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US airline ancillary fees top USD2 billion in third quarter - up 36%

18-Dec-2009

Airline efforts to come up with new and creative ways to exact more money from passengers in an excruciatingly low-fare environment, generated USD2 billion in the third quarter of 2009, up 36% from the year-ago period, with baggage fees producing the lion’s share.

In its quarterly assessment of US carrier financial results, the Bureau of Transportation Statistics reported that ancillary fees totaled 6.9% of total US airline operating revenue, up from only 4.1% in Q32008.

Ancillary fees reported by BTS by 26 carriers does not include on-board food or seating assignment fees, but does include baggage, reservation change fees which are growing, frequent flyer mile sales, pet and stand-by passenger fees. Revenue from seating assignments and on-board sales of food, drink, pillows, blankets, entertainment, or any other ancillary items are reported as Transport Related Revenue and cannot be identified separately, said the BTS.

Delta, the numbers for which do not include Northwest, is taking in twice the fee per passenger (or USD24 for a total of USD447.5 million) as most of its competitors, with US Airways following with USD18. The rest are in the USD10-12 range, with the singular exception of Southwest, which says it is attracting more passengers with its “no-fee” zone on first bags, resulting in a market share gain of around 1% (which is worth about USD800 million in revenue, according to the LCC).

Indeed, both Southwest and JetBlue have a different philosophy on ancillary fees, preferring to charge for new services such as Wi-Fi, rather than unbundle services once part of the ticket. JetBlue’s ancillary revenue, in fact, dropped 8.4%. Meanwhile, Continental’s percentage change was the largest, despite its lower fees per passenger, at 134.3%.

Ancillary Fee Revenue*
Airlines Ranked by 3rd Quarter 2009 Ancillary Fee Revenue
Dollars in Millions (000,000)

3Q 2009 Rank

Airline

3rd Quarter 2008

4th Quarter 2008

1st Quarter 2009

2nd Quarter 2009

3rd Quarter 2009

3Q 2009 Fee per Passenger ($)

Percent Change 3Q 2008-3Q 2009 (%)

1

Delta

262.2

289.0

367.4

407.0

447.5

24

70.6

2

American

242.5

246.2

241.4

246.5

261.2

12

7.7

3

US Airways

129.6

227.0

221.3

228.2

230.8

18

78.0

4

Northwest

165.5

185.2

168.1

173.7

223.2

20

34.9

5

United

152.0

151.3

146.3

158.5

168.5

11

10.9

6

Southwest

143.4

140.6

143.0

148.4

155.7

6

8.6

7

Continental

55.7

77.5

144.0

136.0

130.5

11

134.3

8

AirTran

38.0

36.2

55.9

65.7

68.0

10

79.0

9

JetBlue

53.1

49.5

48.9

48.5

48.7

8

-8.4

10

Alaska

34.3

30.2

28.8

28.7

47.3

11

37.9

 

Industry Total**

1,432.7

1,615.1

1,722.6

1,818.3

1,954.7

12

36.4

AirTran, US Airways and Delta enjoyed the greatest percentage of ancillary fees to operating revenues at 11.4%, 8.2% and 9.3%, respectively.

Ancillary Fee Revenue Compared to Total Operating Revenue*
Airlines Ranked by Percent of 3rd Quarter 2009 Operating Revenue from Ancillary Fees

3Q 2009 Rank

Airline

3rd Quarter 2008

4th Quarter 2008

1st Quarter 2009

2nd Quarter 2009

3rd Quarter 2009

Percentage Point Change 3Q 2008-3Q 2009 (%)

1

AirTran

5.6

6.1

10.3

10.9

11.4

5.8

2

Delta

4.5

6.0

8.7

9.0

9.3

4.8

3

US Airways

3.9

8.0

8.7

8.3

8.2

4.3

4

Northwest

4.2

5.8

6.3

6.6

7.8

3.6

5

Southwest

5.0

5.2

6.1

5.7

5.9

0.9

6

JetBlue

5.9

6.0

6.2

5.8

5.7

-0.2

7

Alaska

3.6

4.1

3.7

3.9

5.5

1.9

8

American

3.8

4.5

5.0

5.1

5.1

1.3

9

Continental

1.4

2.3

5.0

4.4

4.0

2.6

10

United

2.7

3.3

4.0

4.0

3.8

1.1

 

Industry Total**

4.1

5.5

6.5

6.8

6.9

2.8

US Airways, of the 21 reporting carriers, also exacted the highest per-passenger baggage fee at USD9, for a total of USD111.40. However, Delta again topped the mark with USD129.5 million, followed by American at USD119.5 million. Northwest’s growth was 141.4% to USD78.9 million for a total Delta/Northwest count of USD208 million in baggage fees alone. The industry earned USD739 million in baggage-fee revenues during the quarter, up 111.3%

Baggage Fee Collections
Airlines Ranked by 3rd Quarter 2009 Baggage Fee Revenue
Dollars in Millions (000,000)

3Q 2009 Rank

Airline

3rd Quarter 2008

4th Quarter 2008

1st Quarter 2009

2nd Quarter 2009

3rd Quarter 2009

3Q 2009 Fee per Passenger ($)

Percent Change 3Q 2008-3Q 2009 (%)

1

Delta

47.5

60.5

102.8

118.4

129.5

7

172.6

2

American

94.1

113.9

108.1

118.4

119.5

5

27.0

3

US Airways

67.9

93.8

94.2

104.1

111.4

9

64.0

4

Northwest

32.7

63.6

59.8

67.2

78.9

7

141.4

5

United

42.3

58.8

59.1

67.4

77.9

5

84.2

6

Continental

21.2

49.3

55.6

63.2

66.0

6

211.7

7

AirTran

7.9

12.7

30.9

40.5

40.2

6

411.5

8

Alaska

9.0

5.5

5.4

6.2

25.2

6

178.9

9

Spirit

0

0

0

16.2

16.4

10

N/A

10

Frontier

2.9

10.0

12.5

13.5

14.9

6

407.7

 

Industry Total**

350.1

498.6

566.3

669.6

739.8

7

111.3

Delta and Air Tran swim against tide with huge increases in reservation change fees

Reservation Change Fees for Delta grew nearly 2,000% between 3Q2008 and 3Q2009, to USD112 million. This, at a time when the 21 other carriers reporting, except AirTran, reported single and double-digit drops in change fees. The revenue per passenger for such fees is relatively low compared to baggage fees, for instance at between USD2 at AirTran to USD9 at Northwest. The industry collectively earned USD614.5 million from this source, a rise of 41.4%.

Reservation Change Fee Collections
Airlines Ranked by 3rd Quarter 2009 Reservation Change Fee Revenue
Dollars in Millions (000,000)

3Q 2009 Rank

Airline

3rd Quarter 2008

4th Quarter 2008

1st Quarter 2009

2nd Quarter 2009

3rd Quarter 2009

3Q 2009 Fee per Passenger ($)

Percent Change 3Q 2008-3Q 2009 (%)

1

American

127.3

114.5

115.9

109.6

120.4

5

-5.4

2

Delta

5.4

4.5

86.9

100.7

112.0

6

1,971.8

3

Northwest

114.1

107.1

101.2

105.0

100.5

9

-12.0

4

United

96.9

81.9

78.1

81.1

79.4

5

-18.0

5

US Airways  

0

68.3

66.5

64.0

61.0

5

N/A

6

Continental

0

0

59.6

59.8

56.0

5

N/A

7

JetBlue

35.4

34.3

32.2

30.0

28.7

5

-18.9

8

Alaska

19.0

17.1

16.3

15.3

15.6

4

-18.4

9

AirTran

6.5

5.8

4.8

12.3

12.2

2

87.8

10

Hawaiian

6.7

6.0

5.7

6.6

6.5

3

-2.8

 

Industry Total*

433.8

459.9

587.5

606.5

613.5

5

41.4

'Miscellaneous' revenue declines

With 26 carriers reporting, the industry earned USD601.4 million in 'miscellaneous' revenue, a decline of 7.3%. Northwest’s miscellaneous fees were up 134% to USD43.8 million or USD4 per passengers. The only other triple-digit increases came from Northwest Airlink Mesaba, up 111.4% to USD16.5 million or USD9 per passenger as both carriers benefited from strong post-bankruptcy strong growth.

Miscellaneous Operating Revenue*
Airlines Ranked by 3rd Quarter 2009 Miscellaneous Operating Revenue
Dollars in Millions (000,000)

3Q 2009 Rank

Airline

3rd Quarter 2008

4th Quarter 2008

1st Quarter 2009

2nd Quarter 2009

3rd Quarter 2009

3Q 2009 Fee per Passenger ($)

Percent Change 3Q 2008-3Q 2009 (%)

1

Delta

209.4

223.9

177.7

187.9

206.0

11

-1.6

2

Southwest

143.4

140.6

143.0

148.2

148.4

6

3.5

3

US Airways

61.7

64.9

60.6

60.1

58.4

4

-5.4

4

Northwest

18.6

14.5

7.1

1.5

43.8

4

134.7

5

American

21.1

17.9

17.4

18.4

21.3

1

0.9

6

Comair

17.5

17.6

18.3

16.8

17.5

11

0.1

7

Mesaba

7.8

14.1

14.4

14.5

16.5

9

111.4

8

AirTran

23.6

17.6

20.2

12.9

15.6

2

-34.2

9

Spirit

33.2

29.4

30.6

14.7

14.5

9

-56.4

10

United

12.8

10.7

9.1

10.0

11.2

1

-12.9

 

Industry Total

648.8

656.6

568.8

542.2

601.4

4

-7.3

Operating margins improve

Other nuggets from the BTS report included improved operating margins for the mainline and low-cost carriers. Airlines and ExpressJet Airlines were the only two of the 20 airlines. This was the first operating profit margin for network carriers since Sep-2007, finally joining the low-cost and regional groups which have consistently reported operating margins over the period. Unsurprisingly, regionals logged a sector profit margin of 8.3%, but the BTS reported it was the largest margin since 4Q2006. Mesa, which is undergoing difficulties given the potential loss of is Delta programme, in addition the recent loss of United Express, requested confidentiality for its 3Q2009 statistics.

Operating margins will be a statistic to watch in the coming months and years. Delta, this week, threw down the gauntlet, telling analysts that its goal was to deliver a 10-12% operating margin by 2012. The legacy carriers are trying to reinvent themselves as largely premium carriers devoting their resources on attracting those travelers rather than trying to be everything to everyone.

The seven network carriers, always lagging other industries in terms of margins, posted a profit margin of 1.4% in the third quarter with a combined operating profit of USD338 million. In 3Q2008, these carriers reported a loss margin of -5.4% with a loss of USD1.624 billion.

Passenger Airline System* Quarterly Operating Profit/Loss Margin (In Percent)
Airline Groups Ranked by 3rd Quarter 2009 Margin
(Operating Profit/Loss as Percent of Total Operating Revenue)

3Q 2009 Rank

Airline Group

3rd Quarter 2008 (%)

4th Quarter 2008 (%)

1st Quarter 2009 (%)

2nd Quarter 2009 (%)

3rd Quarter 2009 (%)

3rd Quarter Operating Profit/Loss $(Millions)

1

Regional

3.5

4.9

4.3

7.2

8.3

141

2

Low-Cost

-0.8

3.9

2.9

7.0

4.2

206

3

Network

-5.4

-6.7

-4.0

-0.5

1.4

338

 

21-Carrier Total

-4.1

-4.4

-2.4

1.2

2.2

685

The top three operating profit margins were reported by network carrier Alaska Airlines and low-cost carriers Allegiant Air and Spirit Airlines, which most observers put in a separate category from legacy, low-cost and regional counterparts because of their markedly different business models.

Network Airline System* Quarterly Operating Profit/Loss Margin (In Percent)
Network Airlines Ranked by 3rd Quarter 2009 Margin
(Operating Profit/Loss as Percent of Total Operating Revenue)

3Q 2009 Rank

Network Airlines

3rd Quarter 2008 (%)

4th Quarter 2008 (%)

1st Quarter 2009 (%)

2nd Quarter 2009 (%)

3rd Quarter 2009 (%)

3rd Quarter Operating Profit/Loss $(Millions)

1

Alaska

7.2

4.1

1.0

4.2

16.8

145

2

Northwest

-5.7

-13.8

0.9

5.4

6.9

198

3

United

-8.4

-13.5

-3.7

4.3

2.9

130

4

Delta

2.2

-1.2

-10.0

-3.5

1.4

67

5

Continental

-4.2

-1.0

-3.1

-5.2

1.3

43

6

US Airways

-20.5

-12.5

-1.0

4.4

0.1

1

7

American

-4.2

-3.9

-4.7

-5.3

-4.8

-246

 

7-Carrier Total

-5.4

-6.7

-4.0

-0.5

1.4

338

Low-Cost System* Quarterly Operating Profit/Loss Margin (In Percent)
Low-Cost Airlines Ranked by 3rd Quarter 2009 Margin
(Operating Profit/Loss as Percent of Total Operating Revenue)

3Q 2009 Rank

Low-Cost Airlines

3rd Quarter 2008 (%)

4th Quarter 2008 (%)

1st Quarter 2009 (%)

2nd Quarter 2009 (%)

3rd Quarter 2009 (%)

3rd Quarter Operating Profit/Loss $(Millions)

1

Spirit

-19.4

12.0

17.1

17.3

14.6

26

2

Allegiant

5.0

21.6

30.1

23.8

14.4

18

3

Frontier

-2.6

0.0

8.4

9.5

10.3

31

4

JetBlue

1.6

5.3

9.1

7.9

7.7

67

5

AirTran

-6.9

9.3

8.8

11.0

6.2

37

6

Virgin America

-47.5

-24.0

-36.7

-8.4

3.2

5

7

Southwest

3.0

2.6

-2.1

4.7

0.8

23

 

7-Carrier Total

-0.8

3.9

2.9

7.0

4.2

206

Regional profitability improving

Horizon Airlines, a subsidiary of Alaska Air Group, reported the largest profit margin at 13.7% at USD24 million and significant achievement given questions from analysts last year on whether or not AAG should get rid of the regional subsidiary. In conference calls at the time, they described the regional as a drag on Alaska’s results. However, since then President Jeff Pinneo has restructured the airline moving toward a single fleet of Bombardier Q400s and shedding the airline of its de Havilland Dash 8s, many of which went to CommutAir to serve as a Continental Connection out of Cleveland. It is also shedding the 18 CRJ 700s, once used to feed Frontier and now used in support of Alaska’s network until they are sold.

Horizon was followed by American Eagle which posted USD55 million in profits and an 11.8% profit margin. Interestingly, observers have said for years, the airline has far too much overhead to make a profit. The American Eagle results marks significant progress.

AirlineFinancials.com’s Bob Herbst reported that not one of the regional airline partnerships broke even last year. Information on just how much the incremental revenues provided by regionals contribute to mainline carriers’ bottom lines does not exist. However, Herbst noted that American does provide some incremental revenue data in its SEC filings showing passengers connecting to American’s flights from American Connection and Eagle flights generated passenger revenues for American flights of $1.7 billion in both 2008 and 2007, which are included in Revenues – Passenger in the consolidated statements of operations. The Northwest acquisition was clear as it forced the Delta Connection program into the red for the first time.

Airline System* Quarterly Operating Profit/Loss Margin (In Percent)
Ranked by 3rd Quarter 2009 Margin
(Operating Profit/Loss as Percent of Total Operating Revenue)

3Q 2009 Rank

Regional Airlines

3rd Quarter 2008 (%)

4th Quarter 2008 (%)

1st Quarter 2009 (%)

2nd Quarter 2009 (%)

3rd Quarter 2009 (%)

3rd Quarter Operating Profit/Loss $(Millions)

1

Horizon

4.2

5.1

1.4

7.0

13.7

24

2

American Eagle

5.3

2.7

6.6

7.1

11.8

55

3

Atlantic Southeast

6.0

7.6

4.0

7.7

10.7

22

4

SkyWest

6.5

6.5

6.8

8.7

9.2

41

5

Comair

9.0

7.1

7.9

16.2

3.8

9

6

ExpressJet

-11.2

-5.0

-7.0

-6.1

-4.7

-8

7

Mesa**

0.2

7.1

0.9

4.3

N/A

N/A

 

7-Carrier Total

3.5

4.9

4.3

7.2

8.3

141


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