The MacNair Travel Leadership Blog

Ancillary Fees and Beyond: Cut Costs with a TMC

Posted by Mike MacNair on Nov 22, 2016 12:00:00 PM

Ancillary Fees and Beyond: Cut Costs with a TMCAncillary fees can have a significant impact on your travel budget. As airlines continue to charge for services that were once provided at no cost, the task of tracking various ancillary fees for air travel becomes a complex challenge for Chief Finance Officers (CFOs).

However, these costs can be controlled when CFOs thoroughly track and assess all data related to ancillary fees previously incurred by your travelers. This information will contribute to a travel policy that makes sense for your business, while providing clear guidelines and flexibility to your travelers.

How Ancillary Fees Came About

In an effort to stay competitive, American Airlines announced it would impose a “first checked-bag” fee in May 2008 of $15 each way. Today, travelers pay almost $25 each way in checked bag fees – around the same amount that most legacy carriers now charge.

Carriers rationalized that ancillary fees were needed due to the high price of jet fuel. At the time, the price of fuel was nearly $150 per barrel. As of late September 2016, fuel prices dropped to $50 per barrel, but the price of checked bags stayed the same. Ancillary fees have become big business for the airlines and that is not about to change anytime soon.

With surcharges for checked baggage, preferred seating, on-board Wi-Fi, in-flight meals, drinks, snacks, hotel and rental car tie-ins, early check-in, lounge access, redemption of frequent flier points and flying on peak travel days, it is no wonder that ancillary fees now represent a huge portion of the airline industry’s income.

The revenue generated by ancillary fees is truly staggering. In a recent study by IdeaWorks, it was reported that in 2015 airlines collected $38 billion in ancillary fees – an increase of $6.6 billion from the previous year. The business model is so popular, that several airlines even started charging for pillows and blankets.

It is important to realize that extra charges for the same service varies from airline to airline, making it difficult for travelers to easily grasp the true cost of a ticket. For example, US discount carriers like Spirit and Allegiant extract a third or more of the value of the ticket from their customers through ancillary fees.

A Breakdown of Ancillary Fees

In another study by IdeaWorks, the US airline ancillary revenue model is broken down in the following pie chart:

A Breakdown of Ancillary FeesSource: IdeaWorks Press Release

The main contributor of revenue comes from the sale of frequent flyer miles. This is when the bank pays the airline to redeem frequent flyer miles accrued through a credit card. This makes up 55 percent of profits from ancillary revenue and earned airlines $27.45 billion in 2013.

Baggage fees accounted for 20 percent of ancillary revenue, and another 20 percent came from on-board retail and services. Travel insurance and retail made up 5 percent.

Assessing Ancillary Fees

Here are some common and costly add-ons that quickly increase the total purchase price of an airline ticket:

Change fees. Penalties for changing a nonrefundable ticket can be as much as $200 for domestic flights and up to $400 for international, as well as any increase in ticket price from the time you originally booked to the new travel date. Make the change within the 24-hour window to avoid a penalty fee. Learn how to avoid change fees here.

Baggage fees. If possible use a carry-on, which is free on most major airlines. Southwest gives you two checked bags for free. Some carriers permit a free personal item, like a small backpack or duffel bag, as long as it fits under the seat. Did you know that some airlines charge less for checked bags than carry-ons? And even worse, United’s new basic economy fares ban carry-on baggage altogether. So be sure to examine the carrier’s baggage fee policy before booking. Here is a full list of baggage fees broken down by airline.

Fare bundling. As if knowing the true cost of an airline ticket before purchasing was not ambiguous enough, many carriers now offer fare bundling. Bundling is the airline industry’s practice of offering different levels of economy fares that provide different combinations of features at different prices. With catchy names like Comfort Plus or Choice Essential, the price of the bundle and what it includes varies wildly among carriers. The Huffington Post does a nice job of explaining fare bundling options broken down by most major airlines. If you truly understand that what you are paying for meets your needs, some bundled fares can be extremely cost effective.

A Look into the Future

In 2014, DOT proposed docket DOT-OST-2014-0056, which would require airlines to disclose any additional fees for first and second checked bag, a carry-on item and advance seat assignment at the time a fare is displayed. The thrust of the proposal is to force airlines and ticket agents to reveal any ancillary fees for services associated with airline tickets at all points of sale. The DOT believes fees for additional services are often difficult to determine when searching for airfares. As a result, many travelers cannot understand the true cost of travel before purchasing a ticket.

Columnist for the Washington Post, Christopher Elliot, sums it up best in his article, “New DOT rules: A boon to passengers or a bust for the airline industry.” He says:

“Airlines have made billions by systematically redefining what’s included in the cost of an airline ticket. Quietly stripping the ability to check a bag, reserve a seat and even carry a bag on board from the base fare allows air carriers to claim that their tickets have never been more affordable while they still earn a tidy profit. Last year, for example, domestic airlines collected $3.3 billion in baggage fees.

Forcing airlines and ticket agents to disclose these fees for a particular passenger on a specific flight at the time a fare is displayed would effectively end what many consumer advocates claim is an airline business model based on deception. Air travelers would know exactly how much they’d pay for each service at the time they pull up a fare quote. An airline ticket would effectively become an airline ticket again, in the traditional and historic sense of the word.”

How a TMC Can Help

Ancillary fees have transformed airline pricing and it is practically impossible to avoid paying for one add-on or another both during and after booking. When rogue travelers book their own flights without considering hidden ancillary charges, the impact on the cost for the total trip suffers as does the company’s bottom line.

With the help of a TMC, CFOs can control the cost of rising ancillary fees associated with travel. Take the necessary time to assess ancillary fees, track and develop an approval system and then incorporate this process into your travel policy. Communicate the policy and make sure it is enforced. When this process is followed, expect a drop in expenses and an increase in overall budget control and predictability.

Take charge of extra fees and keep your organization’s bottom line in check. Our eBook, 5 Key Strategies for CFOs to take control of T&E Management, will further help you balance the financial priorities of your organization.

Learn 5 strategies for CFOs to take control of travel management

Topics: Travel Management, Ancillary Fees, CFO, TMc, Travel Management Company