Baggage Fees Hurting Airlines Bottom Line

The nation's legacy carriers charge many of their passengers to check luggage. But while they're doing this, they're overall revenue is falling.

Image: iStockPhoto

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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 contemporaneously on my own website, 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) announced 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.

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