ANALYSIS: Southwest and JetBlue eye ancillary revenue gains in 2013

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Low-cost carriers Southwest Airlines and JetBlue are making a push to grow ancillary revenue in 2013, as the two carriers capitalise on new and upcoming ancillary products.

Both airlines, which released their 2012 full year financial results recently, cited strong ancillary revenue performance in 2012 and aim to grow this further this year through stronger sales of existing ancillary fees and the addition of new charges.

Southwest's chief financial officer Tammy Romo said during the airline's earnings call on 24 January that the carrier continues to be pleased with the revenue contribution from the airline's ancillary products.

Revenues from Southwest's Business Select product came in at $23 million, a fourth quarter record for the carrier. Business Select, which passengers can choose to upgrade to when purchasing an airfare from Southwest, gives travellers priority boarding, check-in and expedited security clearance among other perks.

The carrier also reported $50 million in incremental passenger revenues from its Rapid Rewards frequent flyer programme, taking 2012's total incremental revenue from the programme to $180 million.

JetBlue says its 2012 ancillary revenue helped drive record revenue performance in 2012, by growing 10% during the year or about $50 million. Ancillary revenue in the fourth quarter was about $20 per passenger, said JetBlue's chief financial officer Mark Powers during the airline's earnings call on 29 January.

Powers attributes the growth largely to the airline's Even More product, which generated $150 million in revenue in 2012, up from $120 million in 2011.

Even More comprises of Even More Space, extra legroom seating on board the airline's aircraft, and Even More Space, which gives travellers access to expedited security at airports.

JetBlue expects Even More to continue to drive revenue in 2013, and forecasts that ancillary revenues in the year will grow by between 10% and 15%.

Powers said the airline is looking at "pay for performance" structures for some work groups to help drive sales of Even More. "We certainly would expect a lot more effort behind selling that, candidly, very, very nice high-margin product," he said.

Southwest has detailed a plan to grow ancillary revenue by $100 million in 2013, through raising existing fees and adding new ones.

Earlier this month, the airline began selling priority boarding positions at airport gates beginning 45 minutes before the flight's departure, at $40 per flight. These "A" boarding positions are also offered to passengers who purchase Southwest's Business Select fares and EarlyBird priority check-in. Southwest does not assign seat numbers to passengers.

The airline does not expect the sale of priority boarding positions to be a significant driver of ancillary revenue, with chief commercial officer Bob Jordan saying it expects to sell fewer than one position at the gate.

However, later this year, the airline will continue rolling out changes to its ancillary fees in a bid to bump up ancillary revenue.

From February, it will raise fees on certain checked baggage. Southwest passengers can check up to two bags for free, but pay additional for extra checked bags.

The airline will also increase the charge for its EarlyBird priority check-in product to $12.50 per leg from $10, effective from March. EarlyBird revenue came in at $161 million in 2012, a result that far exceeded the airline's original expectations, said Romo.

Later in 2013, Southwest will introduce a new no-show fee for travellers who purchase the most restrictive fares who fail to show up for their flights. The airline's chief executive Gary Kelly said in December 2012 that such fees are considered "industry standard" and will allow the carrier to re-sell a seat that is not being used.

Jordan has said that besides contributing $100 million in incremental revenue in 2013, the new ancillary fee changes will have an annual run rate of $150 million to $175 million.

While both Southwest and JetBlue seem intent on growing ancillary revenue in 2013, the two airlines do not seem headed in the direction of ultra low-cost carriers' business model of charging passengers for every single service on a flight.

Southwest's Kelly has been asked repeatedly in recent months if he will consider charging passengers for the first two checked bags in what would be a farewell to Southwest's "bags fly free" motto. While Kelly has not explicitly ruled out charging for bags, he pointed out on the airline's earnings call that Southwest has been proven right in its belief that not charging with bags will win it more customers in the long run.

"We've consistently shared that the best estimate that we had was about $1 billion increase annually from these market share gains, which we attribute much of that to our baggage policy," said Kelly, adding that the airline has no plans to charge for bags "at this time". Southwest had noted that as capacity from its subsidiary AirTran is reduced while the two airlines' networks are being integrated, ancillary revenue from AirTran has gone down. AirTran charges for checked bags and Kelly has acknowledged that the carrier will lose "a lot" in baggage fees when it eliminates them on AirTran.

Both Southwest and JetBlue, for now, do not look set to follow in the paths of other low-cost competitors like Spirit Airlines and Allegiant Air when it comes to applying ancillary fees across the board. Southwest and JetBlue still offer complimentary snacks and non-alcoholic beverages on board, and JetBlue even offers free live television.

Spirit charges passengers for a wide range of products and services, ranging from a bottle of water on board to carry-on bags. The Florida-based carrier has said it plans to unbundle services further to gain more ancillary revenue.