The Age of Ancillary Revenue

We recently attended TravelCom and one phrase stood out amongst all others “ancillary revenue”.   This term covers the various ways in which airlines supplement their traditional revenue streams.  Some examples include charging $15-$100 to check in bags, selling sandwiches instead of giving away free snacks, and fuel surcharges.  Basically, it is code for nickel-and-diming passengers with hidden fees.

This hunt for ancillary revenue isn’t unique to airlines.  In fact, travel agencies are on their own mission to find alternative revenue streams.  Expedia, which is the largest online travel agency, just made this revealing announcement to Wall Street:

In 2008, over 60% of our revenue came from transactions involving the booking of hotel reservations, with less than 15% of our worldwide revenue derived from the sale of airline tickets. …… We have been working toward and will continue to work toward increasing the mix of advertising and media revenue from both the expansion of our TripAdvisor Media Network, as well as increasing advertising revenue from our worldwide websites such as Expedia.com and hotels.com, which have historically been focused on transaction revenue. During the first quarter of 2009, advertising and media revenue accounted for approximately 11% of worldwide revenue.

In other words, Expedia now makes almost as much revenue from selling advertising as it does from flight booking commissions.  Incredible!   What’s even more surprising is that Expedia’s TripAdvisor has launched a flight meta-search engine in which it displays the cheapest flights and actually directs you to Expedia’s competitors to book.

What is going on here?         

It started last year when the airlines responded to the oil price hikes by adding fuel surcharges and baggage fees.   It worked.   AirTran announced that it made a $28.7M profit in the first three months of 2009 with $56M in revenues coming from “other” (aka ancillary revenue).  So, even though oil is back down from $140 to $53 a barrel, there’s no sign that the airlines will walk away from this goldmine …especially with the global economic slowdown.

The online travel agencies’ move to advertising revenue has been spurred by other factors.  First, they are losing market share to the airlines’, hotels’ and car rental chains’ own websites.  Also, some of the larger online travel agencies smell blood in the water and are reducing or eliminating flight booking fees to drive out smaller rivals which are completely dependent on that revenue.  And so we get the case outlined above- Expedia is now making almost as much money driving affiliate traffic to the airlines’ sites as it is by selling the flight ticket directly to the traveler.

Is it just me, or is this getting out of control?  I can’t tell you how many times I‘ve heard fellow passengers say, “Why don’t they just raise the ticket price instead of surprising me with these ridiculous fees?”  Wouldn’t the airlines and online travel agencies be better served if they competed on value instead of price?  I’d gladly pay twice as much for the fantastic Virgin America experience, especially if they would throw in snack or two.  And as for the online travel agencies, there’s nothing wrong with a booking fee as long as it is supported by service—i.e. suggesting better flights, hotels, and vacation packages than we would find otherwise.  Come on travel industry players!  Focus on your core value proposition, make it world-class, and then charge a high enough price to earn a profit.  Seems to work for Southwest Airlines.

Check out how much you’ll have to cough up for baggage check-in on your next flight: flyingfees.com.

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