United was the first, but when only Spirit and Skybus match, that’s hardly an industry-wide trend. But now US Airways has responded to the new second checked bag fee that United announced a week or so back. And like United, it said more such ancillary charges are likely as oil keeps climbing. You can hear someone you know talk about these extra charges on National Public Radio’s Morning Edition here, and you can read US Airways’ own explanation of the policy on the next page where the airline’s president, Scott Kirby (below), talks about the change.
Dear US Airways Employee:
Today, US Airways announced that we’re matching United Airlines’ checked bag policy ($25 for the second checked bag) for travel after May 5. Even though other low-cost carriers have this policy, and even though our premium customers won’t be charged for the second bag, you’re likely to get questions from customers and co-workers. Let me share some of the reasons for this change with you – both the short-term view and the longer term industry view.
In the short term, high fuel costs are our new reality. Oil topped $100 a barrel this month and it appears that the days of $30 or even $50-a-barrel oil are gone forever. The impact on the airline industry is very significant. In our case, higher fuel prices are projected to add $800 million to our expenses in 2008. When you consider that our entire profit in 2007 was $440 million (excluding special items), the impact is stark.
There are several ways to offset this impact. Raising fares is one way, but raising fares is only possible when supply and demand are balanced. When there are too many seats in the industry chasing too few passengers (as is the case today), passengers will move their business to other airlines with lower prices. This means we have to look for ways to 1) raise revenues to protect the financial health of the company, 2) stay competitive in the industry, and 3) give customers what they truly value.
This requires us to think about the business in ways we may not have five, 10 or 15 years ago.
That’s where we are today. And we’re moving carefully. Rather than issuing a blanket charge for any second bag, we’ve looked at it with a closer eye and will not charge our best customers –Dividend Miles Preferred or Star Alliance Silver or Gold members. Nor are we charging members of the military or our employees, or charging customers checking assistive devices.
This means that roughly 8 percent of our current customer base will be affected by the change. Even so, the impact on revenues and costs will be significant. We’re looking at all aspects of the airline with an eye toward adapting our business to the needs of our customers, because not all customers want — nor will they pay for — the exact same product. That’s why hotel chains like Marriott have several different kinds of brands that cater to different kinds of customers (a high-end Ritz-Carlton or more economical Fairfield Inn). We, too, have different “brands” for our customers – upgraded international service, First Class and airport clubs, while also offering low book-ahead fares for leisure customers.
There are other examples of this “unbundled” approach in other industries. Hotels, for example, charge extra for amenities like bottled water, parking, use of the gym or telephone, etc. Rental car companies charge extra for navigation systems or satellite radio. At US Airways and other airlines, we also charge today for food in coach.
These business models reflect the reality that services cost money, and those who want and use them should pay for them.
Some critics may call this another example of airline customers being “nickel-and-dimed” for services that used to be provided as part of the flying experience – food, entertainment, and now bags. But the airline industry of 2008 is very different from the industry of 1998 or 1988, and we have to be realistic – and innovative – about our product. I suspect that this will be a year when we see a lot of change in the industry – mergers, acquisitions, and more “un-bundled” services rather than a “one product fits all” approach to our business.
The financial stability of the company and our employees’ security rests on a more realistic assessment of airline life in 2008. Rather than wait for external factors to change, we have to take charge of our own destiny and ensure we’re here for the long-term.
More details are being sent to the airports and are being posted on awaCompass, theHub and our newest web site, Wings. As always, if you have questions, let us know.
Scott Kirby (above)