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THE TRUTH ABOUT AIRLINE BAG FEES
By Joe Brancatelli
September 30, 2009 -- Here's an indisputable fact: During the second quarter of the year, the nation's largest airlines collected $669.5 million worth of baggage fees from the nation's hapless passengers. That's an attention-grabbing 275 percent increase from the second quarter of 2008.

But here's an indisputable truth: The more baggage fees that the big airlines pile on their customers, the faster their overall revenue is collapsing. In fact, the only carriers that escaped a double-digit revenue decline in the second quarter were the two that still allow all passengers to check at least one bag for free.

That you heard about the indisputable fact last week from airline executives, self-important industry analysts, and the myopic general media but weren't told about the indisputable truth is an indication of exactly how badly business travelers are served these days. Not only are the big airlines flying blindly toward a fiscal precipice, their supposed watchdogs are blithely going along for the ride.

"Baggage fees are the kind of shortsighted things that are killing us," the top U.S. executive of a European airline told me recently. "The accountants we have are great at tracking the 'ancillary' revenue we generate whenever we invent something like a baggage charge. But they have absolutely no way to match that against our potential overall revenue exposure if travelers book away from us. And no one holds them accountable for their one-way accounting. It's a scandal."

"Scandal" may be a little strong, but there's no arguing this airline executive's basic point. Ever since airlines began hiving off traditional services like in-flight meals, seat assignments, and checked baggage from the basic airfare, the carriers have carefully tracked the growth of this secondary revenue. But they never correlate it against their overall revenue picture. And U.S. legacy carriers have studiously ignored the fact that Southwest and JetBlue, which generally avoid what is now called as a la carte pricing, have gained market share, won the most customer kudos, and, not coincidentally, been the most consistently profitable.

Consider the odd, but entirely trackable, evolution of baggage fees. For decades, most carriers on domestic routes permitted customers to check at least two bags free. That changed during the first quarter of 2008, when United Airlines introduced a $25 fee for most coach passengers checking a second bag. The other legacy carriers—American, Continental, US Airways, and the now-merged Delta and Northwest—quickly matched. By 2008’s second quarter, American Airlines announced a $15 fee for checking the first bag. That fee was quickly matched too, not only by the legacy lines, but also by smaller carriers such as Alaska Airlines and AirTran Airways. The only holdouts: Southwest Airlines, which has clung tenaciously to its two-free-bags policy, and JetBlue Airways, which still permits all passengers one gratis checked bag.

By the time the airlines had released their 2009 first-quarter results, a pattern was obvious: The carriers that had most quickly embraced checked-bag fees had suffered a massive decline in revenue, anywhere from 9 to 21 percent compared with the first quarter of 2008. As I reported in an earlier column, the airlines that didn't ding customers for bag fees had much more modest declines. The pattern was there for anyone to see.

But when the U.S. Bureau of Transportation Statistics (BTS) said last week that airlines generated $669 million in bag fees during the second quarter, no one bothered to compare the statistics to the carriers' second-quarter revenue. All you heard about was the 275 percent year-over-year increase that the revenue represented. All you got was quotes about how carriers had finally found a reliable new revenue stream or wire-service dispatches claiming that passengers had "accepted" bag fees.

The truth, however, is exactly the opposite. Airlines collecting baggage fees suffered catastrophic overall revenue declines in the second quarter.

American Airlines, for example, generated an industry-leading $118.4 million in bag fees during the second quarter, a 219 percent year-over-year jump, says the BTS. Yet its total revenue in the second quarter dropped 20.9 percent to $4.88 billion from $6.17 billion in 2008's second quarter. The newly merged Delta ($118 million in bag fees) and Northwest ($67 million) reported a staggering 25 percent decline in combined passenger revenue during the second quarter. United's second-quarter revenue dropped 24.6 percent. Continental's total revenue plunged 22.7 percent, followed by AirTran (18.5 percent) and US Airways (18.4 percent). Alaska Air and its Horizon Air commuter subsidiary shed 12.3 percent of its second-quarter passenger revenue.

Just as in the first quarter, the only carriers to keep their second-quarter revenue declines in single digits were the two airlines that still permit free checked bags. Southwest was down 8.8 percent, and JetBlue's operating revenue declined by 6 percent.

Although it is impossible to generalize about airline revenue trends since the entire industry has contracted due to a number of circumstances in the last two years, the trend lines are undeniable. The carriers that try to generate cash by charging fliers for baggage are the same airlines being penalized most severely by passengers.

If there's any doubt that travelers absolutely despise baggage fees, check out the results of a new flash poll conducted by the Triangle Business Journal. More than half of the participants fingered bag fees as the current airline item they most want eliminated. And their unprompted comments about the fees are withering.

Of course, the nation's revenue-bleeding airlines don't see it that way. They've put their faith in the same bean counters who are blindly "growing" revenue with new fees. In recent weeks, they've begun to charge as much as $50 to check a second bag on many international flights. Last week, the legacy carriers invented a totally new surcharge: $10 if you fly on three traditionally busy days (November 29 and January 2 and 3) during the upcoming holidays.

And British Airways has created an unprecedented category of ancillary revenue: fees on premium-class fliers. Effective October 7, it will charge most U.S. business-class customers $90 a flight for the privilege of choosing a seat in business class more than 24 hours before departure. For U.S. fliers connecting through BA's global hub at London's Heathrow Airport, that means a startling $360 roundtrip in new fees atop business-class fares that already cost as much as $16,000.

Makes you wonder what third-quarter revenue figures are going to look like.

The Fine Print…
Can't figure out which airline is charging how much for baggage? Try this chart produced by Orbitz, the online travel agency. And remember: most full-fare coach, business-class, and first-class travel is exempt from bag fees. You may also get a fee waiver if you are an elite member of the airline's frequent-flier program.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.

THE FINE PRINT This column is Copyright © 2009 Condé Nast Inc. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2009 by Joe Brancatelli. All rights reserved.