Richard Turen
In the childish world of consumer perceptions, price trumps just about everything else. But in the adult world of profit and loss, price is just about getting the consumer in the door. What comes after that is, increasingly, the key determinant of sustainable profits.
In the travel sector, we see this change take some dramatic forms. Airlines, hotels and cruise lines are actively imposing more and more ancillary fees designed to upgrade the experience for which the consumer has, theoretically, closed the deal.
This is one game in which the airlines have no peers. They have made the mere experience of flying so distasteful that the consumer is willing to pay up for even the slightest measure of additional comfort.
Let's give them their financial due. In 2013, according to a recent study from Ideaworks Co., 10 airlines generated more than $1 billion in revenue through the judicious use of ancillary fees. The leader and world champion of extra charges is United Airlines, which collected $5.7 billion in such fees last year. American Airlines generated just over $3 billion, with Delta close behind.
But the study also looked at percentage of income as well as the raw data. Here, the clear winner was Spirit Airlines, which generated better than 38% of its total income from ancillary services in 2013.
Spirit's approach to additional fees is worthy of a two-part Reality Check. My favorite little fine print policy of theirs concerns reimbursement for "interim expenses" when they manage to lose a passenger's bags. In order to be reimbursed for purchased emergency clothing, passengers have to mail the replacement clothing to Spirit at their own expense.
Airline stocks have been soaring, and one of the reasons for that is that industry analysts see a public resigned to paying extra fees for onboard services coupled with myriad new extra-fee services.
The current "seat back" controversy will, I am certain, result in additional fees for the privilege of reclining into someone else's space. My guess is that one airline will require that all passengers intending to recline their seat in flight will be required to purchase economy plus seating. Others have suggested that one side of the aircraft will be reserved for those who are inclined to "recline."
A la carte pricing is already in effect for snacks and meal service, early boarding, exit row seating, extra legroom seating and, of course, baggage charges.
Look for food services to be ramped up to include more profitable options, along with new online processing fees and personalized seating charges. It will cost even more for "human" airline interaction. Ultimately, more airlines will charge all passengers who wish to select their seat in advance. Analysts expect a particularly high return when this policy takes effect.
In the hotel sector we have started seeing ancillary charges for a range of services once thought to be complimentary. You can find hotels that charge for baggage storage or extra towels or pillows. But to see the wave of the future in hotel surcharges, you might want to visit the Tune Hotel in Melbourne, Australia.
At the Tune, a property launched by the founder of the successful, low-cost carrier AirAsia, guests pay for a room and then add-on additional services such as WiFi, clean towels, bathroom toiletries and the privilege of actually turning on the television.
Thanks to social media, news of the Tune's low entry-level pricing and freedom to select additional amenities has spread rapidly. Other hotels are now under pressure to offer competitive pricing with a menu of guest add-ons. In that sense, Australia is an interesting hotel battleground to watch.
In the U.S., I think we'll soon see environmentally friendly quiet rooms sold at a premium. So-called ecofriendly or "green rooms" have not been particularly successful. But we will soon see a new branding format in which guests seeking extra privacy and quiet in rooms treated with antibacterial cleaners will have supplemental options within the property. Many hoteliers are quite optimistic about this reimagining of the green concept.
The hotel sector took in $2 billion in ancillary fees last year, a year-over-year increase of 6% but far short of the airlines' level of extra-fee revenue growth. Look for hotels to begin charging guests for an early check-in. Las Vegas is leading this trend, with both Caesars Palace and the Bellagio offering guests early check-in for a fee.
The Aria manages to double dip on ancillary fees by offering a fee-based "no waiting" check-in line. The arriving guest can then purchase a $30 package that includes several room choices, such as connecting rooms, specific floors and room locations that might be near or far away from the elevator.
In some major U.S cities, guests will soon be offered in-room "dinner and a movie" packages in an attempt to keep guests on the property.
As regards hotels, we are soon going to see major brands re-engineering their pricing to offer guests ancillary services that are both palatable and profitable.
The airline and hotel sectors look with some envy at the success of the cruise sector, which they see as having it both ways: promoting inclusive vacations, then doing their best in their pricing policies to show that inclusiveness is not in their DNA.
Although Carnival and Norwegian now own five-star inclusive brands, the bulk of the American cruise industry is based on an entry-level cabin price that does not include drinks, gratuities, shore excursions or fine dining. This presents opportunities.
Carnival is testing a series of perks that can be purchased for $50 per cabin. If the tests are successful, Carnival will be selling packages that include the ability to board the ship early, an assurance that the guest's room will be ready for immediate occupancy and a promise of hastened luggage delivery so passengers can change quickly into their on-board finery.
The major cruise lines have figured out ways to monetize that most appealing of cruising myths: top-drawer, inspired cuisine. It does exist on any number of ships, but the guest has to pay extra for it.
Norwegian Cruise Line has been seeing some stellar financial results despite real ticket pricing challenges. This revenue growth has been achieved, in part, as a result of numerous noninclusive extra-fee dining venues, entertainment options that are fee-based and cruise-within-a-cruise options that place certain cabin types, like the exclusive Haven area, on a pricing par with top suites on the five-star lines.
Norwegian has been able to enhance its onboard supplemental income by partnering with some major names, such as the Blue Man Group. All its ships now feature an outpost of Carlo's Bake Shop, designed by Buddy Valastro of the TLC program "Cake Boss," and branded vodka from rapper Pitbull. There are clear indications that this kind of celebrity partnership results in ancillary spending opportunities that few guests will turn down.
The traveling public knows it is being upsold, and travel agents are concerned that the vast majority of supplemental onboard fees are noncommissionable. In my opinion, both the public and the sellers are being squeezed like lemons.
Senior Contributing Editor Richard Bruce Turen was named a Superstar Generalist in Conde Nast Traveler's most recent list of Top Travel Specialists. He is the owner of luxury vacation firm Churchill & Turen and also owns and edits TravelTruth.com. Contact him at rturen@travelweekly.com.