AIRLINES' INCOME A LA CARTE

BusinessWeek, Jun 18 2009, 11:02 AM ET

While many U.S. airlines were in the red in the typically slow first quarter--the 10 largest carriers lost a collective $1.7 billion--the setback was far less serious than analysts forecasted, sparking a rally in airline stocks. Cheap fuel helped, but there was another reason for the better-than-expected results: incidental income streams.

The real cash cow these days is the frequent-flier programs, says Tim Winship, who helped develop such programs for Singapore Airlines and Hilton Hotels and now runs FrequentFlier.com. Winship estimates that the three largest carriers--Delta, United, and American--each generate roughly $1 billion annually from the sale of frequent-flier miles to hotels, rental-car companies, and others offering points-for-miles to their customers.

It's a revenue stream that's almost pure profit, since the marginal cost of transporting a free passenger is basically a can of soda, a bag of peanuts, and the incremental fuel cost--a little less than 3 cents a mile at current prices, or about $38 for a round trip between Chicago and New York. That's less than a tenth of the $500 to $1,000 an airline collects by selling the points needed to win one free seat. "This is a very profitable business--more profitable than the flying itself," says Winship.

Airlines are also raking in revenue from their most recently imposed fees. Jay Sorensen, president of IdeaWorks, an industry consulting firm, estimates that United will pocket $300 million in extra revenue this year from its recently added baggage fees. And Sorensen expects a proliferation of the fees some airlines charge customers who seek more legroom, given how lucrative these charges are proving for such early adopters as US Airways. That carrier, he says, will probably generate an extra $50 million a year from passengers paying to sit in an exit row. Industry experts predict airlines will roll out more a la carte fees--for everything from early boarding and fast-track security screening to the right to sit next to an empty seat.