From the sound of it, U.S.-based airlines would be in far deeper trouble if they hadn’t started charging for first and second bags, food, drinks, blankets and pillows last year. That was one of the messages from airline executives during a Bank of America-Merrill Lynch web conference Thursday.

It follows Ryanair CEO Michael O’Leary’s recent announcement that he plans to charge for toilet visits on his aircraft within two years. O’Leary, who leads Europe’s largest low-cost carrier, said the airline also plans to generate extra revenue by removing two of the three lavatories on its Boeing 737-800s aircraft and installing up to six seats in the space. He says he’ll ask Boeing to look at putting credit card readers on the lavatory locks on new aircraft.

No airline executive in the U.S. or Canada has dared to float such an idea – at least not yet. But based on remarks at Thursday’s analyst conference, that day might come.

Most of the conference speakers painted a bleak picture of higher costs spurred by rising fuel prices, reduced demand, increased security costs, fewer business travelers, and continuing economic turmoil. The one bright spot was the revenue generated by those previously unthinkable “ancillary” charges.
US Airways President Scott Kirby said airline passengers should expect to see a growing list of new charges for items and services like preferred seating or checking a second bag. He described what he called “a la carte” pricing as a fundamental change in the way airlines do business and in the industry business model. Kirby said the new fees “will be here forever,” and will help the airline’s financial position by producing significant additional income to offset higher fuel costs and weak passenger demand.

He was echoed by US Airways CEO Doug Parker, who told company stockholders that some customers were upset by the bag charges, but he said the new fees have reduced the amount of luggage flowing through the system by 20 percent, streamlining the process and helping the airline improve its on-time performance. US Airways expects those fees to add as much as $500 million to its bottom line this year.

JetBlue CEO Dave Barger said although his airline’s ancillary revenue was up 20 percent this year over last, “We don’t want to be known as an airline that nickel-and-dimes its passengers.” That said, Barger told the analysts the airline’s offering of 38 inches of legroom – four more inches than normal – for some seats on its Airbus A320s and Embraer E190s was worth $62 million to Jet Blue.

Zane Rowe, executive vice president and chief financial officer at Continental Airlines, said his airline is focused on growing its ancillary revenue. He said fees charged for checking first and second bags will bring $200 million for Continental in 2009.

AirTran CFO and Senior Vice President of Finance Arne Haak said his airline is seeing “strong ancillary revenues” from unbundled products that will help offset reduced passenger demand.

Delta President Ed Bastian said revenues from “unbundling” of services and fees for its new American Express credit card will add $2 billion to the carrier’s books.

Gerard Arpey, president and CEO of AMR Corp., American Airlines’ parent company, agreed. He said the “unbundling of product” is the key to high revenue. Two years ago, American began selling one-day passes for $50 to its Admirals Clubs, where a one-year fee for new members ranges from $350 to $500. Arpey didn’t quantify the amount but said the one-day passes have generated “a lot of cash.”

Greg Taylor, senior vice president at United Airlines, a unit of Chicago-based UAL Corp., said the carrier will collect more than $1.1 billion this year from fees for items such as checked bags, better seats, and changed tickets, $200 million more than last year, when it carried more passengers. United executives at a Credit Suisse conference late last year broke it down this way: $250 million in new baggage fees, $600 million in ticketing charges, $250 million from “upselling” seats for premium seating in coach or upgrading to first or business class, and $100 million from selling extra frequent-flier miles and offering door-to-door baggage delivery service.

That’s not to say the airline industry hasn’t been hard hit by the global recession and the swine flu. Passenger revenues, especially from business travelers, have fallen almost 20 percent in the first four months of 2009, compared to the same time last year. That’s a trend the executives said they expect to continue for the foreseeable future. Fuel prices also are on the rise, up more than 20 percent this year. With no end in sight, carriers will continue to slash prices and cut capacity to force up load factors and yields to make the best of a bad economic situation.

The H1N1 flu virus that turned Mexico into a place vacationers avoided this spring also took its toll on airline financials. Delta’s Bastian said the flu probably cost his airline $125 million to $150 million in the second quarter of 2009. He said the airline is cutting the number of flights to Mexico City owing to changes in customer plans because of the flu.

Larry Kellner, Continental chairman and CEO, said the flu has had a significant impact on his carrier’s U.S.-Mexico air travel, and on flights to Asia, where memories of avian flu and SARS (severe acute respiratory syndrome) are still fresh. He estimated “the H1N1 flu reduced Continental’s consolidated passenger revenue by $30 million in May 2009.”

American’s Arpey said the swine flu outbreak cut deeply into his airline’s business in Mexico and hurt international travel around the world.