Alaska Air Group has revealed internal discussions are taking place among the company’s management over the possibility of charging passengers for preferred seating as way to bolster its ancillary revenue streams.
Company CFO Brandon Pedersen recently stressed to investors that ancillary sales have become an important source of revenue for the company. Currently, Alaska Air Group averages roughly $12 per passenger in ancillary revenue, which results in about a $300 million stream of annual revenue for the carrier. Fees for the first checked bag account for roughly 40%, or $120 million, of Alaska’s total ancillary revenues.
Even as Alaska’s ancillary revenue per passenger has skyrocketed roughly 235% since 2005, the company has concluded it is somewhat behind the curve in ancillary revenue generation compared to its US network carrier peers. “We recognise we haven’t done as much as other carriers with respect ancillary revenues,” says Pedersen. “We think there is more to do here.”
Pedersen explains that Alaska does not currently charge for premium seating, which allows customers to select their preferred seat onboard for a set fee. “That [premium seating] could be an opportunity for us in the future,” he reveals. The potential revenue generated by selling preferred seats could provide a positive incremental benefit to Alaska. The company’s larger network counterpart US Airways has estimated its preferred seat selection offering dubbed “ChoiceSeats” should generate more than $100 million annually.
Alaska’s CFO also quickly cautioned that no conclusion regarding instituting a charge for preferred seating has been drawn. “No decisions have been made at this point,” Pedersen declares.
He does envision room for growth in revenues from Alaska’s sales of hotel rooms and rental cars. The company recorded “nice increases” year-over-year for 2011 in that business, but Pedersen acknowledged the growth was “off a pretty low base”.
Recently Alaska has received a lot of questions from the investment community about potentially raising its first checked bag fee from $20 to the industry standard of $25 (the APEX Editor’s blog, 28 April 2012). While Alaska has “done the math” on the revenue upside of increasing its checked bag fees, Pedersen also cautions that Alaska’s major competitor Southwest Airlines does not charge passengers to check their bags. Alaska needs to “balance the desire for more revenue” with the reality that one of its largest competitors has does not charge similar fees, cautions Pedersen.
Alaska is attempting to strike a delicate balance between growing its ancillary revenue base while ensuring a positive customer experience. As a result of its efforts to maintain that balance certain charges for customers are off limits including carry-on bag fees or charging passengers a website convenience fee. Ultra low cost carrier Spirit Airlines charges its customers fees in both those areas and Allegiant Air earlier this year began charging its passengers for carry-on bags. “We do think there are some places where we have an opportunity [for increased ancillary sales], but some we would probably not go toward just because they’re not consistent with how we want to position the brand,” explains Pedersen.