How Ancillary Fees Drive Revenue Surplus of U.S. Airlines

After decades of deregulation, the U.S. Department of Transportation (DOT) has begun re-regulating the airline industry through new rules on family seating, refund requirements, and ancillary fee transparency. While economists often caution against market intervention, the rapid expansion of ancillary fees raises questions about whether such oversight is warranted. In this study, revenue surplus is defined as the markup of price over marginal cost, capturing the degree to which airlines generate revenue beyond the level justified by cost efficiency.This paper examines how ancillary revenues affect airlines’ revenue surplus and reshape competitive dynamics across business models. Using panel data on U.S. airlines from 2000 to 2019, we find that ancillary revenues significantly enhance overall revenue surplus, with ultra–low-cost carriers (ULCCs) outperforming both low-cost (LCCs) and full-service airlines (FSAs) despite offering lower base fares. These results indicate that ancillary fees are not simply cost-recovery mechanisms but serve as a strategic profit lever—one that alters pricing structures and market competition in the post-deregulation era.