Airline bag fees: Irksome, but eternal

Washington DC
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To hear flyers describe it, airline fees to haul their bags are unfair, unprincipled, cheap and even outrageous. But airline executives say that imposing ancillary fees for luggage carried in an aircraft belly is not just fair and equitable, but also logical and good for ­passengers.

The concept of imposing a bag fee began with the low-fares carriers of Europe, but it has spread, says Tiger Airways chief executive Tony Davis. "It is very much like the old ­European concept of a hotel, where you pay for a room and then pay for extras such as a meal or even a telephone call." Davis says charging for baggage is essential to Tiger's embrace of a low-cost fundamental: high productivity. "To load and unload bags from the hold adds to the turnaround time, and low-cost airlines are about seat-mileage productivity," he says. Tiger charges a per-kilo fee once a bag goes over a certain amount.

Tiger is firmly modelled on the Ryanair approach, a model that has always offered a bare-bones proposition: the lowest fare it can devise, but the passenger pays extra for just about everything. Ryanair, which raised its bag fees to £16 ($25) in May, says ­revenues from baggage carriage have fallen slightly but it feels the fees helped modify flyer behaviour. Bag fees along with other ­ancillaries have become a staple of European low-fare carriers. For instance, at bmi "we have the bag fees at bmibaby, our low-fares unit, because it's a low-cost airline, but not at the mainline bmi", says bmi deputy chief executive Tim Bye.

 
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But the concept had been relatively slow to reach the world's largest airline market, the USA. There, when network carriers began considering ancillaries, they looked at the Air Canada model of unbundling by attributes and focused on such services as choice of seats and choice of refundability. Air Canada had a fare category in which the passenger either brought no checked luggage or paid a higher category, but in the US airlines saw competitive ­concerns as the deciding factor. If they began charging for bags, a service that had been long assumed to be a part of the basic fare, passengers would leave them in droves.

So it was left to those US carriers that experimented out of necessity to import the bag fees. It was a carrier that was attempting to create a new category, the "Ultra low-cost airline", that began the experiment. Spirit Airlines, based in South Florida, decided in March 2007 to be the nation's first low-cost player to impose fees for on-board drinks, seat choices and bags. It began charging $5 per bag, with a discount if the fee was paid online. It later raised the fees.

But other US carriers remained wary. Then came the oil shock, and things changed quickly. Oil prices replaced labour as the single largest expense category, finally hitting an all-time high of $147 a barrel in July 2008.

The first move came from United Airlines as the Chicago-based carrier, struggling to return to sustained profits after its long stay in bankruptcy reorganisation, said in February 2008 that it would charge $25 to passengers checking a second bag. The first bag was free, and members of the elite levels of its loyalty plan and international flyers were exempt. United's reasoning was that fuel had risen by about 60% year-on-year by that time. It ­estimated about $100 million in added ­revenue from the fee.

First bag charge

But the biggest move came from American Airlines, which had matched United's second bag fee in April. Then in May, American said it would start charging for a first bag. The ­carrier says it "took extraordinary pains to ­prepare for the step. We did a lot of research on how our customers would be impacted. We did a lot of preparation with our airport people and our flight attendants."

American says the bag fees are worth "perhaps hundreds of millions in added revenues, but in a $22 billion company that's not enough to make the difference between a loss and a profit". It adds: "We know customers and others would say, 'gee, why don't you just raise your fares?' But we also know this is just unrealistic in an industry where price is king."

By late autumn, the number of checked bags at American was down by about 20%, says the carrier. By then, fees for the first two bags were all but universal. Delta Air Lines was the holdout on the first bag fee, but low-fare carriers such as JetBlue Airways were charging for a second bag. Also universal were passenger complaints. Terry Trippler, the Minneapolis-based travel agent and commentator, says: "You heard the phrase 'nickel and diming' a lot." Opinion was solidly against fees for bags and an IBM survey found that over three-quarters of US travellers called the fees "a rip off".

One place that bag fees are not universal or even contemplated is Southwest Airlines. Southwest chief executive Gary Kelly says he does "not want to be perceived as 'nickel and diming' our customers". The carrier began an intensive advertising campaign with the theme "Freedom from Fees".

So effective was the campaign that "most people thought we were charging for a second bag even when we weren't", jokes Kevin Healy, AirTran's senior vice-president marketing and planning. AirTran had begun charging a $10 fee for a second checked bag back in April, but withheld imposing fees for carrying a first bag because its main rival, Delta, had not done so. Delta, which had imposed a $25 second-checked bag fee, held off for a long time. But in November, Delta said it would impose a $15 first bag fee, aligning its bag fee policies with those of Northwest Airlines, which was merged into Delta in October.

Within days, AirTran followed suit and both began charging $15 for a first checked bag and $25 for a second. AirTran chief executive Bob Fornaro says: "We were waiting for Delta but in this environment I don't see that any carrier has much choice. Certainly at first fuel costs were the reason, and now it's declining demand. But you have to bear in mind that customers will spend a long time, hours, on the Internet looking for the cheapest fare and then come to the airport and spend $20 on a soda, a bag of chips, a candy bar and a magazine." AirTran's bag fees could generate between $50 million and $100 million in revenues, says chief financial officer Arne Haak. Michael Derchin, an analyst with FTN Midwest Securities, estimates the bag fees would increase 2009 ancillary revenues by more than 20% while overall AirTran's revenues will be up a mere 2%.

One of the carriers that has been most enthusiastic about fees of all sorts is US Airways. Chief executive Doug Parker says: "The bag fees have helped us enormously in improving our operational performance. The $15 fee for a first checked bag cut the number of checked bags by about 20%, and that means a faster turn in loading and unloading the planes. The hold is a more difficult operation than people coming on board. And the hardest thing to do in the entire airline business is to transfer bags along with their owner, the passenger, from one flight to another."

As oil began it precipitous fall in late autumn, consumer speculation rose that airlines would abandon the fees. Some carriers withdrew planned increases in the second bag fees, and Air Canada even withdrew its second bag fee. But the fees are not going away, says Fornaro: "We think that people paying for what they want is here to stay."