JetBlue, Frontier, Southwest, AirTran & WestJet see yield pressures - ancillary revenues crucial

North American LCCs, JetBlue, Frontier, Southwest, AirTran and WestJet, have all reported pressure on unit revenues in recent months and the near-term outlook is also challenging. For Southwest, the weak outlook for passenger revenues per ASM (PRASM) is of concern considering its push into key business markets lately.

Southwest stated, “April 2009 passenger revenues per ASM are estimated to be in line with last year, as expected. However, current revenue and booking trends continue to be adversely impacted by the weak economic environment and now also by concerns over the recent H1N1 Swine Flu outbreak. Therefore, the Company currently expects the year-over-year decline in second quarter 2009 passenger revenues per ASM to exceed first quarter 2009's decline of 2.8%".

Ancillary revenues to the rescue

JetBlue’s unit revenue performance (PRASM) at +5% in Apr-2009 was however one of the weakest figures for 12 months, and follows a 12% reduction in Mar-2009. The carrier has forecast a 0-3% reduction in 2Q2009 RASM, but forecasts full year RASM to increase between -2% to +1%.

But helping offset the weakness in yields, JetBlue (like most LCCs worldwide) is focusing on driving ancillary revenue improvements. The carrier stated, “our continued focus on ancillary revenues, which we currently expect to increase by about 20% year-over-year in 2009, should help drive RASM improvements”.

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JetBlue passenger revenue per ASM*: Apr-2008 to Apr-2009

AirTran, which this week reported all-time record load factor and revenue passenger miles (RPMs) for the month of April, is also looking to ancillary revenues to offset the challenging yield environment.

The CEO of the Atlanta-based carrier, Robert Fornaro, told the Associated Press this week, “we do need other sources of revenue to be successful. If I had a choice, I would like to have one price, but all the analysis we have done says that we can collect more revenue by disaggregating the product and let the customer decide on which features they want. I haven't seen one price point that will cover everything. The price point that the customer would want to pay would be too low for all of us to make a return”.

Frontier, which is currently restructuring under bankruptcy protection, reported a group PRASM reduction in Apr-2009 of 7.9%, after March’s precipitous 16% fall. The carrier’s mainline PRASM decreased 3.3% to USD 7.55 cents, while passenger yield was USD 9.43 cents, down 0.16 cents or 1.7% from April 2008. The shrinking airline carried 771,138 passengers last month, down 12.3% year-on-year, while RPMs decreased 17.5% and capacity (ASMs) fell 16.1%, resulting in a mainline load factor of 80.1%, a decrease of 1.4 ppts over April 2008.

Reflecting on the carrier’s first quarter earnings report, CEO, Sean Menke, stated Frontier offset a loss in passenger revenue (down 6.1% year-on-year) with a USD100 million increase in ancillary revenues. Mr Menke told the Denver Business Journal, that Frontier averaged USD2.50 per passenger in ancillary revenue this time two years ago, but now is achieving approximately USD9 per passenger. He added the revenue increase was evenly split between passengers using the new 'AirFairs' product (with extra fees for eg checked bags), and passengers paying excess baggage fees.

Frontier Airlines passenger revenue per ASM (USD cents): Apr-2008 to Apr-2009

North of the border, WestJet CEO, Sean Durfy, stated this week, “with the weakened economy, second quarter RASM is tracking to year-over-year declines that are, at best, similar to what we experienced in the first quarter of 2009”. He added, the recent swine flu outbreak appears to be delaying some consumers' travel bookings, “however, it is too early to determine how it will impact RASM”.

But with its strong ancillary programme in place, Mr Durfy concluded, “despite these conditions, we are confident in our business model and our organisation's ability to continue on our profitable path”.

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