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US airlines’ ancillary revenues continue to grow, but at a slower pace for legacy carriers

15-Nov-2011

The US Department of Transportation (DoT), through the Bureau of Transportation Statistics (BTS), has released second quarter data which provides some interesting numbers for consideration. Looking at the ancillary revenue collected by carriers, we find that the amounts collected continue to grow, but for most legacy airlines at a slower pace. The overall year-on-year total increased only 5%.

However, passengers flying Spirit had a quite different experience and despite its general “no fees” image, Southwest has increased its take from fees by 10% over the year.

US airlines by 2Q2011 ancillary revenue* (USD millions)

2Q2011 rank

Airline

2Q2010

2Q2011

Percentage change 2Q2010-2Q2011 (%)

Share of all carriers' ancillary revenue

1

Delta

681.6

691.3

1.4

31.3%

2

American

292.3

303.4

3.8

13.7%

3

US Airways

255.6

253.9

-0.7

11.5%

4

Southwest

201.7

223.5

10.8

10.1%

5

United

179.1

165.1

-7.8

7.5%

6

Continental

160.7

162.2

0.9

7.3%

7

Spirit

41.9

82.0

95.7

3.7%

8

AirTran

65.5

75.6

15.4

3.4%

9

Alaska

46.3

65.5

41.5

3.0%

10

JetBlue

47.7

51.8

8.6

2.3%

 

Industry Total**

2103.8

2208.4

5.0

 

Delta most aggressive

As we have found in previous analyses, Delta Air Lines is the most aggressive in charging its customers. Unsurprisingly, its ancillary revenue total is almost a third of the industry pie. While they are at present the largest US carrier in size, they will soon be eclipsed by United/Continental, although the merged entity will still be in a distant second place for revenue collection.

As noted in the table, income from lots of sources is not tabulated in this data, making the total passenger outlay considerably higher for many travellers. Revenue from seating assignments must be growing rapidly if customer complaints about its prevalence are any indication.

Cost and revenue

The next two tables below have combined the separate cost and revenue tables produced by the BTS. Columns with results for intervening quarters have also been removed to provide a direct year-to-year comparison.

Network carriers

The first table looks at the six network carriers. In each case, both costs and revenues per ASM have increased and, in every case except American, unit revenue has outpaced unit cost. In 2010, the cumulative cost/revenue gap was USD 1.7 cents per ASM; dropping to just USD 1 cent a year later, direct evidence of a declining profit expectation for the current year.

Network airline system* unit costs/revenue (USD cents per ASM): 2Q2011

Network airlines

2Q 2010

2Q 2011

2Q2011 operating expenses (USD millions)

2Q 2010

2Q 2011

2Q2011 operating revenue (USD millions)

US Airways

15.7

17.8

3405

17.6

18.8

3584

United

14.9

16.7

5130

16.6

18.2

5571

Delta

14.4

16.4

8540

16.2

17.6

9174

American

14.3

15.9

6225

14.8

15.6

6109

Continental

13.9

15.2

3910

15.3

16.6

4284

Alaska

12.1

14.6

976

14.3

16.5

1108

6-Carrier total

14.5

16.2

28,186

15.9

17.2

29,830

Low-cost carriers

As a group, the LCCs show a less outstanding overall performance with three of its members (Frontier, AirTran and Virgin America) showing a shortfall in the quarter. Again there is a narrowing gap between unit cost and unit revenue. In 2010, the group produced a USD 1.8 cent differential that has, for 2Q2011, dropped to USD 1.3 cents.

Low-cost airline system* unit costs/revenue (USD cents per ASM): 2Q2011

Low-cost airlines

2Q 2010

2Q 2011

2Q2011 operating expenses (USD millions)

2Q 2010

2Q 2011

2Q2011 operating revenue (USD millions)

Frontier

11.0

16.5

491

11.0

15.3

454

Southwest

11.0

12.6

3401

12.0

13.3

3596

Allegiant

8.9

11.6

177

10.3

12.5

191

AirTran

10.1

12.4

819

11.2

12.2

811

JetBlue

9.7

11.3

1066

10.8

12.2

1153

Spirit

9.2

9.9

241

9.1

11.4

276

Virgin America

9.2

11.1

272

9.8

11.0

269

7-Carrier Total

10.5

12.3

6466

11.6

12.9

6749

Given those shrinking margins, and hope that fees and charges will disappear – or even be reduced – is wishful thinking.

A successful strategy that cannot work forever

For the past two years, US carriers have shown extraordinary capacity restraint and all appear to make even more downward adjustments if required. However, the idea that the carriers can continue to shrink themselves into profitability has limits. Wireless anyone? Only USD10 per segment.


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