Jay Sorensen flies both business class and economy.
While the differences between the two have always been stark — priority boarding and free alcohol are decades-old features of first-class travel — lately the gulf seems to have widened, said the U.S. consulting firm president.
Economy-class trips are defined by shrinking legroom, narrower cushion space, diminishing rewards for frequent fliers and, especially, the myriad fees that can pile up like thunderclouds as airlines increasingly offer top-up options on their tickets.
“Traditional airlines seem to want to punish passengers who buy these fares,” Sorensen said of bottom-rung tickets.
The additional money passengers pay for checked bags, pre-selected seats and onboard snacks makes up a growing share of airline revenue, even as a debate swirls around whether the charges amount to “junk fees” or the lower base price offers greater choice for travellers.
Air Canada took in nearly US$2 billion in so-called ancillary revenue in 2022, up by nearly 50 per cent from five years earlier, according to Sorensen’s IdeaWorksCompany. The category’s share of total revenue grew to more than 15 per cent from below 11 per cent in the same period.
WestJet this month introduced a new service tier, “Extended Comfort,” where economy-class passengers can pay for extra legroom, early access to overhead bins — coveted real estate due to checked baggage costs — and a free alcoholic drink.
Popularized by budget carriers more than 15 years ago and adopted by mainline players since, ancillary revenue plays an increasingly critical role in the industry, helping to diversify income and insulate companies from fluctuations in fare prices, fuel costs and competition.
“Ancillary revenues are stickier than passenger revenues, which can be subject to fare changes related to competitor fares on the same route,” said TD Cowen analyst Helane Becker, adding that airlines aim to “create moats around their business.”
COVID-19 also spawned habits that have been tough for some travellers to kick, including advance seat selection.
“Where you sat became important to many customers, because if you sat at the front of the airplane, you got off the airplane first. People paid a premium for that, and I think that that behaviour has stayed,” Sorensen said.
Ancillary income derives mainly from three streams: à la carte services such meals, onboard Wi-Fi and extra bags — or any bags; frequent flyer programs; and commission-based offerings such as hotel bookings, car rentals and travel insurance.
Globally, ancillary revenue was forecast to hit a new high of US$117.9 billion in 2023, up from the previous record of US$109 billion in 2019, according to an October report from travel technology platform CarTrawler.
Not everyone is on board.
Endless “nickel-and-diming” risks alienating passengers, who grumble online about a dizzying array of extra fees and service tiers, said John Gradek, who teaches at McGill University’s aviation management program.
On social media, WestJet’s new Extended Comfort option elicited everything from confusion — “are we getting an extra bill?” — to irritation — “just adds more … costs to already rising cost of air travel.”
But the fees aren’t going anywhere.
“They love these things,” Gradek said of airline executives.
“The revenues are very big dollars, and in some cases are the lifeline for survivability of ultra-low-cost carriers.”
Indeed, they make up about 40 per cent of Flair Airlines’ revenue — 50 per cent is the goal — according to its vice-president of ancillary revenue and digital experience.
“Everyone wants a bigger share of the wallet of travellers,” said Juliana Ramirez.
Part of the strategy is to lure consumers to the website with rock-bottom fares, and then offer numerous add-ons, she said.
A $67 fare for a one-way Toronto-Vancouver flight next month quickly balloons to $323 after selecting the $90 “Big Bundle” — one carry-on, one large checked bag, priority boarding, trip modification — plus a front-row seat, a bundle of travel insurance, a $15 online check-in ($25 if you wait until the airport) as well as taxes and third-party fees.
Ramirez acknowledged the frustrations of paying well over twice the price of your ticket simply to secure what would have been standard parts of the flight package a few decades back.
“We get it. No one likes to pay for a carry-on,” she said.
In its budget last week, the federal government pledged to “crack down on junk fees” charged by carriers. That prompted the National Airlines Council of Canada to demand greater clarity from Ottawa, arguing that fees give customers greater flexibility.
Air Canada said the advantage of unbundling is that customers know precisely what they are paying for.
“It is very transparent,” said spokesman Peter Fitzpatrick, highlighting the different tiers of service.
“Our branded fares are part of our ancillary strategy, as each branded fare is a combination of ancillaries (such as bag, seat selection and flexibility) sold as a package.
“Our experience is customers appreciate having the option to tailor their travel to suit their needs, including not paying for services they do not wish to have,” he said.
(He also said earnings derived from sources other than fares and cargo amount to well under 10 per cent of total revenues — lower than the consultancy report’s estimate.)
WestJet’s Madison Kruger put forward a similar explanation: “By offering our guests unbundled product offerings, it ensures that they are only selecting the travel options that matter most to them.”
Larger airlines see no choice other than to slice their purchase options into ever thinner levels of service in order to beat back the threat of discount carriers, said Ricky Zhang, founder of Vancouver-based travel rewards website Prince of Travel.
“Most leisure travellers pick based on price,” he said. “So Air Canada and WestJet have had to lower their base fares … and that results in the unbundling of the experience.”
Whether it unravels Canadians’ taste for travel is another question.
“If you’re positioning yourself as a better-service airline than (ultralow cost carriers), that branding statement is not aligned with your behaviour to basic economy passengers,” Sorensen said of carriers with spartan service for lower-tier customers.
“Why are you treating me radically different when I happen to be in my value mode?”
This report by The Canadian Press was first published April 22, 2024.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
