re serious. It’s a slow distribution news year – and so there’s basically only one thing everyone talked about at CASMA: “Merchandising”

With the very closely-related popular brother… (Wait for it)… “Ancillary Revenue”

And the 2nd cousin that everyone admires from afar - “Fare Families”.

- Yes, Paypal had yet another lunch keynote speech. And Yes, there were the federally mandated panels about E-Ticketing (Hey – isn’t that IATA Deadline coming up?), Alternative Payment Methods (Credit cards suck), and Agency Booking Habits (Drat them!). These are CASMA staples.

- The Panels this year were seemed LONNNGGGG (90 minutes?! Uggg).. And the major panels were about…. (Wait for it)….. Ancillary revenue! The punch-line of this was that the panel was “moderated” by Maruice Coleman – who seemed to have only two main points. 1) Hey - Did you know he used to work at Aer Lingus (he mentioned this no less than 11 times) and 2) Ryan Air is the BEST AIRLINE EVAH !! (mentioned Ryan Air no less than 28 times).

- The other major panel seemed to be Technology Providers talking about…. (Wait for it)…. Ancillary revenue. The panel can be summed up like this:

Sabre: "Hey - Did I tell you we're great?!... well, we are great!".

Amade-oose: "Industry Buzz Word #1, Industry Buzz Word #2, [Insert a remark about Altea]"

WorldTravelSpanPort: Most Reasonable of the bunch - "We can't expect airlines to be standardized"

ATPCo: "umm - don't know why we're up here"

ITA Software: "This stuff is hard, we'd love to hear what the airlines are looking for"

So there you go readers. Sorry for the letdown – but it can’t be all breaktaking news all the time. We’ll save that for the next Airline that charges for an aisle seat...

Airline Merchandising 101

If you spend any time at travel conferences, you're going to hear airlines talking about "merchandising". It is quite probably a federally mandated talking point. What does it mean?

We can enjoy Slide 18 from this PPT from United Airlines for a peak behind the curtain. UA is targeting a $1B revenue increase (roughly 5% over current ~$20B revenue) in five years from the following initiatives:

• Seat upsell, $300M/year


• Unbundling product (e.g. Baggage Fees), up to $300M/year


• New products, $400M/year

We wish we knew more about the "new products" (c'mon, pay toilets!), but we speculate that means things like entertainment, buy-on-board, new lounge purhcase plans, etc. Wait and see.

PS, FOR NERDS ONLY:

This is all interesting stuff, but the humor is found in the math error. Note that the slide indicates that seat upsell "can DOUBLE to $300M/year". That means the incremental benefit is only $150M. That means the total target only adds to $850M, not $1B. Not to mention that a $100M range was cited for "unbundling product". Oops, now we're down to $750M. Fine, fine, $250M is a rounding error when you're talking about $20+B in total. However, they may want to hire a consultant to check the other consultants' work (yes, FMV Available)

Some Economy Seats are More Economy Than Others

Since FMV moved it’s headquarters to Chicago late last year – we find ourselves flying United a lot. You may think it’s because of their weird faux-cartoon ads that they plaster everywhere – but it’s really because of their “EconomyPlus” seating with extra legroom. After earlier hints, JetBlue has officially jumped on that bandwagon:

JetBlue will reconfigure its Airbus A320 fleet to offer seats with more legroom, and will charge more for those seats. JetBlue is calling the product Even More Legroom, which will offer 38 inches of pitch in the second to fifth rows plus emergency exit rows 10 and 11... The airline will charge $10 each way for short-haul flights (under 600 miles), $15 for medium-haul flights (601 to 1,500 miles) and $20 for long-haul flights (over 1,500 miles).

That’s actually great – but there is also another kicker:

The airline won't be selling Even More Legroom in the GDSs because of "technological limitations," JetBlue said. But the airline added that clients who book via a GDS can go to the Manage Your Flight link on JetBlue's Web site to purchase the extra legroom.

A few FMV points:

1) OK, we just assumed that JetBlue’s marketing department had a down day when they branded their new refundable fare product “Refundable Fares”. But seriously, “Even More Legroom”? Please try a little harder to imply that the old coach seats don't have crappy legroom. You know who will REALLY hate this name?? The call center agents who face this scenario happening 100 times a day:

JetBlue Agent: “Hello, You have reached JetBlue – how may I help you”

Customer: “Uhh, Hi – I bought a seat for my upcoming trip, and I know I get a roomy seat, but I’d now like to purchase EVEN MORE LEGROOM!! Ha Ha Ha”

2) This also has “Ancillary Revenue” written all over it and kind of goes against the Jetblue vein. Fine – you don’t have a “business class” – but you now have the beginnings of tiered system…

3) Finally – and most importantly - we love the fact that this purchase option is not available in the GDS. It’s the mythical “Fourth Cabin” limitation of GDSs; they cannot inventory control this type of stuff, and therefore can’t sell it. But FMV will bet you $10 (Even More Legroom for a short-haul flight) that the GDSs come out and blame the airline as not being “buyer focused” for doing this to them. It's classic GDS victim-hood at it's best (see Air Canada).

So while you won't catch us flying JetBlue just yet (simply not enough flights from ORD), we applaud them for providing meaningful product differentiation (i.e. not just a seatback TV and faux-hipster vibe). We also applaud mother nature, for dumping a (late) winter storm on Chicago today, giving us the perfect excuse to duck out early to watch the NCAA tournament. For those stuck on a cot at ORD - sorry, but these things happen for a reason.

Ancillary Revenue: Not Just for Pillow Sales

All too often, when pundits talk about airline ancillary revenue, it's all about selling snacks on board or charging passengers to use the bathroom. Today, a special thanks to a yawner article about JetBlue for reminding us that ancillary revenue can come from the most basic form of nickel and diming: change fees.

Today's ATW Daily News reports that JetBlue expects a 50% year-on-year increase in ancillary revenue in 2008, bringing annual nonfare income to over $250M. For comparison, 2006 "other revenue" was $139M, and we estimate the 2007 number will be around $190M (based on JBLU 3Q07 Form 10-Q). That got us wondering exactly how they make that money.

It turns out, that for the third quarter of 2007, their filing footnotes explain that most of the other revenue increase was "primarily due to higher change fees and excess baggage fees...resulting from more passengers and increased change fee rates". Sweet! That is so old school! Hundreds of millions of dollars from simply selling nonrefundable fares, and then charging people to reclaim the purchase after their plans change.

Sports cliche: Sick to the fundamentals, Take it game by game, Give it 110%, don't get fancy.

If you actually read that article, it also turns out that JetBlue will try to boost passenger revenue by, we paraphrase, copying United's EconomyPlus seating model. But they WILL NOT, we repeat WILL NOT, emulate United's 2nd bag policy. Hip, nimble, JetBlue can't go for that legacy carrier stuff.

But Look On The Bright Side...

It’s no secret that many airlines have recently started to add luggage fees for checked bags in an effort to raise revenue. Some airlines do it modestly, some do it very blatantly. Spirit Airlines, a pioneer in baggage fees, has now increased their fee – charging $10 per bag if you pre-reserve your luggage online, or $20 per bag if you check your bag in at the airport.

However, you have to really admire the ability of Spirit’s PR department to spin a simple luggage fee. In their recent press release of the luggage fee – Spirit claims that adding the fee is really a GREAT thing for their customers!

“Instead of raising every fare across our entire network in response to ever increasing fuel prices, we are proud to introduce our new luggage policy, which gives our passengers the opportunity to control their cost of travel by packing lighter,” said Barry Biffle, Spirit’s Senior Vice President and Chief Marketing Officer.

Biffle PR Translation: Yes - we’re adding a luggage fee… but hey, we’re not raising fares. So there’s some good news out of all of this!!

Biffle FMV Translation: Hate the Game, Not the Player.


And seriously – this is a great statement that is mentioned TWICE in the PR: “Our luggage policy… gives our passengers the opportunity to control their cost of travel by packing lighter”

Huh?? This basically says “Passengers will get charged for a bag – but you have the option of not checking in a bag… Man we’re great!!”

After all this, FMV management has decided to fire its PR firm and find a new agency that can spin like Spirit’s new luggage claim carousel. However, rest assured, we will also give the firm the option of packing lighter….

No good deed...

This is a little off the usual Fares material, but it highlights a risk of onboard sales, so here we go:

The Chicago Tribune reports that during October, Delta Airlines is offering passengers pink lemonade for $2, with proceeds going toward breast cancer research. Great call. The problem is, some enterprising onboard staff started offering "Pink Lady Cocktails" (vodka with the lemonade) for only $3 additional. Health professionals in the know alerted Delta that alcohol consumption in fact INCREASES breast cancer risk.

Doh!

Delta tells the Tribune that the clever product bundling will stop. Is that the end of the story? Maybe.

Who out there thinks that Delta has really strict controls on the sale of lemonade and collection of donations? Closer to Fort Knox or the take-a-penny tray at 7-11? In fact, who would wager that if a passenger opted for alcoholic lemonade, the $5 went to exclusively to Delta to cover the vodka (which probably is counted like gold bricks)? That leaves nothing for the charity!

We also know that flight crews HATE collecting this type of money since they have to sign for it and are responsible for any shortfalls. Delicate balancing act for airline exec's to keep in mind as they continue to expand onboard sales - - especially for non-consumables like video player rental...

Actung Baby !!

Hello from CASMA in the Ritz-Carlton Berlin! We’re at the Fall session of CASMA, which basically means “not in North America”. The theme this year is “Breaking Down Walls” – which kind of makes us cringe a bit. We think it must be tough for an entire city to be associated with a wall that was TAKEN DOWN like 20 years ago. At least some of the Chinese one is still there!

Anyways – your intrepid FMV bloggers are on the scene and here are some notes from day one:

- The buzz-word of the conference is “Ancillary Revenue” and it seems that everyone is trying to figure out extra revenue streams, and trying to copy the Air Canada model- either by creating a family of fares, or charging for extras. We’re talking cars, hotels, baggage, insurance, and others. And YES - someone did crack a "charging for the bathroom joke" - that seems to never get old.

- The best new revenue ideas we heard was the selling of airline gift cards on board, the ability to pay a fee to reserve an empty seat next to you (if available), and taking a portion of currency exchange. For example, some airlines let you pay in US Dollars or Euros – and a bank facilitates that change. Why not use a 3rd party and split the commission fee made on that transaction?

- There was an interesting point that Ryanair may actually be the best airline in world at delivering consistent customer service!! Yes, that sounds totally wrong, until you also remember that they are very clear to the customer that they only do two things: They get you there on time, and they get you there for rock bottom prices. Ryanair consistently has the best on-time metrics of any airline in the world.

- A few airlines like Ryanair and AerLingus are set to get their costs of distribution to turn NEGATIVE. Yes, you read that right – this is set to be a revenue opportunity for some since they already recoup the costs of credit cards and certain channels by charging extra. It was reported that a GDS asked the #2 at Ryanair at a prior conference what it would take to get Ryanair to list in the GDS and the response was “not until the GDS pays us 5 Euro for each ticket”.

- Finally – we think the tide is turning on alternative forms of payment. It looks like Paypal is finally gaining traction in the Airline market (with US Air, Southwest, Northwest, and Midwest) and it looks like other forms of Direct Connect payments are being explored. All this sets the stage for a big war on Credit Card fees – if you think the GDS battles were bad a few years ago – you haven’t seen anything in the upcoming credit card battles !!

Ok – we’re about to go out and check out Check-Point Charlie, and hope there is more to the city than a defunct wall...

Popcorn, Candy, and a "Big Front Seat"

Yesterday's Wall Street Journal Middle Seat column by Scott McCarthy had a tidy summary of carriers' strategies to reduce fares by charging extra for various services. You know, checked baggage fees, fees for more legroom, etc.

There's an analogy in there attributed to the CEO of Spirit Airlines B. Ben Baldanza, who notes that such fees are NOT "Nickel and Diming" as some consumers claim, but rather on par with movie theatres that sell you a ticket and then gouge you at the concession stand.

As Tyler Durden once asked, "How's that working out for you? Being clever?".

Interestingly, Baldanza tells us.

Per the article, Spirit's average one-way fare is $100 yet the carrier collects another $15 per passenger via "Non Nickel and Diming" We must say, 15% seems like a pretty good premium. However, note per our post below that Continental Airlines is collecting at least $125 per one-way (based on $250 per round trip) on comparable leisure sales vs. Spirit's $115.

Whoa, so Continental is doing 8%+ better on revenue than Spirit using good old fashioned airline gimmicks like free warm soda, a strong network, and a loyalty plan.

Baldanza says, "you either need to compete on price or compete on product. You can't do both." However, we wonder if Spirit is really saving enough by checking a few less bags to compete with low fares. How much does it cost Spirit to become a flying minimart selling newspapers, magazines, and aspirin?

Note to Spirit passengers - sneak some Junior Mints onboard in your baggage. It works at the movie theatre, doesn't it?

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.