The hidden cost of choice

16:00, Nov 29 2012

The most important thing for consumers is choice. Competition delivers better value and puts you in control of much you spend. 

When it comes to flying, however, consumers who are used to being provided full service as part of their overall fare seem averse to the trend towards so-called ancillary revenue, where airlines are offering people choices about what they get on their flights.

You can pay as little as $49 to fly between Auckland and Wellington, but forget about being fed or even checking in a bag. Or you can pay a higher fare and get those things for "free". That's your choice.

Ancillary charges now range from paying for excess baggage to seat selection to wi-fi and commissions for a hotel booking.

Worldwide this ancillary revenue is tipped to hit US$36.1 billion ($44 billion) this year. But you also have to consider the profits, or lack of them, airlines are making.

Despite the International Transport Association (Iata) revising up its projection of airline profitability by US$1.1b for 2012 to an expected total of US$4.1b, that's still a negligible return on investment of less than 1 per cent. Airlines remain a high-risk, low-yield investment with airports and service providers the only ones in the industry making good profits. 


A report out this week by consultancy IdeaWorks and global travel technology provider Amadeus confirmed that, saying the current challenging operating environment made ancillary revenue more attractive and, in some cases needed. They said forgoing this revenue would mean many airlines making a loss.  

It's a case of survival. In this country Air New Zealand is facing exactly the same challenges, particularly on the heavily competitive trans-Tasman route.

This month it introduced costs for seat selection and excess baggage, just as its main trans-Tasman and domestic rival Jetstar already does.

For example, passengers now pay to select a preferred, exit row or bassinet seat ranging from $5 for a standard seat on a domestic flight to $75 for an exit row seat on a long-haul international flight.

Now pretty much anyone can get an exit row seat if they're willing to pay for it, whereas before those seats tended to go to Koru club members and the like.

Flight Centre spokesman Mike Friend says because the online market has plateaued, all carriers are working more closely with travel agents to offer customers these ancillary services, as opposed to them just being available to people who book online directly with the airline.

Air New Zealand was one of 176 airlines surveyed on their ancillary revenue. It came under the "traditional airlines" category which has increased its ancillary revenue by 17 per cent this year.

Though income from these charges is climbing, traditional airlines still only make an average 2.9 per cent of annual revenue from them. That figure increases to 19.7 per cent though for a few airlines, the so-called ancillary revenue champs such as AirAsia and Spirit Airlines.

While I'm a champion of choice, you can go too far with all this.

Publicity-seeking low-cost carrier RyanAir made headlines last year for suggesting it would charge flyers £1 to use the loo and mooted cutting back from three toilets per aircraft to just one, which would allow another row of seats to be installed and thus improve yields.

It backed down on that proposal but apparently has also jokingly suggested selling standing room only on short-haul flights. That's Irish humour for you.

Cheaper fares have proved popular, pushing up the numbers flying. One key issue to beware of though, particularly on long-haul flights, is what legroom and size of seat you've chosen.

Leg room - as measured from seat back to seat back - ranges from 29 inches (73.6 cm) to 34ins (83.3 cms) on economy flights. That compares to a range of 38ins (96.5 cms) to 40in (101cms) in business class on a trans-Tasman flight. It may sound minor but it can make a big difference when you're spending long hours in the air.

Moral of the column: you pay for what you get, but make sure you know what you're getting before paying.