Bag Fees May Not Be Airlines' Savior After All


There's been a lot of speculation lately that bag fees are actually hurting the airlines that charge them. This all started with a column from Joe Brancatelli, in which he boldly asserted "The more baggage fees that the big airlines pile on their customers, the faster their overall revenue is collapsing."

As Brancatelli says, there's no disputing the hard data. The airlines with the most fees have also seen their revenue drop in large amounts since those fees were implemented, and especially during the past few months. United, for example, saw a 21 percent drop in revenue during the second quarter of this year. Continental, Delta, and American all saw quarterly revenue drops between 15 and 19 percent.

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Bag fees could very well be driving those numbers, but there is also the matter of a large-scale recession and a corresponding drop in overall travel. All airlines are struggling right now, bag fees or not, and one could argue that bigger losses at bigger airlines are due simply to those airlines operating on a larger scale. Legacy lines also tend to rely heavily on business travel, which has all but ground to a halt this year. With all these factors at play, it's almost impossible to prove a distinct cause-and-effect relationship between the bag fees and revenue declines—the former does not necessarily beget the latter.

But the case grows more compelling when one looks at Southwest and JetBlue. As Brancatelli notes, "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." In today's third-quarter earnings call, where Southwest reported a small loss , CEO Gary Kelly said, "I don't think it's a reach at all to suggest that we're getting two or three percent of our customers because we're not charging for bags—and a little number of a big number is a big number."

Of course, numerous estimates suggest Southwest is leaving hundreds of millions on the table by not charging for checked bags. According to Kelly, however, there's little second-guessing his airline's choices. "It's been our view that we're at worst neutral by not charging the bag fee, and we believe that we're ahead of the game by getting more customers by not charging the bag fee." So, there!

But assuming fees really are cutting into airlines' revenue, is there any way fee-charging airlines could adopt the Southwest/JetBlue model? Probably not, simply because bag fees bring far too much money for airlines that desperately need it. Ending bag fees would be like cutting a desert city's water supply: Eventually, everything would dry up. Bag fees are keeping airline losses manageable, and preventing carriers from dipping into their cash reserves. In today's low-revenue environment, the loss of bag fees could spell beginning of the end for perhaps several carriers.

So, damned if they do, damned if they don't? For now, bag fees are certainly helping, and they certainly aren't going anywhere. But as Southwest, JetBlue, and other low-cost carriers continue to fare (relatively) better than fee-charging legacies, one has to ask: Do bag fees cost more than they're worth?

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