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Getting there is half the fun. Given how miserable travel has been recently, that equation doesn’t hold much promise for how enjoyable this summer’s revenge vacations will be. But airlines want to make your journey more comfortable and convenient—for a price.
Americans are traveling in droves as they try to make up for lost time during the pandemic, but that’s hardly been a windfall for the airline industry. All the major domestic airlines are trading down this year as they grapple with labor shortages, airport congestion and other capacity constraints at a time of record fuel prices—not to mention bad and downright violent behavior from customers.
Those factors, along with worries of declining demand later this year and next, have weighed on investors’ minds. In the past month, analysts have been lowering their earnings per share estimates for either this year or next for key companies like American Airlines Group (AAL), Delta Air Lines (DAL), United Airlines Holdings (UAL), and Southwest Airlines (LUV), according to data from FactSet.
The upshot is that airlines are have been getting more creative in finding incremental revenue. Enter the upsell.
At this point, most travelers are aware that they have to pay more for things like extra legroom and early boarding, and the practice has already been built into analysts’ models for some airlines profits.
Raymond James analyst Savanthi Syth recently upgraded Southwest to Strong Buy, arguing in part that the company’s “current initiatives should enable it to capture a greater share of corporate revenue (relative to 2019 levels), including through up-sell.”
Indeed, the practice is proliferating, and provides a key incremental top-line driver for airlines looking to offset the pressures facing the industry. In 2009, just 5% of airline revenue came from this practice, but that figure has jumped to 15%.
That figure jumps to 50% for some low-cost carriers, says Stephen Grabowski, co-founder and CEO of Gordian Software, which provides travel websites and airlines with the technology to sell add-ons.
Traditional airlines like Delta are watching the success of low cost carriers like Spirit Airlines (SAVE) and Ryanair Holdings (RYA.Ireland) to see that “there are a lot more opportunities for them to monetize the flight journey and have been creating new products, like trimmed down basic economy cabin classes, as a result,” he tells Barron’s. “These all add up to meaningful margin gains for airlines that lean into them.”
While amenities like early boarding and seat selection aren’t new, airlines are looking to expand this market, on everything from yearly subscriptions for extra leg room or tailored lounge access for travelers with long layovers.
Moreover, Grabowski argues that airlines’ huge access to customer data isn’t harnessed at the moment—that’s why you get emails telling you to select a seat when you already have. Companies that can change this in the near future, and use data to personalize offerings, will see the biggest success by targeting offers tailored to travelers’ known preferences.
In the end, that might not be welcome news for beleaguered travelers, who are already dealing with sky-high airfares and big delays. Yet it could offer some relief to airline shareholders.
Write to Teresa Rivas at firstname.lastname@example.org