Teddies to trinkets, airlines eye sales in the sky

Thu Jun 21, 2012 1:45pm BST

A Southwest Airlines 737-700 takes off from Bob Hope Airport in Burbank, California April 4, 2011. REUTERS/Mario Anzuoni

A Southwest Airlines 737-700 takes off from Bob Hope Airport in Burbank, California April 4, 2011.

Credit: Reuters/Mario Anzuoni

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(Reuters) - Major airlines struggling to maintain profits in the face of stiff competition and rising fuel bills are increasingly looking at sales of non-ticket extras as a way to boost earnings without harming their reputations or alienating customers.

Low-cost pioneers such as U.S. carrier Southwest Airlines and Irish group Ryanair, have been cashing in on such alternative or ancillary revenues since their advent, pushing sales of everything from teddy bears to train tickets, bacon sandwiches to baggage charges.

Now traditional airlines are taking a cue from their no-frills rivals and looking to charge for services that do not need hefty infrastructure investment or that are contracted out.

Telecommunications, for example, is seen as a prime source of additional revenue as technology advances, with aviation consultancy Ascend expecting more traditional carriers to start charging passengers for wireless and internet-related services.

"My prediction would be that three to four years from now practically every commercial airline, with the exception maybe of some very old aircraft, will have (wireless) connectivity installed in their aircraft," said Stephan Egli, chief commercial officer of Geneva-based OnAir.

"The passengers like it, use it and want it."

Carriers such as IAG's British Airways, already charge extra for services such as hotels, car rental and day trip bookings, currency exchange and travel insurance as well as for font row seats and seats with more leg room by the emergency exit.

As competition and cost pressures increase, these and other legacy airlines are on the lookout for even more ways to boost earnings - aside from adding fuel surcharges to ticket prices - but they do not always find it as easy to start charging for services as their no-frills rivals.

"Because of the brand positioning, there's a definite advantage for newer carriers who can say 'we've always done it like this' whereas older ones have a problem in terms of brand image - there's a Ryanair lottery - you wouldn't find Singapore Airlines having a scratchcard lottery on board," said Ascend's chief economist Peter Morris.

"But as communications and connectivity improve there are elements that will be chargeable."

In Europe, Air France-KLM and Lufthansa are among airlines that recently reported results battered by higher fuel costs, and the industry is braced for a worsening euro zone debt crisis to wipe out the benefit of now lower oil prices.

Ryanair - Europe's biggest budget airline and one of the pioneers of ancillary revenues - now generates around a fifth of its total revenues from optional extras such as food, drink, duty-free products and in-flight lottery scratchcards, while internet-related revenues also help.

Ancillary revenue outpaced traffic growth, rising 11 percent to 886 million euros ($1.1 billion)in the year to the end of March.

"The low-cost (airline) philosophy is unbundling, where they strip the product down to its raw state and if you want something beyond that you have to pay," said Davy's Furlong.

British budget airlines easyJet saw ancillary revenues rise 13 percent in its last full year, helped by ‘speedy boarding', the extra charge that passengers can pay to get ahead of the rush for unreserved seats.

EasyJet's ancillary revenues have remained steady at around a quarter of the carrier's total revenues over the last three years.

A recent Amadeus and IdeaWorks report estimates traditional airlines generate between 5 and 10 percent of their total sales from ancillary revenues. The report said this would "grow significantly" as legacy carriers become more innovative in their introduction of new revenue sources.

While the extra fees boost airlines' profit margins and stimulate demand by making fares seem cheaper, the initiatives do not always go down well with travelers.

EasyJet's recent push to increase credit card charges for flight bookings has been unpopular, as was U.S. airline JetBlue's move to charge for pillows.

Stefan, 32, flying from London Heathrow to Boston with American Airlines on Saturday, said he had been hit with unexpected charges on budget airlines before and preferred the pricing clarity of legacy carriers.

"It was unexpected and annoying. On low-cost airlines it makes a difference that you don't know the hidden costs. They advertise the flights at 10 euros but in the end it costs 100 euros. It makes me want to use Lufthansa or something classic," he said.

($1 = 0.7873 euros)

(Additional reporting by Kate Holton and Neil Maidment; Editing by Hans-Juergen Peters)