‘Junk fees’ or flexible flying? Passenger charges fuel profits — and travellers’ ire

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This article was published 22/04/2024 (901 days ago), so information in it may no longer be current.

MONTREAL – Jay Sorensen flies both business class and economy.

While the differences between the two have always been stark — priority boarding and free alcohol are decades-old features of first-class travel — lately the gulf seems to have widened, said the U.S. consulting firm president.

Economy-class trips are defined by shrinking legroom, narrower cushion space, diminishing rewards for frequent fliers and, especially, the myriad fees that can pile up like thunderclouds as airlines increasingly offer top-up options on their tickets.

“Traditional airlines seem to want to punish passengers who buy these fares,” Sorensen said of bottom-rung tickets.

The additional money passengers pay for checked bags, pre-selected seats and onboard snacks makes up a growing share of airline revenue, even as a debate swirls around whether the charges amount to “junk fees” or the lower base price offers greater choice for travellers.

Air Canada took in nearly US$2 billion in so-called ancillary revenue in 2022, up by nearly 50 per cent from five years earlier, according to Sorensen’s IdeaWorksCompany. The category’s share of total revenue grew to more than 15 per cent from below 11 per cent in the same period.

WestJet this month introduced a new service tier, “Extended Comfort,” where economy-class passengers can pay for extra legroom, early access to overhead bins — coveted real estate due to checked baggage costs — and a free alcoholic drink.

Popularized by budget carriers more than 15 years ago and adopted by mainline players since, ancillary revenue plays an increasingly critical role in the industry, helping to diversify income and insulate companies from fluctuations in fare prices, fuel costs and competition.

“Ancillary revenues are stickier than passenger revenues, which can be subject to fare changes related to competitor fares on the same route,” said TD Cowen analyst Helane Becker, adding that airlines aim to “create moats around their business.”

COVID-19 also spawned habits that have been tough for some travellers to kick, including advance seat selection.

“Where you sat became important to many customers, because if you sat at the front of the airplane, you got off the airplane first. People paid a premium for that, and I think that that behaviour has stayed,” Sorensen said.

Ancillary income derives mainly from three streams: à la carte services such meals, onboard Wi-Fi and extra bags — or any bags; frequent flyer programs; and commission-based offerings such as hotel bookings, car rentals and travel insurance.

Globally, ancillary revenue was forecast to hit a new high of US$117.9 billion in 2023, up from the previous record of US$109 billion in 2019, according to an October report from travel technology platform CarTrawler.

Not everyone is on board.

Endless “nickel-and-diming” risks alienating passengers, who grumble online about a dizzying array of extra fees and service tiers, said John Gradek, who teaches at McGill University’s aviation management program.

On social media, WestJet’s new Extended Comfort option elicited everything from confusion — “are we getting an extra bill?” — to irritation — “just adds more … costs to already rising cost of air travel.”

But the fees aren’t going anywhere.

“They love these things,” Gradek said of airline executives.

“The revenues are very big dollars, and in some cases are the lifeline for survivability of ultra-low-cost carriers.”

Indeed, they make up about 40 per cent of Flair Airlines’ revenue — 50 per cent is the goal — according to its vice-president of ancillary revenue and digital experience.

“Everyone wants a bigger share of the wallet of travellers,” said Juliana Ramirez.

Part of the strategy is to lure consumers to the website with rock-bottom fares, and then offer numerous add-ons, she said.

A $67 fare for a one-way Toronto-Vancouver flight next month quickly balloons to $323 after selecting the $90 “Big Bundle” — one carry-on, one large checked bag, priority boarding, trip modification — plus a front-row seat, a bundle of travel insurance, a $15 online check-in ($25 if you wait until the airport) as well as taxes and third-party fees.

Ramirez acknowledged the frustrations of paying well over twice the price of your ticket simply to secure what would have been standard parts of the flight package a few decades back.

“We get it. No one likes to pay for a carry-on,” she said.

In its budget last week, the federal government pledged to “crack down on junk fees” charged by carriers. That prompted the National Airlines Council of Canada to demand greater clarity from Ottawa, arguing that fees give customers greater flexibility.

Air Canada said the advantage of unbundling is that customers know precisely what they are paying for.

“It is very transparent,” said spokesman Peter Fitzpatrick, highlighting the different tiers of service.

“Our branded fares are part of our ancillary strategy, as each branded fare is a combination of ancillaries (such as bag, seat selection and flexibility) sold as a package.

“Our experience is customers appreciate having the option to tailor their travel to suit their needs, including not paying for services they do not wish to have,” he said.

(He also said earnings derived from sources other than fares and cargo amount to well under 10 per cent of total revenues — lower than the consultancy report’s estimate.)

WestJet’s Madison Kruger put forward a similar explanation: “By offering our guests unbundled product offerings, it ensures that they are only selecting the travel options that matter most to them.”

Larger airlines see no choice other than to slice their purchase options into ever thinner levels of service in order to beat back the threat of discount carriers, said Ricky Zhang, founder of Vancouver-based travel rewards website Prince of Travel.

“Most leisure travellers pick based on price,” he said. “So Air Canada and WestJet have had to lower their base fares … and that results in the unbundling of the experience.”

Whether it unravels Canadians’ taste for travel is another question.

“If you’re positioning yourself as a better-service airline than (ultralow cost carriers), that branding statement is not aligned with your behaviour to basic economy passengers,” Sorensen said of carriers with spartan service for lower-tier customers.

“Why are you treating me radically different when I happen to be in my value mode?”

This report by The Canadian Press was first published April 22, 2024.

Companies in this story: (TSX:AC)