ANALYSIS: May 14 2009

More than 200 people gathered in Miami this week, including executives from 50 carriers, to discuss one burning topic. In London there were nearly 100 delegates at a forum where the same subject was on the agenda.

It has also been discussed keenly and sometimes angrily at conferences earlier this year in New York and Amsterdam. 

Unbundling, optional services, ancillary charges, a la carte pricing - call it what you will - has risen rapidly as a new revenue steam for suppliers in the travel industry. At the Amsterdam conference it was described as the No 1 topic in aviation.

The idea that airlines, not to mention hotels and even airports, can raise extra money by charging for individual items has been gaining pace over the last two or three years. It is mainly airlines that are introducing these extra charges although hotels seem to be doing their best to catch them up.

Roger Williams

For carriers, these items include seat reservations, baggage check in, food and drink, use of mobiles on board, pillows, in fact almost anything for which an airline thinks it can charge.

At least one airline, Ryanair aims to get most of its revenue from these optional services (OC - it was originally called optional charges) rather than from fares. But most in these current tough times are merely grateful that it is another source of income.

But while OC has been mostly pursued by low cost carriers, with some already drawing 20% of their revenue from unbundling OC, the legacy ones have not been lagging behind.  At the London conference this week, Michelle Lawley, BCD Travel's managing director for the UK and Ireland, said US Airways' income from ancillary services this year was estimated at up to $500m while united Airline's expected to pull in $1.2bn. By 2013,  they expect to gather 10% of their revenue from them.

Roger Williams, managing partner of Airline Information which staged the Airline Sales Channel Forum in Miami, said unbundling was "huge" in the States. But he said the industry needed to proceed with a cautious step by step approach to keep the public onside.

He cited the Ryanair example of how it had made clear it planned to charge for everything but that at the same time it would keep its fares low.  Whether airlines will succeed in this, or even try, is unclear. Mr Williams said that so far - and he was talking of the US - fares were not coming down and carriers still had the same fare structure in place as before unbundling was introduced.

At the National Business Travel Association's Business Travel Financial Forum in New York in March, Jim Compton, executive vp of marketing for Continental Airlines, described ancillary charges as a "work in progress" - a phrase which gave the impression the charges had been levied before being  fully thought through.

Mr Williams made the same point. "Airlines were under a lot of revenue pressure and brought in a lot of new charges which they had not thought through. There could be a push back by the customer."

If all travellers have very valid objections to unbundling charges where prices rise but fares do not fall, then business travellers or rather travel managers also have an additional grievance.

These fees for drinks and pillows and whatever else do not appear on the GDS screens so not only do travel managers not know exactly how much an air fare is going to cost them, they also have difficulty in tracking down and capturing that extra spend. As Ms Lawley told travel managers at the London event these charges "will make your job infinitely more complex and add to the cost of your travel policy. They are difficult to track and tracking them costs money."

But a breakthrough may have been made here. Two companies, Amadeus and ITA Software have been working with other industry bodies, notably the Airline Tariff Publishing Company (ATPCO), to remedy this.

 Robert Buckman, Amadeus North America's director airline distribution strategy, who attendee the Miami conference, told ABTN it would be possible to display ancillary charges on GDS screens by the fourth quarter this year. This will at least help travel managers see where the money is going.

Mr Buckman said airlines had originally aimed ancillary charges at the leisure customer who was likely to have a bag to check in rather than at the business traveller. As long as these charges were reasonable, Mr Buckman thought the consumer would pay.

But this was in the days when business travellers went premium, not economy as now. These were not charges the airlines expected to land on business travellers.  More evidence that the charges had not been thought through.

Robert Buckman

But what if these ancillary charges bring extra value? There is no extra value in having to pay to check a bag in - that was a service originally included in the price of the ticket.

But Mr Williams gave two clear examples of added value. The first is in operation with Clickair. If it has an aircraft with a three-three configuration and there are about 20 seats unsold, it will offers these spare seats, usually ones in the middle of a row of three to two people travelling together for say $10.

The two passengers get a spare seat for extra elbow room and somewhere to put their papers and books while the airline gets $10 it would not otherwise have received.

The second example involved an airline keeping a detailed profile on its frequent flyers. What, Mr Williams said, if a passenger,  a keen scuba diver  known to enjoy risk sports, was travelling to the US east coast on business. Why not offer him an added on but discounted three or four days in the Bahamas where he can cave dive. The airline gets a commission from the agency and the businessman enjoys some risky dives. 

Both examples make business sense and please and engage the traveller. But this seems to be a level most airlines have not even contemplated, let alone reached.

For the moment, the traffic mostly looks one way: extra charges levied on the traveller without the compensating factor of lower fares. (If fares are lower it is because of the fall in demand, not the benevolence of the carriers.)

It may not be the right time to expect carriers to lower fares voluntarily. But if that is the case, it is also not the right time to be adding extra charges.