A low-cost, low-fare carrier such as Spirit Airlines Inc. makes its living on passenger fees. That those fees, known as non-ticket revenue, dropped by more than $2 per passenger in the first quarter, compared to a year ago, might suggest a shift in travellers’ tolerance for additional charges.
Spirit blames its sagging fee tally on low fares; travellers seeking out the lowest fares have had plenty of choices, with a raft of bargain flights, some below $50, departing from cities nationwide. Those price-sensitive travelers enticed by the lowest of low prices tend to avoid racking up additional fees.
Fare skirmishes have extended to the full spectrum of pricing, aided by the collapse of advance-booking windows for tickets once aimed solely at business travellers. In many cases, buying a ticket to fly the following day is no more expensive than buying one a month early. What’s more, lower fuel prices have boosted airline seat supply beyond demand in many markets, curbing fares for both corporate and leisure travelers.
The industry refers to this narrowing as “fare compression.” It has played a central role in airlines’ unit revenue declines and reduced stock prices. Five of the six largest airlines, excluding only Southwest Airlines Inc., have experienced share declines of 12 percent to 19 percent this year due to the negative revenue news.
“In this current fare-compression environment we are seeing consumers who previously wouldn’t fly, now choosing to fly because fares are so low,” Spirit spokesman Paul Berry said in an e-mail. “Many of these consumers are foregoing purchasing optional items.”
Some of this decline relates to ticket-change fees. Pay $41 for a ticket, and no one of sound reasoning would pay an airline $110 to $200 for a change, plus any fare difference. You just buy a new ticket. Other ancillary items are also experiencing “a slight degradation,” Spirit Chief Executive Officer Bob Fornaro said in an April 26 conference call with analysts. “I just think it’s continued downward pricing creates the—let’s call it—adverse selection, or whatever that is,” he said.
Falling fee collection at Spirit hasn’t been mirrored in the US airline industry as a whole, which collected $6.82 billion last year in fees for checked bags and ticket changes, according to the Bureau of Transportation Statistics, which reported the fourth-quarter tallies on Monday. That’s a small uptick from $6.5 billion in those fees collected in 2014. Altogether, checked-bag and change fees accounted for roughly 26 percent of the industry’s $25.6 billion net income and more than 4 percent of total revenue last year.
Given the fare bargains, non-ticket sales have become even more important for most airlines. These fees are largely consistent, regardless of the fares in a market, and they are ripe for innovation.
Still, even if fee fatigue isn’t yet widespread, some observers think the industry might struggle to wring new baggage fees from travellers. “This initiative is largely played out,” Airline Weekly warned on Monday.