Unbundled fees. Are they an advantage for Railways?
I read two interesting reports which came out in July, both dealing with different aspects of airline ancillary revenue.
The preliminary results of the Amadeus Guide to Ancillary Revenue showed that airlines are increasingly making money from doing things other than flying people – which is good news for the aviation industry and, by and large, for the travelling public too. These revenues, at €11bn in 2009, were 43% higher than in 2008: they were for things like baggage fees, on-board sales of food, hotel and car bookings, insurance, and partner revenue from frequent flier programmes. Amadeus has systems which can help airlines to offer and collect these, and can also manage cross-selling of non-air products to people booking flights. US carrier Allegiant waas the star performer. It made nearly €25 in ancillary revenue from each passenger: this accounted for 29% of its total revenue. Aer Lingus made nearly €17/passenger (14% of its revenue). I said that this could be good for the passenger. So it can.
Flying with Air New Zealand from London to Hong Kong recently, I was struck by the volume of checked bags some of the other passengers had. The check-in area was a mess as people re-packed their bags and donned extra clothing to ensure that their hold baggage was within permitted weight limits. Shouldn’t they pay for the extra fuel and loading time their baggage needs? If you take a domestic flight in the US, you are not served free food – you have to pay for what you want. This reduces the fare in more ways than one. No doubt less food is carried than in the days when everyone was served a meal – better for fuel economy. But if you pay more for a ticket which includes food, you also pay more tax on your ticket – because it’s a percentage of the ticket price. You don’t pay the tax on the food you buy on board – or on the checked bag fees which you don’t have to pay if you don’t check bags. That, surely, is beneficial.
My second piece of reading was a report from the US Government Accountability Office (GAO) – snappily titled, as their reports tend to be, “Commercial aviation. Consumers could benefit from better information about airline-imposed fees and refundability of government-imposed taxes and fees.” It dealt with US airlines, and mainly US domestic travel. It commented that fees associated with travel (checked bags, early boarding, seat selection, phone booking fees, sleep sets and meals) amounted to at least $3bn in 2009. Some of these charges have existed for a long time: some, especially checked bag fees, are new. These unbundled fees are not related to “transportation of a person”, and are therefore not subject to the 7.5% excise tax which goes into the Airway and Airport Trust Fund. This pays for a range of aviation-related services – things like air traffic control, airport improvements and aviation safety measures. The amount lost - not going into this fund because of unbundling - is small in relation to its $11bn annual revenue, although it’s growing: revenue from checked bag fees in the first quarter of 2010 was 33% higher than in Q1, 2009. Consumers are not always well-informed about ancillary fees when booking travel: this makes it difficult to compare total journey costs by different carriers (especially since some fees are waived for elite frequent flyer programme members). Some airlines offer a choice of bundled or unbundled fares: passengers can pay the lot or just for those add-ons they want (and most do the latter). Some sell service packages (for example two free checked bags) for an annual subscription. The average number of checked bags carried by each passenger has declined since introduction of the checked bag fee: the volume of carry-on baggage has increased. This has benefits and disbenefits! It’s difficult to establish a direct connection with mishandled bag statistics. Fewer bags were lost in 2008 and 2009 than in the boom years of 2006 and 2007, but figures were also low in the bad years of 2002 and 2003, so probably mishandling increases with volume. Some of the fees and taxes associated with travel are refundable, but this is a very unclear area – and, crucially, passengers are not informed of their rights to refunds. The $2.50/enplanement security fee is clearly refundable: Customs and Immigration fees are also. Most other taxes are clearly not: the unclear one is the health inspection tax. Taxes paid on unrefunded unused tickets remain in the Airport and Airway Trust Fund.
It seems that unbundling is here to stay, and the way it is sold and communicated will continue to develop. Like most other things, it has good and bad points and is subject to the Law of Unintended Consequences: no doubt we will hear some interesting stories about it as time goes on. And transparency is necessary, so that we can all make informed choices.
I hope you enjoyed reading this: I look forward to your feedback.
Andrew
