Easy money and airlines is definitely an oxymoron. Airlines around the world are bending over backwards to find new revenue streams to build their coffers with the ancillary fees that are now estimated to have brought $10 billion worldwide last year. This comes at a time observers are suggesting that airlines are running out of the ability to charge new fees, although I don’t believe that for a minute.

It is likely only a matter of time before they discover and embrace tray-table advertising, especially since many airlines have already rolled out advertising on boarding passes. So it was with interest I met the Mile High Marketing team, a new vendor to the Regional Airline Association spring meeting, which has created a program to bring to fruition Frances Luczak’s tray-table idea when she founded the Chicago-based company two years ago.

In a marketing push that I couldn’t help but admire, Luczak and her colleagues fanned out across the show floor, button-holing anyone and everyone during RAA to say over $20 million could be made with tray-table advertising at no cost to the airline unless they count the time of their maintenance technicians who would install the ads. When I first met them I heard the name and assumed they were based out of Denver but it soon became clear that Denver was not the mile high they were talking about. It was capturing an audience at, in fact, 30,000 feet.

Their ambitious efforts paid off and Luczak’s team of six has now advanced to the negotiation stage with at least two airlines – one a major carrier and one a regional operator. Luczak hopes to wrap up a deal by year’s end. The regional airline, natch, has to get permission from its major partner which could get interesting if the major partner sees how much money can be made. It is also talking to international carriers.

“Next year is going to be tough on United and American, for example, because of high debt payments are due and the tight credit market,” Luczak told Aviation Today’s Daily Brief. “Everyone can benefit by this; the airline, and the passengers. The idea is for advertisers to give something back to passengers. A cruise line is offering $25 on-board credit the next time the passenger books a cruise and a rental car agency offers a free upgrade, while hotels offer an extra night’s stay. That way the airlines get part of the take and the passenger gets to take away something from seeing the ad which is a very popular feature of this program for advertisers and readers alike. They like that touchy advertising.”

Luczak estimated that a major carrier with 30% of the fleet using tray-table ads, would earn over $23 million while a regional – depending on the size of the aircraft – $6 million to $8 million.

While it also does conventional marketing, the main focus for Mile High Marketing is tray-table advertising, she said. Mile High Marketing offers a complete turnkey operation minimizing the downtime and costs of the actual application of the ads, which include major department stores, major booksellers, and a publishing company.

“We have also been approached by a Hollywood production company wanting to advertize new movie releases, as well as a credit card company and a car manufacturer,” Luczak told Aviation Today’s Daily Brief.

“What the airline has to do allow us to use their meal trays for advertising,” she explained. “In return, it is paid a quarterly a percentage of the gross. We implement it during the monthly maintenance check. Our objective is to work with the maintenance coordinator to get to aircraft during already-scheduled down time to affix the ads as well as for when ads are removed or replaced. It is up to the airline as to whether its maintenance technicians do it or they pay Mile High Marketing to do the installation.

“If you consider there is no or, at the most, minimal, costs to the airline,” he continued, “and there is no hiring or recruiting of advertisers, it is a win-win deal for them. We do all the art work and printing and delivery the materials where and when they tell us.”

Of course, Mile High Marketing is not alone in such advertising efforts. Former Air Line Pilots Association President Duane Woerth is instrumental in a start-up Sojern, founded by former Intel Exec Gorden Whitten, which recently signed deals with Continental, US Airways, United and Delta/Northwest for putting advertising on the boarding passes printed at home, according to USA Today. US Airways has already dabbled in tray-table advertising.

Sojern expects to tailor the ads to individual customers who include such preferences such as interests, sports, hobbies and cuisine into their profile on airline web sites. The size of the market? Today 40% of the 700 million check ins are done online. “That’s 280 million blank billboards,” Whitten told USA Today, which reported that ad agencies are already eyeing overhead storage bins and even barf bags. At the airport ads are being sold at luggage carousels and TSA recently approved selling on the ubiquitous gray bins we use to pass through security. Interestingly, Sojern would not discuss the potential revenue of its programs. It is also not unusual for jetways to carry ads such as Continental's at Newark which carry HSBC ads both inside and out.

Now, I know Mile High Marketing’s estimate of $20+ million is chicken feed in the $10-billion world of ancillary fees but in this environment, every little bit helps. The International Air Transport Association is expecting a $9 billion worldwide loss for the industry this year and in the second quarter alone, the top nine U.S. carriers lost nearly $600 million. That will be compounded by even bigger losses in the third and fourth quarters. Meanwhile, airlines have cut costs, sold new stock and borrowed money in their constant chase for liquidity. With little left to sell or cut, fees have become a life line.

It is little wonder that baggage fees are so seductive. Last year, American’s brought in $108.1 million while total overall revenue from ancillary fees rose 60% over 2002. Delta’s baggage fees $102.8 million, while US Airways earned $94.2 million. United and Northwest looked like pikers by comparison with $59.1 million and $59.7 million. AirTran, JetBlue and Frontier brought in $30.8 million, $12.6 million and $12.4 million with Southwest bringing up the rear of the list at only $5.9 million.

Ticket change fees this year have turned out to be extremely lucrative at $2 billion a year, with United and US Airways leading the industry at $78 million and $66 million, respectively, according to the Department of Transportation.

What some call a back-door way to raising fares, change and cancellation fees added 3.2% to passenger revenues and totaled $527.6 million in the first quarter, largely paid by business travelers. Consumer advocates, who think the practice should be regulated, want airlines to follow already-accepted practices at hotels and theaters. Hotels at least give travelers a chance to cancel, with not penalty as long as done far enough in advance and tickets can always be transferred to a friend or sold.

For their part, the airlines are achieving two goals. They do not want companies buying up huge blocks of tickets and doling them out to employees or selling them to create a secondary ticket market. Instead, they want to encourage travelers to buy unrestricted tickets at full fares to manage no-shows and reduce overbooking problems.

Ca-Ching, Ca-Ching
The fees came just in the nick of time as airlines on life support were lifted by what IdeaWorks calls an “intravenous injection” from ancillary revenues. In publishing its latest Guide to Ancillary Revenue and a la Carte Pricing, the company said such revenues rose nearly 346% (€6 billion) over the worldwide results listed in its previous edition and several billions of dollars over the $2.29 billion (€1.72 billion) earned in 2006. It said last week the worldwide industry receipts totaled a whopping $10.25 billion (€7.68 billion) in 2008 and this year’s numbers will inevitably be higher given all the new fees the airlines have imposed this year, not to mention their new WiFi offering.

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Interestingly, what had been the almost exclusive purview of European low-cost carriers, has now gone mainstream with legacy carriers taking of the two of the top five spots in IdeaWork’s tally. Allegiant Air, that crafty, Las Vegas-based, unconventional carrier which does not even have an 800 number to save costs, bested former ancillary fee leader Ryanair with 22.7% of revenues coming from ancillary sales. Its achievement was made more impressive by the fact that it was the only U.S. carrier in the top five with $85.9 million in the first half of this year compared to $56.3 million in the year-ago period.

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“Legacy airlines now fill the top three positions, which once included low-cost carriers Ryanair and easyJet,” it said. “And the ancillary revenue produced by individual carriers, such as United and Ryanair, has increased dramatically. The top-five club now requires far more revenue to join – in excess of €450 million. That’s more than any single carrier produced to join the prior top 5 list.”
Two of the top five – Qantas and Emirates – are regarded as among the finest premium carriers.

“At the beginning of this decade, ‘ancillary revenue’ was not a buzz word or strategy that businesses were building departments around with multi-million-dollar revenue targets, but that has changed,” said Tina Fitch, co-founder, president and CEO of ezRez Software, who sponsored the IdeaWorks study. “In today's tightened market, we're seeing airlines and other travel companies broadening the relevance of their brands to a larger set of consumers by adding more travel offerings as means to diversify revenue and increase customer loyalty.”

When Aviation Today’s Daily Brief tried to estimate the revenues that can be expected this year just from U.S. carriers, it was almost impossible. Instead of solid figures of the amount of money taken it, the airlines would only point to their press releases in announcing the fees which amounted to $100 million here, $300 million there. Clearly the fees have brought in far more than anticipated despite low passenger numbers.

Pax Acceptance of Fees
When they were first imposed in the U.S., everyone howled from the passengers to the media. They charged the airlines with nickel and diming them to death. The airlines, meanwhile, in the ultimate rationalization, said they were unbundling services so passengers only had to pay for what they valued. This extended to US Airways announcement that it would charge passengers a fee to check bags in at the airport, when Chair Doug Parker said with all innocence dripping from his voice, that this would streamline the passenger experience at the airport. That’s not what European low-cost carriers were thinking when they did the same thing. They were thinking this would minimize the need for so many airport employees.

Turns out, Doug Parker was right. Passengers do get the link between fees and costs, according to a survey published earlier this year. More than half (53%) of U.S. travelers polled actually prefer to buy the cheapest ticket and then add on the fees they want compared to 18% who prefer buying the basic fare with fees included. The survey quantified for the first time how travelers felt about these fees and, while they don’t like the fees, a majority understand why they are imposed. Not only that, they see value in it.

The survey, done for Amadeus revealed 28% will pay extra for better service, but 40% said they would not. About 50% say checking the first bag should be included in the air fare, while 17% think pillows and blankets should be thrown in. Fifteen percent want the seat selection thrown in and 14% want food and beverages included.

Regardless, my take on the fees was simpler. In the absence of any ability to raise fares to cover the cost of transporting low-fare passengers, airlines are finally giving passengers what they are paying for and they are probably not covering costs with fares alone, even so. The high fare passenger is largely exempt from such fees, and that is as it should be.

According to IdeaWorks, after a la carte pricing became the norm last year, fees covered everything from checking bags, on-board food service, and premium seating. More recently, Southwest, which touts its no-fee zone, began charging for priority seating – getting to board first – and we finally got that the no-fee zone actually meant no hidden fees.

The company’s findings reveal:
• United Airlines generates an average of €4.36 ($5.81) from checked baggage charges per US domestic passenger.
• Southwest Airlines sells about four Business Select tickets per flight on average and the program contributed approximately $75 million (€56.3 million) in revenue in 2008.
• The Qantas Frequent Flyer program contributes whopping revenue of €11.87 ($15.82) per passenger – a record among the world's airlines.
• AirAsia X, the Malaysia-based low cost airline, realizes €2.06 million ($2.75 million) from the sale of pre-order meals to passengers on its long-haul flights such as London–Kuala Lumpur.

Not just a numbers game, the guide also includes articles such as:
• How airlines can maximize ancillary revenue based upon leading carriers in Europe, North America, and Africa:
• Successful Airlines Will Focus on These Five Strategies
• Building a Better Revenue Aware Airline
• How to be Better than Ryanair
• United and SAS Use a la Carte Pricing -- You Can Too
• Lessons Learned from Lodging
• Tales from the Ancillary Revenue Front – Executive Interviews

A Government Cut?
The amount of money has, of course, attracted the attention of Congress, which would like to take a piece of the pie. House Transportation Committee Chair James Oberstar and Aviation Subcommittee Chair Jerry Costello have asked the General Accountability Office to look into all fees – from baggage and meals to fuel surcharges, seat selection premiums and cancellation penalties – to determine whether they are diluting the Aviation Trust Fund. The two legislators say they are also concerned the fees are excessive and want GAO to track what airlines charge versus what it costs them to provide the service.

One thing is for sure – fees are here to stay. But some see unbundling as only the latest trend. They see a “rebundling” trend with the move of premium meals, airport lounge day passes and the ability to purchase frequent flier miles into the coach cabin.