In a quarter that has seen BA seal their deal with American and also get approval to merge with Iberia you would think they have a lot to celebrate. Sadly, the quarterly figures paint a more depressing picture.

Carriers like JetBlue and Southwest as well as traditional carriers like US Airways have all been positing positive results. Contrast that with BA’s quarterly loss. BA has had to cope with the ash cloud and, more importantly, the on-going strikes by their cabin crew. However, dig below the headline loss and there are some signs of hope.

Cash remains very strong and yields are recovering. Costs are down and if BA are able to resolve the issues with the minority of the crew who are still wanting to strike they could start turning in results like Lufthansa. They had to cope with some industrial unrest and, to a lesser extent, the ash cloud but have managed (despite losses at subsidiaries British Midland International and Austrian Airlines) to turn in a 159 million euro profit.

Southwest have continued their own record breaking quarterly earnings record as well as the trend for US carriers to report healthy results. According to the Southwest website, their 2nd quarter revenue reached an all time high of $3.2 billion. What is even more impressive about that figure is the 21% year on year increase.

The bags might be flying free, but it does seem to be fueling Southwest’s top (and bottom) lines!

I don’t think I can put it any better than Southwest themselves said in their press release accompanying their figures:

“We have made excellent progress toward generating revenue levels sufficient to reach our 15 percent pretax return on invested capital target. Although business demand has not fully recovered, it has strengthened, and consumer travel demand is robust. We experienced record traffic levels during the quarter, despite flat year-over-year capacity, demonstrating a continuing and significant market share shift to Southwest, in part due to our unique and successful ‘Bags Fly Free’ policy. Further, we led the industry with our year-over-year domestic passenger revenue and corresponding unit revenue performance.”

The majority of airlines would love to have single digit pretax return on invested capital, never mind approaching 15%. And to couple that with record traffic levels that hasn’t been bought by lots of extra new routes/planes shows something is working. And it appears that that something is “Bags Fly Free”.

The devil though, as always, is in the detail. Whilst at the top and bottom line it looks like “Bags Fly Free” is working well, it would take further analysis to see if it really is taking market share away from competitors (by looking at parallel routes) as well as working out how much that extra revenue is feeding to the bottom line.

However, we have to be thankful for competition and customers having a choice!

Continuing the theme of profitability, I thought I’d comment on some excellent results from Allegiant in the US. For those of you that have read the classic “Marketing Myopia” article from the ’60’s you’ll know that some in the airline industry suffer from this. They view themselves as airlines whereas Allegiant works as a travel company that just happen to own an airline.

It might seem a semantic difference, but, after 30 continuous quarters of profitability (a pretty envious record in any industry) they seem to be on a to a winning formula. Some of the highlights from their results that jumped out at me (apart from the almost 9% drop in their operating margin) was how they split out their ancillary revenue income. Given all the discussions from Stelios in his EasyJet court case and in the US Congress, they have two reporting lines. One is for the average fare – ancillary air-related charges and the second is for ancillary third party products.

Also interesting is that they give the figures for each of these. In round numbers, average fare is $108 and that is made up of:

* Average fare scheduled service $73
* Ancillary air related $30
* Ancillary third party $5

For those of you following the EasyJet case, both those ancillary figures are around 32% (EasyJet are allowed some 25% from ancillary in their licence of the Easy name) of the average ticket.

If you are at all interested in ancillary revenue then it is well worth reading the more detailed Stock Market Information which you can read by clicking here

For those of you following the bible of “Low Cost Carriers” you’ll know some of the key tenets of the faith: fly to low cost airports not the main, central (and presumably higher charging) ones, operate one aircraft type and distribute direct. The purest would say that these are the keys to profitability.

One of the airlines that seems to have its own recipe for success are our friends at JetBlue. Single aircraft type? No. Mix of Embrarers and A320. Direct distribution? No – have teamed up with Sabre for third party distribution. As for items like out of the way airports, you can’t really say that about Regan National or Boston’s Logan which are areas of expansion for the company.

Now throwing the “rule book” out the window is only worth following if it produces better returns. And, according to JetBlue’s most recent quarterly figures it looks as if their strategy might be starting to pay dividends. An operating margin of just over 10% (and which “traditional” airline would not sell their soul to get a margin like that?) was up on the same quarter in the previous year gives some pointers to the overal approach.

They’re also doing a better job at filling the seats they have for sale – a load factor of 82% up 2.5 points shows that they are doing something right. It would be interesting to know how much of that is from the increased potential for distribution or taking market share from the likes of United or American as a result of thier baggage charges. Or, perhaps it is the re-launch and invigoration of TrueBlue their rewards program (another item of seeming “no-no’s” for a LCC!)

Couple all of this with some $1 billion in cash and short term investments it looks like JetBlue are in a particularly sweet spot as the US industry starts to recover and people begin travelling again. Looks like they have found one way of having that New Airline Business Model.

Pity the poor creditors of FlyGlobespan. PwC, who are winding the company up, report that it could take up to two years to resolve all the outstanding claims. Even then, the payout could be less than 5p for every one pound owed. The payment might be higher if there is any money recovered from E Clear.

It seems that aside from the £35 million owed to FlyGlobespan, E Clear owes some £65 million to other creditors. As I’ve blogged in the past, checking the agreements that airlines (or any merchant) has with their PSP or acquirer to check what position you are in is clearly a must if you want to prevent this happening to you!

Many PSP’s had been edging the major acquirers out of the market (airlines were often going direct to PSP’s and letting them access the banks) although, with the debacle at E Clear, this trend seems to have slowed. The major acquirers (witness the auction going on for RBS’s Streamline/WorldPay unit) have benefited from a “flight to quality”. It will be interesting to see if that results in higher costs to merchants in the long run. A hint of that will come in whoever buys RBS’s unit and what price they pay for it!

In the meantime, a lot of the PSP’s are going to great lenghts to show how money is ring-fenced and that they are financially strong. Given the recent investment in the likes of Ogone and GlobalCollect shows that the industry is seen as good business with long term prospects. That can only be to the benefit of competition!

****Breaking News*****

BA Cabin crew have voted to reject the latest management offer in their long running dispute. Out of some 11,000 Unite Cabin Crew members only half voted, with around 3,500 voting to strike against roughly 1,700 voting to accept.

Contrast this news with what their competitors are doing: Emirates have ordered 30 777-300ER’s with at least 300 seats on it and FlyBe announce they are ordering 35 Embrarer 175’s (with a lot less seats) and it makes you wonder what the BA crew who rejected the offer are thinking? FlyBe have linked up Air France making CDG become another viable hub to Schipol (we’ll all soon be avoiding high flight tax Germany if their proposals get enacted!)

If you are some of the 45 million or so of the UK population that doesn’t live within easy travel distance of Heathrow or Gatwick then you are starting to get lots of real choices of airlines and airports on where to fly to. If, like me, you are in Glasgow, then Schipol is as easy a hub to get to as Heathrow. And with the clear, lingering resentment 3,500 cabin crew feel for their employer I’m not sure how much their superior business class seats will compensate for those feelings.

Let’s hope (although it seems a very slim one) that the union and crew will see sense and not strike. Maybe seeing all their competitors buying lots of new planes might concentrate minds?

Any of you that have been in the States of late will probably have seen the Southwest advertising campaign “Bags fly free” in a not too subtle dig at their competitors. In the greatest free market of them all, it shows that the prevailing orthodoxy (which seems to be charge for almost everything) doesn’t always have to apply. Thankfully, that is one of the advantages of competition.

Now, Southwest have not been the only big carrier to take a different approach. JetBlue have also been making a stand outside of the crowd. That’s all well and good, but does it work? Clearly, it works for consumers, but is it enough to put extra (profitable?) bums onto seats? A few months after the baggage battle really started, there was some circumstantial evidence that there was share shift going on (away from the big traditional network carriers) and that this could be benefiting JetBlue and Southwest.

The US Congress has been looking at this subject (see some of my earlier blog posts) and in testimony to them, Southwest provide some hard numbers around the revenue that this appears to have generated. According to them, it is $1 billion in extra revenue “since the campaign began”. Leaving aside exactly how long that has been running, that is still a chunk of change.

It is hard to disentangle cause and effect (there have been lots of other things happening in the market, not just baggage charges) and to say categorically that “bags fly free” caused every dollar of this. The other interesting figure is will it feed through to the bottom line? Revenue is great, but sustainable profits are even better. I’ll be checking Jay Sorensen Ancillary Revenue Guide this year to see if his analysis shows that it is having a positive impact on profits!

The centre for Asia Pacific Aviation has an excellent report on “Ancillary revenues:GAO report and Subcommittee hearings promise more regulations” which is full of Ancillary Revenue statistics as well as some very interesting arguments from the likes of Spirit airlines, where they drill down in to the substance behind their approach to fees and fares.

Well worth reading by clicking here

No that is not a typo. Ryanair have over 7 million bookings for the month of July. So much for people hating Ryanair with a passion. It certainly doesn’t seem to have hit bookings!

Interestingly enough, they report that as European teams went out of the World Cup, their bookings went up. I dread to think how many bookings they would have had if Germany, Holland and Spain had not made it to the final four!

The real insight here is the single minded marketing proposition that Ryanair put out. I have to say I think O’Leary is a marketing genius. No, honestly, I do. Ryanair puts out a single minded message. I once heard Willie Walsh (BA’s CEO) say that Ryanair “consistently deliver what they promise. They promise you nothing and that’s what you get”. Now, implicit in that is that they will get you safely from A to B (even although B may be closer to A than the place you really want to get to, but, 7 million people can’t be wrong!) and that anything else you pay for.

That single minded proposition also educates consumers as to what they are going to get. There is no mixed message (think how difficult it is for any traditional carrier to market very costly business class fares along with cheap seats at the back of the bus) about low price and customer care. Everyone knows with Ryanair that it is (a) cheap – as long as you don’t take any optional extra (although I don’t get how check in is optional) and (b) you are on your own if anything goes wrong, like ash clouds and so on. You know this, I know this and it seems 7 million pax this month know this!

The other great insight that O’Learly has with this single minded marketing proposition is that he educates people who he doesn’t want as customers. That saves people booking with them with high expectations that can’t be delivered at the prices he is charging. You know it is (potentially) cheap and there is a reason for it. And it seems to work (can 7 million people in one month be wrong?) both for customers and shareholders – just compare and contrast the bottom lines of Ryanair and British Airways!

Travel was one of the first areas to embrace the internet. We saw the massive growth in Online Travel Agencies like Ortbiz, Expedia and Travelocity. Airlines and hotels all rushed to sell their product direct to consumers both to cut distribution costs but also to allow them a closer, direct, relationship with the customer.

Whilst that was all pioneering stuff, as often happens, the back-end gets neglected. The nitty-gritty of getting paid in the travel world is still firmly routed in the mid 20th century. That history could be the subject of several other blogs on their own, however, it looks like the industry is now starting to bring the payments angle into the 21st century.

In my previous blog I talked about EMD (Electronic Miscellaneous Documents) and the impact that they were going to have on the industry. Well, it has been a busy week as the industry has just announced the launch of OpenAxis. This is a group of airlines like Delta, Continental and American who have come together to have standards that enable distribution of products and content.

Those standards are a first step in making sure items like baggage charges or extra legroom seats can all be sold direct or indirect. The next step is getting the money from the customer cost effectively. So it is really interesting to see that eNett are the first payments company to join the new grouping.

In the press release announcing the new members, there is a quote from Chris Vukelich from eNett (for those of you who don’t know him, I worked with him at British Airways where amongst other things he took on American Express over the merchant fee that BA were paying and was, more recently at OpenSkies) where, as ever, he hits the nail on the head. He talks about “developing standards for all forms of……….settlement”.

It really is about getting paid. If you have the distribution sorted, and these new standards mean, that, for example, the extra legroom seat could get sold anywhere from a travel agency, to the airlines website/call centre, a self service check-in machine at the airport to, potentially onboard the aircraft. Tracking all of that, reconciling it and making sure the money ends up in your bank account (cost effectively, of course) is what eNett is aiming (along with other payment processors) at.

Whilst all these standards doesn’t mean the fees are going away it does mean that many airlines might start to move forward and make a profit!

This is fast changing area and I’d welcome thoughts/comments on the issue. Please leave a comment as I would love to hear from you.

To find out more about OpenAxis click here

For more information on Payments as it relates to the Travel Industry please check out the website for Airline and Travel Payment Summit by clicking here this will take you to the Industry Trends section.

You can also read this blog posting on AllPayNews which covers the full range of payment issues across all industries. To go to the AllPayNews website, click here

It has taken a few years for the ancillary revenue movement in many airlines to gather speed. However, coming behind the airlines have been the standard setters (see the blog about ATPCO and OpenAxis) and now the government.

Yesterday, the Government Accountability Office in the US, issued its findings a snappily titled report on: “Commercial Aviation: Better Information about Airline-Imposed Fees and the Refundability of Government-Imposed Taxes and Fees Could Benefit Consumers”. It certainly echoes some of the issues that the market has been trying to address such as transparency of prices in both direct and indirect sales channels.

However, even just reading the summary might just hint at another agenda for the government: “Airlines’ increasing reliance on fee revenues reduces the proportion of total passenger revenue that is taxed to help fund FAA. The IRS has determined that many airline-imposed fees are not related to the transportation of a person–the basis for imposing the 7.5 percent excise tax on domestic air transportation–according to applicable Treasury regulations and IRS guidance–and, thus, only a proportion of the total fee revenue is subject to taxation.”

In tough times it seems the government view is that the industry is doing this to avoid paying tax. It is interesting to note that according to industry figures (quoted on Airwise News) ancillary charges were about 1% of revenue in 2007 and still only 4% in 2009, which can be the difference between profit and loss in an industry with waiver thin margins. But, hardly enough to be a deliberate tax avoidance ploy?

The report does make a number of relevant points in terms of customer transparency, which with ATPCO, EMD and IATA e-travel the industry should start to address. The real interesting bit is should this be regulated in terms of what is and what isn’t included in a “fare”? Would we think of having similar type rules for what you expect from a restaurant? Some places charge for the bread they give you while you wait, some give it free and some don’t give you any at all. The choices for eating out are myriad, yet, customers somehow seem to navigate them daily.

Making the total price transparent helps customers make informed choices and that is a good thing. With these standards it should start to be easier for this to happen in the indirect sales channels and that can be nothing but a good thing. Hopefully, it might head off another bout of regulations in an already highly regulated (for many good reasons) industry.

You can link the to the Summary of the US Government Accountability Report here and the full report (which is 10 pages in pdf) here

These issues are going to be discussed in more detail at the upcoming Airline Ancillary Revenue Conference (ARAC) in Montreal on 13/14th of October (click here for the conference website) and SeaMountain would be interested in your thoughts and comments on this subject.

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