349 - Scott McCartney with Jay Sorensen, CEO, IdeaWorks: Ancillary Revenue in Depth

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1:00Welcome to Airlines Confidential. I'm Scott McCartney, and I am excited to be in the middle of August. It's been a hot summer, a long summer, an interesting summer for the airline industry. And I think more interesting with the issue that we have to talk about today. I'm joined today by a frequent guest and dear friend, Jay Sorensen, president of IdeaWorks Consultancy. Jay's back with us to talk about all things, primarily ancillary revenue. And first order of business is Jay's going to teach me how to pronounce that word. I have the most trouble pronouncing ancillary, and I should get in the habit of just saying a la carte.

1:48But as important as it is, Jay, welcome. And how do I say it properly? Well, a la carte actually would not be accurate. Oh, great. A la carte, not that I should be saying that Scott McCartney is ever inaccurate, but it does occasionally happen. No, you just made my look more difficult. It's okay. How do I say it? Well, a la carte, of course, includes a portion of ancillary revenue. Ancillary revenue is a broader umbrella. Ancillary. I don't know how to instruct another sentient human being how to say words, so I'm not— Oh, ancillary. Okay. Ancillary. I guess you should emphasize the N and let it carry forward.

2:33Ancillary. Correct. Ancillary. Okay. All right. I got it. Or maybe just slow down, Scott. Yeah. Good luck with that. By the way, by the way, there was, I'm going to point out another error. You know, I think that there's a because of your global audience, there's a portion there's a portion of your audience for which the present time is now winter. Oh, oh, good point. Yes. Yes. Yes. Well, I struggled. I was about I put a summer newsletter out and I struggled with this. I went, oh, wait, I should just call the July newsletter because calling it the summer newsletter is very northern hemisphere centric.

3:17Ah, good point. Excellent point. All right. Jay, I'll just remind listeners, Jay's the former director of marketing at Midwest Express Airlines and worldwide expert, worldwide northern and southern hemisphere, expert and consultant to airlines on ancillary revenue, retail initiatives and loyalty programs. His research and reports have made him one of the leading authorities on airline loyalty programs and that additional revenue that airlines collect, sometimes known as ancillary. He's now consulting with airlines around the world about baggage issues. Jay has a bachelor's degree in business from the University of Wisconsin and for 25 years has run a charity called the Kids First Fund that helps abused and abandoned children.

4:07He also has devoted untold hours to renovating a 1930s Federal Ranger cabin south of Ely, Minnesota. So we've already done the intro, but it is really good to have you back, Jay. It is wonderful to be back within the warm embrace of Airlines Confidential and its effervescent host, Scott McCartney. Ah, well, thank you. I'm not sure I can pronounce effervescent either. There we go. All right. I was struck once again, Jay, in these high oil price times at just how important ancillary revenue is to airlines, just as we got through the second quarter earnings. Because the margins are so thin that that revenue gets just exaggerated in importance, I think, or certainly heightened in importance.

4:59Without that revenue, airlines would really be cooked right now in terms of profits. So this period we're in, it did remind me of the start of check baggage fees, which came in response to a big oil shock and really saved airlines back then. Back in 2008. Back in 2008, exactly. So, you know, when Southwest is earning in the second quarter only$5 per passenger and Americans' earnings were$1.20 per passenger, it seems like ancillary fees are saving the day once again. So I went back to your latest ancillary revenue report and found, much to my surprise, that it had really interesting information, Jay.

5:43Thank you. We tried. Just kidding. Let's talk about it anyway, OK? So you looked at baggage revenue and which airlines have the highest. This is for full year 2025. 25. So Southwest Airlines, for example, doesn't yet fully show up in ancillary revenue rankings. I suspect it will with the next report. But first of all, tell us how you gathered this data, because some of it I found really, you know, kind of under the curtain was really interesting. Well, we do a tremendously effective job at sleuthing out published information. I mean, when we consult to airlines, we pick up data and we do not use that for our reports.

6:31However, we find public sources of data. And every year we create something called the yearbook of ancillary revenue. And it requires us to probably review a thousand different sources of information for a world of airlines. And primarily it's going to be annual reports. Sometimes there's an investor presentation that has juicy numbers in it. Other types of, well, investor days are great sources of information, as well as press releases and even social media posts for some airlines. Typically, the airlines that do a better job of producing ancillary revenue are more eager to talk about it. Plus, there was this federal, this congressional report that came out that we found, and actually we were quoted in it, that talked about bag fees and seat assignment fees.

7:25So that was a helpful source of information as well. But no, we are very good at finding the information so that you don't have to. It's been interesting to me, and from a disclosure perspective, it seems like airlines are having to disclose more because this has become more important, right? It is material information that investors need to have access to. Well, actually, I'll push back against it a little bit. I've been frustrated, especially this year when we're looking at numbers for 2025. I'm surprised often how poor of a job airlines do in promoting themselves via their materials. And, you know, for example, There's one airline out there that has the most robust annual report you could ever wish for, and it's Emirates Airlines.

8:20And of course, what's the irony there, Scott? They aren't publicly held. Right. Right. And so, but it's a wonderful annual report. AirAsia is another airline that has put out a wonderful report in terms of its ancillary revenue activities. activities. But it's also an airline that is very conflicted because AirAsia seems to want to sell everything and be known for selling everything except for their airline operation. Of course, this is becoming moot because the airline is being spun off to AirAsiaX. So it'll be interesting to see what happens in next year's annual report. I certainly have not been overwhelmed by the disclosure, which is probably a good thing for us because it makes us more valuable if this information is more difficult to piece together.

9:08Yeah, yeah, I can see that. Okay, so which airlines bring in the most revenue per passenger and why? Well, I think, you know, the correct mix of ingredients, you know, no surprise, Frontier is a leader, Spirit is a leader, and obviously an airline like Ryanair would be a leader, as would EasyJet, Whiz. These are airlines that embed baggage into everything they do. And so what does that mean? Well, first off, they're going to have a carry-on charge. And that is, you know, if you're going to bring a large carry-on, an overhead bag, I should say, onto the plane, you're going to pay a fee for it, or it's going to be bundled within one of the branded fares.

9:54Plus they're going to have check bag, obviously charges. And the most important part of all of this is they're going to have control of what's happening at the counter and at the gate in terms of auditing passengers before they get on the plane that indeed they're not taking something onto the plane that they have, that they are not allowed or that they haven't paid for. You can make money from, you can make a lot of money from baggage if you create a baggage policy that is consistent with your brand and then you work to enforce it. Interesting. You mentioned Frontier and Spirit. I saw that Frontier was 48 % higher than Spirit, which I found really interesting.

10:40Why is that? Was Spirit, and words that have never been said before, was Spirit undercharging people? Were Spirit prices lower? No, I think spirit was underreporting. And so this is not intentional. This is part of the difficult task of publishing information on airlines based upon their public disclosures. Okay, so in the U.S., we have two sources of information. We have the DOT publishes information on baggage fees and also change fees. And then the airlines also often disclose something as well. in this mix, there's a lot that can go wrong. First off, you know, what information is being disclosed to the DOT in terms of bag revenue?

11:31Is it just when bags are sold as an a la carte item? Or does it include a component of the branded fare when bags are included as that branded fare? And so I would suspect that if an airline, you know, if there's a big gap like between Frontier and Spirit, that this can be explained by virtue of the fact that of reporting discrepancies, not reporting discrepancies, but I guess interpretation discrepancies. because obviously if both airlines were to report their numbers directly to someone, they would probably be far closer than they appeared in these statistics. Well, yeah, it's interesting. 2025, Spirit was making a big push towards branded fares, right?

12:21It had its different bundles. Well, and this is always the challenge in terms of, you know, even within an airline, you know, if you have revenue from a branded fare, you know, there's a little bit of a proration science that occurs here in terms of how do you prorate the different elements of that are included, the different product features that are included in the branded fare as revenue. And so that's, you know, that's typically done internally. It's not something that is posted that's disclosed publicly. In fact, in terms of, you know, I've rarely seen, they're very rare to see a disclosure by an airline of, OK, our branded fare revenue generated X for last year.

13:06So it's it's you know, we are limited by what we can piece together based upon public disclosures, either from the airline itself or from official sources such as the DOT. So while we're on disclosure. But to answer your question, Scott, I don't see a huge discrepancy in the policies between Spirit and Frontier. You know, they both are, they both were, Spirit was and Frontier is, I consider, best in class in terms of policies designed to generate, to maximize baggage revenue. Yeah, yeah. And this may not apply as much as to Spirit and Frontier, but when you talk about disclosure, I'm also curious, credit card companies, when you get a bag fee waived by your credit card, the credit card company actually pays the airline for the check baggage at some undisclosed rate, right?

14:13Does that revenue end up in bag fee numbers or does it end up in loyalty program numbers or credit card? So I guess the answer to your question is who knows. And I want to add one element to this. The DOT has traditionally had a light to no touch on auditing the disclosures by airlines for bags and for change fees and actually for fares. You know, they rely upon the integrity of the industry and they also rely upon a competitor called out another airline if another airline feels that underreporting is going on. And so that has happened with fares. You know, when airlines have underreported fares, sometimes another airline will call them out because they like having that information as a source of competitive intelligence.

15:03I think that this has not occurred on the baggage and in the change fee front, because I think generally these airlines don't want to report any of that information to the DOT. So the DOT has not been rigorous in its application of reporting requirements as well. So that kind of adds to the intrigue as part of the story. Yeah. Yeah. Right. Well, past past several administrations, There hasn't been much DOT regulation. Okay. Political comments aside, you know, one of the things you mentioned is airlines like Frontier paying incentives to employees to catch baggage offenders or be scrupulous about the size and weight of bags or whatever.

15:56Is paying incentives to employees to charge more fees, is that a common practice? Well, you're referring to numbers that were released in the report, and I'll name the report here. The sky is the limit, the rise of junk fees in American travel, which is a U.S. Senate majority report issued 26 November 2024. And it had some delicious tidbits. We're aware of this courtesy of our airline consulting, but it was helpful to see it disclosed in a public source. And so Frontier paid over$12 million in incentives to managers, supervisors, and frontline staff during 2023. We did a little bit of math on that.

16:44And on a per-departure basis, that was about$66 per departure, and it represented 1.4 % of their reported baggage revenue. So, I mean, it's a good investment, and it's something that is, I would say it's common among especially LCCs. I think when we begin to get into the global network carriers, I would say it's probably less common. Perhaps it might happen at a location that's basically a contract location, contract ground handling. but it certainly is prevalent among the best performing low cost carriers. Okay. I guess it's not all that dissimilar to paying flight attendants and an incentive to push credit card sales on flights.

17:35Correct. Right. I mean, if you, if you, if you, you know, provide an incentive, you will see an increased level of employee participation. Yeah. I mean, It's not like what happens in the executive office, right? I mean, the same argument holds there in terms of executive compensation with annual bonuses. Yeah, they get a lot more zeros than the front line employees do. Yes, they do. All right. In this report, you spend a lot of time on the topic of carry-on chaos at the gate. Are there ways airlines can handle this better? Well, I mean, let's look at what they do wrong. And, you know, at present worldwide, we have this situation in which everyone has heard this.

18:22Everyone has been privy to this. Everyone has experienced this. And that is you're at the gate and there's this announcement that's made. And the gate agent makes the announcement, you know, ladies and gentlemen, today's flight is very full. If there are any people with large carry-ons, we will offer to check them free of charge. Well, okay, so when you hear this enough times, it trains the passenger that, you know, when in doubt, just take the bag to the gate. You either will end up carrying it on, which is probably what most people want to do anyways, or you will end up getting it checked for free.

18:58Now, you know, it's not the best time, it's not the best place to have a bag checked, because I suspect that when you check a bag at a gate, it may be more prone to lost bag issues, because it's not been put through the system and tagged, perhaps in the way that most other bags are tagged. But being that being the case, you know, we certainly have encouraged passengers not to pay bag fees. So that's one thing that that airlines that do well with baggage revenue, you know, they work to break that situation. Yeah, I was actually on a flight once where the where the gate agent says, all of you trying to avoid bag fees.

19:38Now's the time. Bring your bag up and I'll check it for free. And it just and it does nothing but it compounds the problem. You know, and so I, you know, I was always amused by, you know, I was conflicted on the whole Southwest bags fly free policy because when I flew, when I would fly Southwest, I saw as many carry on bags, large bags as I did on Southwest as any other airline. And so what that told me is that even with the provision of two free check bags, which they used to have, people still crowded the gate and crowded the aircraft with large carry ons. And by the way, one thing, another part of fixing the problem is how we phrase, what phrases we use.

20:26And so if we use the phrase, which I have done during this podcast, the phrase carry-on bag, that's not helpful. And so there are two phrases that we should embrace as an industry. One is overhead, and the other one is under seat. because when you begin to use that phrasing, it's easier for the consumer to understand what is free and what is paid. And so under seat, if it fits under the seat, hey, you can bring it as a personal item. Personal item is kind of a crazy phrasing as well, but an under seat bag. And then if it's overhead, that's something that you're going to pay for. And so the easiest way for airlines to fix, not the easiest way, But part of the solution is to start charging for overhead bags because that is what creates a tremendous.

21:20I mean, if you charge for overhead bags, then you're going to provide a disincentive for people to take them. And you're going to have more people checking bags as a result of that. Yeah. Yeah. Also interesting, I thought, was United coming in with 16 percent more bag revenue per passenger than American. So what's up with that? It seems like maybe we just found another reason why Americans' margins are thinner. So United has this very surprising, very aggressive baggage policy. And when this came out, every time I take a flight on United Airlines, I take the opportunity to ask gate agents, how is this working?

22:05And I am surprised by the response, it's working fine. And so when you buy a basic economy fare on United, you are precluded from taking a overhead bag. And here's where things get very interesting. So they want, United wants to force these passengers to check in at the counter so that the counter agent can then see what bags they have with them and then check them at the counter. That was the original policy for basic economy. You could not get a boarding pass unless you check in at the counter. Well, they modified that. And that is, you can get a boarding pass if you check in at the counter and you have a credit card on file.

22:53So why are they requiring a credit card on file? So if you buy basic economy and you have a credit card on file, you can get a boarding pass. Now, when you go to the gate, they are very strict. They board basic economy passengers last so that the bin space will be filled by the time you board as a basic economy passenger. But they also are very strict about enforcing the bag policy at the gate. And so if you attempt to carry a overhead bag onto a United flight as a basic economy passenger, you should be stopped by the agent who's going to say, sir, if you take that bag on board the plane, you'll be charged for it.

23:41Oh, and because they have the credit card on file, they just go ahead and charge it? Exacto mundo. Now, here's what the interesting part is. I think the policy for United is the agent should tell the passenger that this is going to happen. All the agent has to do is press a button on the check-in screen as the passenger walks by to charge the fee. And so in my conversations with agents, I have had kind of a mixed bag in terms of responses to this question. The question is, do you tell the passenger when they walk by with a large bag? And some gate agents say, no, I just hit the button. And so, which is an interesting dynamic.

24:28You know, I suspect it forces a lot of interaction via follow-up emails or letters to the home office. People saying, you know, expressing dismay and shock over being charged. Now, yesterday, I flew United and I asked at the front desk at the counter, I said, so what happens when someone, and she said, you know, the agent said, yes, you know, we enforce this rule. And by the way, the boarding pass is abundantly clear. And she printed out a sample boarding pass for me for a basic economy ticket. And it said, you know, it's very clear, you know, that a large carry on is not allowed. So what I've been surprised is how LCC like United has become in this regard.

25:15And but the effect of this is it's working. It's obviously producing a lot more revenue. And it's also, you know, it's having one other effect that they United wants to have. And that is encouraging people to buy up from basic economy to a and they're doing obviously other things. and including, you know, most recently taking away a frequent flyer mileage accrual for basic economy. So that's another thing that they have done. So clearly, United is very aggressive in this basic economy. Yeah, but this is fascinating because, you know, so much we do. A lot of attention is focused on United's margins are better than Americans.

26:01and Delta's margins are bad. And all of that is often told in the premium vein, right? Delta and United are ahead of American in premium revenue, premium product offerings. And yet here we are talking about the differences in basic. And you can see how, as you just said, not only would United be getting a lot more bag revenue than American, But also because its basic economy is more restrictive, it's going to be probably forcing more buy up and people move into higher fare buckets. What's interesting about United is there's something happening there. And I think it's already happened at Delta.

26:48You know, the analogy I'll give you is this. You have a car dealership and you have two customers. One customer comes into the car dealership and gets an oil change on a regular basis. You know, they only go to the Honda dealer, for example, for their oil changes. They have a Honda and they have their oil change at the Honda dealership. They spend$50, you know, twice a year at the Honda dealership. And then you have a customer who comes in, he buys a car once a year or once every two years. And so the new, I guess, method of loyalty is which customer is more valuable to the Honda dealership. And clearly in this case, it's the guy or gal who buys a car once or every two years.

27:37And so I think the airline industry is beginning to realize or adopt policies that are going to reinforce that. But whereas before, I think there was a far more, you know, when we talk about the K-shaped economy in the United States, I think that this has, you know, affected what's happening with loyalty as well. But we're off the Elecar topic. Although, you know, loyalty programs, because of co-branded credit cards, are a big part of the umbrella, especially in the United States, of the answer revenue umbrella. So we're not off topic yet. Yeah, no, I don't think so. And, you know, the customer, I mean, it was clear that, you know, Delta went after New York, Los Angeles, certainly Atlanta.

28:24But, you know, those are more higher income customers. And that was all part of the American Express credit card strategy, the premium strategy, everything else. They've really increased their market share in those markets, taking it from American. Well, I mean, effectively, United's new policy, we have a report coming out in August that's going to talk, that's going to focus on United. First time I've ever written a report that's focusing on one airline, but this airline has just been doing so very much in the last year that it's notable. And I think it really requires a report dedicated to the airline.

29:05But clearly with United, you know, the message is if you want to play and get the best value from us as a customer, you need to have a credit card. Yeah. Yeah. And so and if you don't, you know, that's fine. But we're just not going to open all the doors for you if you don't. Right. Right. So another interesting fact you had in the report is that less than half of American passengers check bags. And that makes sense. And it's probably similar to any other network airline. But of those half that check, less than half pay fees. So only a quarter of all passengers are paying fees. Less than that.

29:49That seems surprising that there are that many American customers with elite status or credit card perks. With credit cards, as we said, the airlines still get paid for the check baggage, but I assume at a lower rate. I don't know. It's a lower rate. So this is a closely guarded secret in terms of airline bank contracts. There's scant information about this publicly. In fact, there's no information about this publicly. But airlines give nothing to banks. The major airlines give nothing to banks for free. Everything is charged. And so when there's a bag that's checked by a customer, it's because that bank has paid some fee to the airline to provide that benefit to their cardholder.

30:42Now, you know, obviously it's going to be a discounted because of the volume we're talking here and the relationship that exists. And in some cases, we've heard that there's caps, you know, that, you know, there's like a cap of like, you know, we're going to cap it at 10 bag checks per year. And after that, the airline basically eats the cost of the check bag. But, you know, yes, there's revenue here. And again, this is another source of revenue. I doubt that this source of revenue appears in the DOT numbers. Yeah, but what I'm curious about is the notion that so many are getting bag fees waived, in a sense.

31:25And so is it kind of a classic airline situation where they're giving away a money producing product? Is this kind of the new first class upgrade? So a bag can be included as part of a branded fare. A bag can be so then it's effectively paid. And secondly, a bag may be included as a perk of elite status. So then I would argue that it's waived. But if a bag is checked as a result of a co-branded credit card benefit, you know, I would mark that as being paid, discounted, but certainly paid. So, you know, I think in these three examples, there's only one that would be waived and that's for loyalty.

32:10And, you know, and that's, you know, that's that I think is offered as a perk. You know, it's one of the few remaining perks that, you know, are important for elite status. We know that the upgrade perk has largely disappeared. And there's also oftentimes some type of seat assignment waiver that occurs as well for elite status. So, you know, I suspect that that's going to stay there. Right. Yeah. All right. Let's turn to assigned seat fees. By the way, there was one funny moment in this Senate report where the airlines were asked to disclose what it costs to check a bag. And I was amused by this because the universal answer was we don't have a number.

33:00We don't calculate that number, which I thought was kind of a laughable response. I think American did finally come through with a number. They may have, as I recall from the report, I think American coughed up a number after the fact. But the number that they stated from a 2018 internal estimate was$28 to check a bag, which I thought that was an interesting statistic. I actually have never seen that number, even in our consulting work. I've not seen a number for that. But I suspect it's something that airlines definitely do track in terms of the cost of checking a bag. But that was interesting.

33:39A little factoid for you is$28 per bag. That is interesting. It is a complicated thing, right? Oh, God, it's very complicated. It involves, you know, vast amount of resources and technology and staffing. So it is not an easy task. Equipment and your share of the airport baggage belt costs and, you know, how much of a ground handlers time is spent on cargo, how much on check baggage, all kinds of issues to it. All right. Let's turn to assigned seat fees and extra legroom seats. Frontier, Spirit, and United were all about the same per passenger,$7.76 to$7.93. So all three of them roughly just short of$8 per passenger.

34:31Yeah. And that number is, those numbers are, again, courtesy of the Senate report. Yeah, interesting. I guess that makes sense when you think about Frontier and Spirit, which, you know, charge or in the case of Spirit, charge used to charge for every seat assignment, right? But how does United get in the same class as Frontier and Spirit? United, if you were to look at, you know, I think some of your listeners who book United on long haul trips like international transatlantic or transpacific trips, it is shocking sometimes what is the fees that are charged for economy plus the extra legroom seat.

35:11And so I think that that is a United has traditionally been very aggressive. And obviously, you know, what's interesting is when I say very aggressive, it's almost almost an unfair indictment because, you know what they're doing is they're meeting the market i mean you know there there are times when i've seen you united uh seat assignment fees on long-haul flights for economy plus and you look at this and you almost think it almost looks like a fair um it's so expensive but you know it is a price that clearly their revenue management system has you know designed in terms of like say you know we're not going to universally uh charge a fee that no one buys and so So obviously, these prices are paid by customers, which make them valid, right?

35:58But, you know, demand and supply, the power of the marketplace. So I think United does a very good job of retailing Economy Plus extra legroom seats. Fascinating. Yeah, yeah. It's amazing what they're doing now. And what's, of course, amazing, you know, but the seat assignment thing overall, I mean, Economy Plus does require the investment of an airline to, you know, pull some seats out to create extra legroom for certain rows. But seat assignments overall, obviously they were they have been part of the low cost carrier playbook for a long time, for over a decade. And when global network carriers began to embrace this, you know, the first the first little crack in the in the in the dam was, you know, the exit row seats, which at some point were reserved for priority or for elite travelers.

36:54And well, then, you know, then we saw them and we saw these fees being charged for exit row. And then suddenly it became the entire airplane. I was shocked at how quickly the industry, the global network carriers swung from virtually no fees for seat assignment into full seat assignment as the same type of policy as low cost carriers. I was very surprised by that. In fact, back 25 years ago when I began to delve into the topic of Answer in Revenue, and by the way, I'm so glad I did, I thought to myself, ah, this will be a five-year thing. This will be a five-year fling. And every year since then, it has just been growing every year.

37:40And it is now a it's a bolted on part of the industry that, you know, is just not going to disappear. It's just part of being an airline now. Yeah. Yeah. So with Frontier Spirit and United all up around eight dollars assigned seat fees and extra legroom. I thought it was interesting. American was at$4,$4.14 per passenger. So, you know, we're back to the same question as before. Why is American only half of what United is? So, I mean, again. And by the way, with that, what about Delta? Well, I don't recall the specifics of the report. You know, there were cases where in this particular report that airlines did not disclose, you know, at the risk of anger in Congress.

38:30and I don't know if that was the case with Delta or not. I don't see them on the chart here. But again, we're relying upon Americans' disclosure to the U.S. Senate. And so there may be challenges associated with how robust that disclosure was in terms of did it include branded fares, which of course oftentimes include a seat assignment benefit, or did it just include seat fees charged outside of that. So there's nothing that I would say that is really different between how United, American, and Delta charge for seats in terms of their retailing of them, except for United just has, I think, has pushed Economy Plus a lot harder than their peer carriers have.

39:15So yeah, I mean, I think a portion of this obviously might explain a distinction in terms of how effective each airline is. And in American, you know, there's just, as you know, you and I have talked on in any number of times, Scott, you know, there's abundant opportunity there for American to just do better in a lot of different areas. Yeah. Yeah. And just the pricing of it may be different. You know, this may be a disclosure difference again, but you had some data in there about the highest fees and United's highest fee was significantly higher than Americans' highest fee. Yeah. Yeah. And I think that points out there's a table in the report on page nine that you're referring to.

40:04And then each airline was asked to provide a range of their seat assignment fees. And I'm looking at the numbers for by airline for 2023, 2024, American was 140, United 319, Frontier 141, and Spirit 299. Spirit, you know, I think probably got very pricey on some of their South American flights because of the distance involved. But no, you know, I think that there's an opportunity here that United just is priced higher for their economy plus product. You know, and there's a big element here in terms of revenue management. How much effort does an airline spend on revenue managing these different prices?

40:58It's a science. And an art. All right, Jay, let's take a little break to thank our sponsors who make all this possible. Thanks to Sirium for its support of Airlines confidential. Serium offers the most accurate and precise data and analytics to enable airlines to optimize planning, operations, and passenger services. The right intelligence drives operational efficiencies, enables you to predict market shifts, and helps airlines respond quickly to maximize revenue, manage costs, and seize commercial opportunity. Visit serium.com for more. In addition, I want to thank Ontario International Airport for its support of Airlines Confidential.

41:45ONT just launched the ONT Bold Program, our proposed vision to transform the airport's facilities to streamline the passenger journey, while also creating jobs, growing the regional economy, and building on ONT's legacy as a global gateway. The program includes plans for a new terminal, a multi-story parking garage, upgrades to existing terminals, enhanced roadways, and new utilities. The ONT Bold program is early in the planning phase. Visit flyontario.com slash bold to learn more and join the journey to ONT's boldest chapter yet. And thanks as well to the Executive MBA in Aviation at the University of Colorado Denver for helping make the podcast possible.

42:30The Executive MBA in Aviation at CU Denver is the first degree of its kind in the world taught by industry experts and designed for ambitious leaders from across the aviation ecosystem. With classes located at Denver International Airport and week-long residencies in Washington, D.C. and at airports around the world, students experience a hybrid, flexible course structure that balances in-person and online classes without career interruption. Go to business.ucdenver.edu to learn more. Okay, back to the questions, Jay. Okay. So a few things about the airline industry that I think I'll never understand.

43:12I'll never understand why airlines have been reluctant to provide accommodation for family seating, for example, why they fight that when there are efforts in Congress to say, you know, you have to seat families together. But I've also never understood airline reluctance for refunding seat fees when the airline doesn't deliver the service. The fees they charge, they call non-refundable. And sometimes it's the airline that moves you or bumps you out of your seat. Sometimes you give up your seat for a different flight or whatever. And the airline won't refund you. It seems like such a ripoff to consumers.

43:49And I suspect that anger that they hold about it is a lot more costly than the$35 fee they're refusing to refund. Why have airlines made this a pain point? And I think you argue in the report that they should really should be more forgiving and gentle. What do you think? Well, you know, I've been in this airline, I've been in this industry for more than 40 years, and I absolutely adore it. But there are times when I just look at it and say, why are you being so stupid? And this is one of these moments in which, you know, I look at seat assignment revenue as walking down the street and finding$20 bills lying all over the place.

44:31It's found money. You know, there is technological effort in terms of retailing seat assignments. But in terms of an actual hard cash cost of providing the product, no, there isn't. And so that would argue that, you know, look, I understand if you were to order some food on a flight and we board the food on the flight, it's not refundable because it's like it probably is going to be tossed. But in this particular case, the first thing, my position with my airline clients is, look, don't fight this. It should be just an ethical or moral response. And that is, this is an easy one. Just refund the money.

45:17Why create a battle? I don't know the answer to this apart from just, I don't know if I want to use the word greed, but certainly a desire for profit would be. In fact, this is a good question for you to perhaps ask any of the airline CEOs that you have on your illustrious podcast. Ah, yes, yes, yes. A tasty question. Yeah. You mentioned ordering food and also a tasty question. Pre-ordering food seems like another area of growth for airlines. I hear about it more and more. I'm sorry. Go ahead, Scott. I'm jumping in. I'm just curious. Are airlines, it seems to me they struggle with this. There are a lot of advantages to it.

46:13But I don't know. Are they getting better at it? Are we going to see more of it? There is money to be made here. And, you know, I've seen airlines publish results on the profit that they make from their buy and board services. This is a hard science to perfect in terms of if you were going to have nicer food that's available for purchase. First off, you know, there's only so far you can go with packaged food. You know, packaged food is great because it's shelf stable. It can stay on the plane a long time. It doesn't have any type of handling, extra handling requirements such as it requires refrigeration or requires heating.

46:57But it oftentimes is not the most attractive thing, especially to offer on a flight that's, you know, more than three hours long. So then you begin to talk about fresh food. And so fresh food could be something that's going to be chilled like a sandwich or it's going to be something that's chilled like a meat entree or a pasta entree and then heated. And so the challenge becomes matching the order with the passenger. And so at one point, the U.S. had an abundant array of catering kitchens all across the United States and, you know, also true for the global market as well. And as economy catering was shut down, many of these kitchens closed.

47:46Milwaukee used to have, for example, where I live, had a robust, a very large Sky Chef's Kitchen. It's gone. It's a parking lot now. And so if you're going to have a flight, let's say, between Chicago and, let's say, some locations four hours away, Boise, let's say, Chicago and Boise. Okay, so you obviously can cater that special meal request, which is really what it is, that sandwich pre-order out of Chicago. Now, when you're talking about Boise, there's very likely no kitchen in Boise anymore. At one point there was. And so how do you get that meal put on the plane on the return flight? And so airlines have a couple of different ways to do it.

48:31One solution is, say, we're not going to sell it on that flight. So problem solved. The other one is going to be we're going to board it in Chicago for the return flight. And, of course, you know, therein lies challenges as well because it has to be boarded and it has to sit someplace chilled for four hours before it's again or probably six hours by the time it's put into the passenger's lap. And so it is buy and board pre-order is a very challenging thing because of the logistics associated with it. And then, you know, can an airline dedicate resources to doing it right? Yes. And it appears that United is attempting that.

49:14And of course, the benefit is, you know, I don't see a giant profit opportunity here, but it does create a better passenger experience on longer flights. And what's interesting is that I had the smile, you know, in my consulting, I say that two hours and 45 minutes is the sweet spot for ancillary revenue in terms of flight distance. That's the point in which things such as seat location, catering, seat size becomes more important to the customer in about two hours and 45 minutes. Under that, there's a lot less interest because the passenger knows, hey, I'm just on the plane for a short amount of time.

49:56I'm not going to spend money on extra stuff. Well, that's basically the window that United chose in which flights to offer their preorder is about two hours and 45 minutes. It's actually, I think it's like 1 ,200 miles or 1 ,190 miles. So, yes, it's a nice thing. and if you dedicate a lot of effort to it, you can eventually create a system that's going to be robust. But, you know, for example, United has to be concerned about, so what happens when the passenger is not satisfied? So what's the recovery when you don't have the meal for them? So you have to build that into the process as well in terms of some type of accommodation.

50:39It is not an easy task. um you know in one weird way it was easier when everyone was fed in that regard um but that ended up not working out well because airlines looked upon that as a cost center and they just keep kept cutting and cutting and cutting until it became you know a joke in terms of what was being offered on the plane yeah yeah um are there other ancillary opportunities that you see ahead for airlines or is this marketplace mature and all the good ideas have been done? You know, I'm asked this question and I've stopped answering it because whatever is left out there, whatever new idea is going to be something that's going to be probably more difficult and not have as great a profit potential.

51:33And so really what I talk with my airline clients. I said, you know, if you were to focus on the big three, and that is seats, bags, and branded fares, you know, you would be managing 95 % of your answer revenue potential. And so just focus on those and do them darn well. And that would be, and of course, you know, this is a message that sometimes airline people don't want to hear because they kind of like the bullet point approach. And that is, you know, look at all the, look at all the things we're introducing. Uh, and so, you know, my message is always to, uh, focus, focus, focus, focus on the core items.

52:19And if you truly are motivated by profit, I mean, can you do some cool stuff once in a while that's going to be brand improving and maybe, uh, generate some profit? Yes, but But it's bags, seats, and brand affairs, and especially managing those, managing the pricing of those, obviously, with the addition of the capabilities of AI as a component of that. Would lounges qualify as revenue opportunity? Or is the cost so high? You know, what's interesting, when I started in the industry back in the 80s, lounges eventually slowly fell out of favor because they were seen as cost centers and extravagant expenditures that didn't provide a payback.

53:13And, you know, I think, you know, you and I have had conversations about the commoditization of airline travel. And so clearly that was an example of, you know, airlines treating their overall product as a commodity and not really focusing on the distinctiveness of a particular, like, first class. The pandemic certainly changed the dynamics of this. And suddenly the lounge became a place of refuge from the madness of the pandemic in terms of it was it added enjoyment to the travel experience. And it also allowed you to get away from the masses of the sneezing and sneezing humanity. And and so it is it is something that has stuck with us since the pandemic.

54:04And it seems so my answer to your question is a big honking yes. But it is something that is a real challenge for airlines to manage because it's a real estate issue. And some of the most expensive real estate on planet Earth is the real estate on an airport concourse. And so, you know, it is a, you know, Southwest Airlines is, you know, in the process of wanting to build out some type of lounge network. And I would argue that their largest challenge in doing that is going to be finding real estate on their concourses. And, you know, there's two things that can really hurt, you know, the lounge product.

54:50And one of them is waiting in line in terms of, you know, and the other one is a crowded lounge. And both of them are challenges nowadays because they have grown in so much popularity. And it's hard for airlines to adjust these levers to crank back because, you know, co-branded credit card agreements are typically 10 years in length. And so if you've done a deal with a bank for a co-branded credit card, it's going to take you time to adjust the economics of that deal to either generate more revenue or to cut back on what's being offered for access. um so it's it's and plus you always have the underlying access being provided to your own club members as well as those who are enjoying the club courtesy of of traveling business class so it's yeah it's a wonderful opportunity and it's an opportunity that really can enhance you know if you look at some of you know look at the the improvements that have occurred and the lounges being offered by American Delta and United.

55:59And there's two effects here. One is the competition among themselves, especially for long-haul business class customers. And then there's the banks that are building lounges. And we have lounges in the U.S. that have been built by American Express, Chase, as well as Capital One. And truth be told, banks building lounges is something that has existed elsewhere in the world for decades. in some markets. And so that the product experience is only set to improve in terms of the quality of what's being offered in the lounge, courtesy of this competition. Well, it's really, it's the co-branded credit card that has changed the economics of it.

56:43Yeah, well, it certainly has changed the revenue side of it. And yeah, you're right, Scott. And so look at Southwest, which I think is I am so fascinated by this, obsessed with it or whatever. But, you know, we've been talking about it for a while. Right. And a lot of it, a lot of what we're talking about is coming to be. Bob Jordan recently said that the lounges and we we had said this a long time ago that they'll be co-branded with Chase. Right. So so Southwest, they've been very creative about finding that real estate that you talked about. Denver is a great example. My understanding is on their concourse in Denver, when you come up the escalator and the thing, there is the Southwest Lounge and it will be giant and co-branded with Chase.

57:36So that Chase customers well down the concourse is an American Express Lounge. Right. Which is always packed, by the way. Which is always packed, right. So for Chase to get in front of American Express and have this giant lounge in the Denver concourse and all, that's a plus. For Southwest, it's a plus. They're going to, I think, create a new brand, right? But Chase has these very nice Sapphire lounges and they want the Southwest lounge to be nice enough that Chase customers used to that will feel very comfortable in whatever the new brand of the lounge is. But, you know, it's not just sort of the, hey, it's a reward for elites or I'm selling annual memberships into the lounge and I get revenue from that and all.

58:28But that lounge is going to allow Chase and Southwest to offer a higher level co-branded credit card. Right. So you now up the credit card fees that you're getting out of the relationship. And you can't really do that unless you have a perk like lounge access to offer on a on a premium credit card. But the advice I would offer to Southwest would be, you know, I think that if you were to have the management team assess what should be done, you may end up with a very generic product that's going to meet the needs of everyone. You know, they're not going to want to offend people who are traveling with families, people who are, you know, retired couples and things like that.

59:14and you kind of end up with this vanilla lounge that's a nice lounge, but it's going to serve everyone. I would recommend that they get very strategic about what they're going to, because they have the opportunity to design something from scratch. Yeah. And so to really zero in on what is the market demographic that you want to turn on with this lounge, because if you go too broad, You're going to do nothing but dilute the experience for everyone. I flew back on American to visit my son in Florida, and it was a very interesting return trip that required 23 hours. And so I visited the American Lounge in Orlando, and there was a line.

1:00:07So I waited in line for 15 minutes. And then when I got in the lounge, it was packed. And I thought to myself, you know, is this better than being on the concourse? Yes. Does this feel special? Not really. And so, you know, I think Southwest, it's such a challenge for an airline. And by the way, you know, America is not alone in this. You know, all of the big three have had their issues regarding crowding. I was at United Chicago yesterday and, you know, they had signs up that were saying, you know, the day passes that they give to their credit card members were not being accepted at a lounge.

1:00:51And apparently they have a system that, you know, really attempts to be, you know, the signs will come down when the lounge capacity is what will accept more of these visitors. But, you know, if you end up creating a lounge for everyone, I think you've lost some of the real marketing power of the lounge. And I think the real marketing, the power of the lounge is not to sell memberships. The real marketing power of the lounge is, of course, to sell memberships, but the real marketing power of any airline is to generate more high yield traffic frequency. Right. And so this is what I'm hearing from United in terms of, you know, when you hear the CEO talk about he wants to create a brand loyal airline.

1:01:39And I think that they really want to target and they're putting their money where their mouth is, high value customers, people who fly frequently, have the card and buy premium products from them. That's the spot for them right now. All right, Jay, hang in with me. We have a mailbag question just for you. Let's take a little break. We will be right back with more on Airlines Confidential. Promotional support provided by the ultimate avgeek website, the archive.net, a vast collection of airline memorabilia, timetables, route maps, rare cabin and airport photos, special flights and more all at the archive.net, the hub of air transport history.

1:02:26Okay, Jay, before we get to the mailbag question, I want to take a moment to thank our other sponsors for really helping keep Airlines Confidential going. I want to thank longtime sponsor RTX. At RTX, a century of aerospace and defense innovation shapes a unique perspective. It takes more than technology alone to rapidly advance the future of flight and strengthen global security. It takes the vision to see what's next, adapting expertise and scaling manufacturing capability to deliver where and when it matters most. Perspective is everything RTX. Visit rtx.com to learn more. And finally, thanks to Infinity Flight Academy for its sponsorship.

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1:03:51All right, Jay, the question for you from John from Rochester is this. Addressed to me, I, Scott, I keep reading about travelers complaining they are being forced to gate check their bags because the overhead bin is full, only to board and see empty bins. is what we talked about before. I don't see a lot of empty bins, but I have, and I get what you're saying, John. John continues, the latest theory seems to be that airlines force passengers to gate check a bag when they're worried about the flight departing late. Yes, very true. As someone who prefers to check a bag, John says, I have always wondered why airlines didn't charge for bags that are carried on board instead of checked.

1:04:39It would definitely speed up and simplify the boarding process. Any idea why the airlines decided to charge for checked bags? Love the show. Keep up the good work. Thank you for that, John. So Jay, before you get to that, I'm reminded that our mutual dear friend, Ben Baldanza, understood this question very well and was really one of the first to start charging for carry-on bags. He priced carry-on bags a little higher than checked bags so that there was a financial incentive for people to check the bag and not bring it on board. And the real benefit was he was able to shave five minutes off boarding time because there were fewer carry-on bags.

1:05:28And that five minutes, you add that, you know, take that out of the schedule. And all of a sudden your planes are flying, you know, on average one more trip a day because you've regained a couple hours of sitting time. And so that meant, you know, those are very expensive assets. You know, Ben had calculated it was like 11 airplanes worth of time in the schedule that he got just by charging for carry-on. So why did airlines decide to charge for check bags back when this began and not for carry-on bags? It's interesting. I think that there's a generational thing at play here, and that is, look, back in 2007, 2008, when check bags were, fees were being implemented by airlines in the U.S.

1:06:24and of course, low cost carriers prior to that were charging these fees. There's this, I understand why you're going to charge me to check a bag because I, as a consumer, understand that there is effort involved here on behalf of the airline. You know, obviously the bag is being carried to the plane, it's being handled, it's, you know, and so there's an expense associated with that. And I remember early on when Ben talked to, introduced this carry-on fee for Spirit, there was a tremendous amount of pushback because people were saying, look, you're charging me to do my own work. And so this was especially, you know, there's a generational difference where older consumers really push back against any airline fees because they began traveling when everything was included in the price of the ticket.

1:07:23Bag, meal, you could seat yourself wherever you want. Swing down to the youngest members of the marketplace. And they have grown up in an era in which everything's all a cart, you know, or on a subscription basis. And so I think that as time passes, it's simply that charging for bags has become more acceptable. And people realize that there's a problem with bags because there's so many that are on the airplane and they see that there's a delay sometimes in terms of departure. I remember flying on Allegiant probably 10 years ago and they had bag fees and it was fascinating because that flight boarded, you know, there's probably, they had bag fees and they probably had 15 people paying for a bag on that flight.

1:08:17And that was kind of the, the, the statistic that was, um, that, that Allegiant was experiencing back then. And you can imagine how quickly that flight boarded. It was a pleasant experience. And the opposite was true as well. It deplaned very quickly. It was better for everyone on board the airplane. It was actually a safer environment. And so I read about airlines, major airlines, wanting to put bigger bins on board the airplane. I just shake my head and I say, that is the wrong direction to go because it's going to slow the boarding process. It creates a less safe environment. And it's just so many of these bags should be in the hold.

1:09:01I was watching a mother with probably a five-year-old walk through security yesterday at Milwaukee Airport. and was stunning to me in terms of how much the military calls it impedimentia. It impedes your progress. And I just thought, God, how is she ever going to get all that past the agent and onto the airplane? She obviously did not want to pay a check bag fee. And she was clearly taking stuff on, trying to take stuff on the plane that was not appropriate. it. So it's, it's a, it's a, it's an age thing. I think it's also a psychological thing. I think, you know, it's, it's, it's, it's like people, people like tomatoes or people don't like tomatoes.

1:09:47There are people in the world who are carry on people. And there are people in the world who are check bag people. I, I happen to be married to a check bag person. She, you know, always wants to check the bag, doesn't want to carry it on. To me, that's crazy. I would carry on and pack accordingly, right? And I do think the original issue for airlines was fear that business travelers were all about the carry on and you didn't want to anger your best customers by forcing them to check a bag and slow the trip down. Cause yeah, boarding is faster, but you're going to be 30, 40 minutes maybe at the, at the baggage carousel.

1:10:34So it, you know, it, uh, does the airline claim the time or does the passenger get the time? And, and, um, I think the, the fear was, um, you'd really anger, uh, the business traveler pool. Um, so I, I don't know, it's a fascinating issue. And maybe it is evolving. I don't know. No, I think it is. I think that, look, I mean, look at where United is at in terms of this policy regarding basic economy. And I just, I'm surprised. I'm surprised by two things. Number one, that they attempted it as a global network carrier. It seemed to be not consistent with what I understood their brand to be. But the second thing is upon talking to numerous gate agents, it's not a disaster.

1:11:22It's being accepted. And I think that's being accepted. And I think age has a part in this. And that is the younger consumer just is not bound to tradition as older airline consumers are where the game was very different. Well, Jay, this has been wonderful, Well, it's been fascinating, been very enlightening, and I really appreciate all the time and all the research you do. It's great to have you with us. Thanks so very much, Scott, for having me. All right. I will be back next week with more. Thanks for listening, everyone. So long. This podcast is produced by Mass Media. Info at massmedia.net.