Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=162009
Story Retrieval Date: 7/29/2014 7:44:42 AM CST
Baggage fees are nothing new. But some airlines are raising them, and travelers may find their flight tickets are cheaper than the checked baggage costs.
For instance, AMR Corp.’s American Airlines and UAL Corp.’s United Airlines are offering a $117 round-trip fare (before taxes and fees) between Chicago and Indianapolis. If a traveler checks two bags each way on either airline, the baggage fees alone would cost $120—more than the ticket price.
Michael Gorman, 69, of Chicago, called the fee hikes absurd. “I think it’s a little ridiculous to be honest,” he said. “The fares have been quite cheap, but then they surprise you with these fees.”
Upon his arrival at Minneapolis-St. Paul International Airport, Michael Henson, 23, was surprised at how much he’d be paying for his two bags. “It was kind of like a hit to the face,” Henson said, who was vacationing in Chicago for spring break. “We paid $50 more on top of our ticket.”
Jay Sorensen, president of IdeaWorks Co., an airline consultant in Shorewood, Wis., said, “The airline industry is unlikely to stop this trend. More tweaking of the fee structure can be expected during 2010 and beyond.”
He added, “The airlines have not seen a significant pushback from consumers with the baggage fees, so they don’t find it discouraging. Instead, it somehow emboldened them.”
Sorensen likens the airline industry and its players to characters in the Wizard of Oz. He described the wizard as “a supreme ruler, but not all great and powerful,” a role played by the major airlines since they aren’t “sitting on a heap of cash” as some consumers may think, he said.
Rather, he said, the airlines have suffered because of the economic downturn, and they were hit hard by rising crude oil prices. The world’s oil markets, he said, are the wicked witches in this act.
And the good witch? Southwest Airlines, he said.
Southwest Airlines Co. is the only major carrier that doesn’t charge for the first or second checked bag, thus keeping baggage fees somewhat competitive.
“I think it’s awesome, so I brought two bags,” said Melody Macaulay, 44, of Houston, Texas, who recently flew Southwest to Chicago. “I think airlines that charge those prices are going to lose customers. Our Southwest flight was completely full, and they often are.”
According to Southwest spokesman Brad Hawkins, consumers don’t need to worry about the airline implementing baggage fees in the near future.
“We will never say never just because you can’t in this world,” Hawkins said. “But our leadership feels very strongly that people don’t want to be nickeled and dimed, and that in the long run, it’s more advantageous to our business model to not impose something on customers that we feel they should get for free or included in the cost of their ticket.”
Hawkins said Southwest weathered the recession and escalating fuel prices because of effective fuel hedging, meaning the airline was able to lock in lower fuel prices before they reached 2008’s highs.
“Southwest has a long history of very forward-thinking fuel hedging programs in place,” he said, "so we are perhaps better positioned than most of our competitors to deal with fluctuations in the energy market.”
But Sorensen believes Southwest could reach a tipping point. His research notes that if Southwest achieved Delta Air Line Inc.’s baggage fee revenue of $7.32 per passenger, Southwest’s 100 million annual passengers would contribute $732 million to its bottom line.
He calls this ancillary revenue the “magic elixir” and the “new revenue lever.” When US Airways introduced routine baggage fees in 2008, it took in $116.5 million for first checked bags and $37.6 million for second checked bags between July and December of that year, according to Sorensen. His work also reveals that about 30 percent of passengers paid to check their first bag, and about 5 percent of them paid for the second.
According to Morningstar Inc. analyst Basili Alukos, how expensive baggage fees become will depend on what other carriers do. “So it’s being capped by Southwest right now,” Alukos said. “Airlines cannot charge whatever they want because there’s a natural cap in that respect.”
Still, Sorensen said airlines could continue to increase fees even with Southwest’s supposed “cap.” His company estimates the Big 5—American, Continental Airlines Inc., Delta, United and US Airways Group Inc.—could bring in about $1.8 billion annually in baggage fee revenue.
When oil prices soared to more than $100 per barrel in 2008, airlines instituted baggage fees to make up for the costs. But Sorensen said tying these fees to crude oil prices was a mistake.
“The fees were necessary because the price of fuel escalated,” he said. “But they foolishly tied the bag fee to the price of fuel.” Now that oil prices have leveled off, consumers are expecting the fees to drop as well.
But that hasn’t happened.
“The airlines are beyond tying these bag fees to current fuel prices,” Sorensen said. “This has just become a necessary part of their revenue picture.”
The old idea that fares were the source of “fixed” revenue and steady profit has now given way to the airlines' view that ancillary fees—like charging for bags—are their moneymaker.
“Fares are somewhat unstable and more subject to fluctuations, whereas fees are not,” Sorensen said. “I think the airlines like that because it provides additional revenue stability. I think they like having a fixed part of the revenue and a floating part.”
For United, baggage-related fees contributed a mere 52 cents per passenger in ancillary revenue in the third quarter of 2007, before airlines began charging for first and second checked bags. Those 2007 baggage-related fees came from surcharges for overweight luggage and checking a third bag, according to Sorensen.
But in the 2009 third quarter, after routine baggage fees were introduced, United was making $5.86 per passenger from these fees alone, accounting for more than a 1,000 percent surge in ancillary revenue. The same happened at Continental, Delta (apart from its recent merger with Northwest Airlines Inc.) and US Airways.
Sorensen said consumers can also expect to see more a la carte pricing in which you pay for the base fare and can add other options and amenities to your air travel.
While having to add items like checked baggage, meals, early boarding and other amenities at the time of purchase could be frustrating for some passengers, Sorensen said many would prefer this pricing approach since it allows options in how much you’re spending.
He compares the a la carte pricing approach to ordering a pizza and adding toppings for an extra cost.“A long time ago, airlines used to give everyone a deluxe pizza whether they wanted it or not,” he said. “Now our basic product is a cheese pizza, and if you want to add more to it, well, you have to pay for it.”
He added, “In my consulting experience, I’ve found there is always that 10 percent of the consumer population that is happy to pay more just to be treated differently.”
Chicago resident Michael Gorman agrees. “I think most people who are rational would rather pay more and get more,” he said. “If you can afford to fly, I think you’d rather pay and get more service and amenities.”
But 23-year-old Michael Henson feels differently. “Why would you be charged to have a pillow, or earphones, or a cup of water or tea? That should be provided,” he said. “I know the cost of fuel is going up and all, but then as a company you have to be courteous to people.”
Melody Macaulay also said a la carte pricing could become a hassle for travelers, especially those who have a difficult time navigating the airline's Web page. "It just makes it more difficult for people who aren't going to sit there and go through all of that," she said. "I think that if the airlines are struggling and they need more money, then they should just ask more for the ticket."