If you are a frequent traveler, you might have noticed that you’ve been paying more for checking in suitcases these days.
With fuel prices up dramatically in the past few years, airlines have struggled to maintain profit margins without raising ticket prices so high that passengers are scared away. The solution? Keep the basic ticket price relatively low, and charge flyers heavily for checking bags.
Indeed, according to report released by the Bureau of Transport Statistics, or BTS, US airlines a set record pace in baggage fees collection for the first half of 2012, adding more than $1.7 billion to their coffers, which is the most ever received in the first six months of a year.
In the first quarter of 2012, America’s 15 largest airlines collected a total of $816 million in bag fees. The number grew to $932 million in the second quarter.
Leading the way is Delta Air Lines
(NYSE:DAL), with some $231 million in the second quarter, while United Airlines
(NYSE:UAL) was second with $195 million. American, US Airways
(NYSE:LCC) and Southwest
(NYSE:LUV) rounded out the top 5. (Southwest does not charge for the first checked bag, but its subsidiary AirTran Airways does.)
Baggage fees were introduced in 2008 and have gone up since, as as Scott Mayerowitz of AP points out
Many of these fees were first introduced to allow airlines to offset rising fuel costs. In 2007, the airlines paid an average of $2.09 a gallon for jet fuel. The next year, prices spiked 46% to $3.06. During the first seven months of this year, airlines have paid an average of $2.96 a gallon.
Airfares have climbed in recent years but not as fast as the cost of fuel. Passengers have shown reluctance to book tickets if the base fare is too high, hence the introduction of the fees.
The increase in baggage fees is also a part of the overarching story of how airlines have been increasingly dependent on ancillary revenue since the industry was deregulated in the 1970s.
When low-cost competitors such as Southwest, Spirit Airlines
(NASDAQ:SAVE), and JetBlue
(NYSE:JBLU) entered the market, offering cheap airfares by cutting on perks, legacy carriers like Delta and United have had to go in the same direction as well.
In the past, the cost of meals, checked baggage, or the use of reservation agents were built into air tickets, which were priced higher. Customers who didn’t check baggage in were in effect subsidizing those who did.
These days, there's an a la carte
system, where you pay a low price for your ticket, and decide whether or not you want to forgo the frills (although some would argue the first checked bag isn’t a frill).
In fact, airlines have become increasingly dependent on ancillary revenue like baggage fees and reservation change fees. In 2005, ancillary revenue represented 7.1% of United’s total revenue. In 2010, that rose to 9.3%. Delta experienced a rise from 8.3% to 13.0% in the same timeframe.
While passengers may have the choice of deciding if they want to pay and check in baggage, they increasing do not have choices in other areas of air travel. In the same report
, the BTS notes that as US airlines continue to consolidate in a tumultuous industry, passengers “can expect fewer carriers to choose from [and] fewer flights to smaller cities.”
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.