An American Express press release went out last week with the following:

Starting June 1, 2010, Delta SkyMiles Credit Cardmembers will receive a free checked bag on every Delta flight – up to a $50 savings per person on a round-trip ticket – available for up to nine people in the same reservation.

But take a look at the quote below from Delta CEO Richard Anderson on January 26th this year.

We are also going to stay the course with respect to ancillary revenues, a $4 billion revenue stream that we are positioned to grow.

Is there a contradiction? Won’t this move by Delta to allow passengers with certain Amex cards to check luggage for free reduce their largest (legitimate) line in the ancillary revenue account, checked bag fees? The answer is that there is no conflicting message at all.

I’ll leave it to USA Today to explain where I am going with this:

But if the traveler uses an airline’s branded credit to pay for gasoline, groceries and other goods and services, the amount charged can add up to thousands of dollars a year. Airlines typically get about a penny of every dollar spent via their branded credit cards. If a card holder purchases $30,000 worth of goods or services, for instance, the airline would get around $300.

The real issue here is what constitutes ancillary revenue and why we get so hung up on that line anyway. Every CEO presenting financial results is expected to detail growth in ancillary revenue, but I’ve never seen an industry approved accounting definition of this term. The stock analysts love it, but any airline that really understands merchandising, branding and the value of customer loyalty will know that success must be measured by much more than just squeezing blood from a stone.

The reason I used the term legitimate above was because I’ve never bought into this argument that all non ticket revenue is ancillary – ancillary in my mind is revenue that can be tracked to an individual passenger, either by unbundling, or by sale of additional services. Selling frequent flier points may be great extra revenue, but in my definition I’ve never lumped it into the ancillary revenue bucket. Pedantic point, I know.

The US Bureau of Transportation Statistics has a different way of classifying this, and takes an opposing view on the sale of award points/miles.

Ancillary fees include baggage fees, reservation change fees and miscellaneous operating revenue, including pet transportation, sale of frequent flyer award miles to airline business partners and standby passenger fees. Revenue from seating assignments and on-board sales of food, drink, pillows, blankets, entertainment, or any other ancillary items are reported as Transport Related Revenue and cannot be identified separately.

If you are still not convinced that Delta is getting a good deal by giving up the bag fees here, then this announcement from December 2009 might help convince you.

The companies announced that AmEx and Delta have signed a multi-year extension of their existing partnership, and part of that provides Delta with an immediate $1 billion for the purchase of SkyMiles to be earned by cardholders. “Delta expects to receive an additional $1 billion from contract improvements through 2010”

That should cover the lost revenue from selected passengers not paying for checking their bags many times over.

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