Will higher bag fees pay off for airlines, or will flyers balk?

Will higher bag fees pay off for airlines, or will flyers balk?
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Unable to make up for rising fuel costs over the past year by raising airfares, airlines have begun increasing baggage fees instead.

What remains to be seen is how much revenue those increases will bring in. 

George Hobica, president of Airfarewatchdog.com, said, "The only question is, will people do the same things with fees that they do with fares, which is resist."

In the last week of August, JetBlue, followed by United, raised the cost of a first checked bag to $30 from the nearly decade-long industry standard of $25. The carriers also bumped second checked bag fees from $35 to $40. So far, other mainline U.S. carriers haven't followed suit, but industry precedent suggests it's likely. U.S. airlines often follow one another with changes in service offerings and fees.

In bumping baggage fees, JetBlue and United are gambling that the move will help cut into the profit erosion resulting from stagnant airfares and higher costs, especially pricier fuel. Through July, U.S. carriers spent 30.4% more per gallon on fuel than they did in the first seven months of 2017, according to the Bureau of Transportation Statistics.

Meanwhile, airlines have lacked the pricing power to recover those added costs by raising fares. Consumer Price Index data shows that through July, ticket prices were down 4.1% year over year.

Overall, revenue at the nine publicly traded mainline U.S. airlines was still up 6.5% in the first half of the year, according to the trade organization Airlines for America, but costs were up 11.6%. As a result, the industry's pretax profit margin dipped to 7.2% from 11.5% a year earlier. 

Patrick Surry, chief data scientist for the Hopper app, which predicts when fares on specific itineraries will bottom out, said that JetBlue and United could well be right in betting that flyers will be more willing to pay extra for checked bags than for airfare. 

"I think there is actually really different price sensitivity," Surry said. 

For one thing, he said, consumers don't have to pay for the checked bag at the time of a ticket purchase. But more than that, online airfare searches don't typically display baggage fees in the initial query response. 

"When you are making that purchase decision as a consumer, you are not necessarily thinking about those other prices you have to pay," Surry said. 

Nevertheless, in aggregate, OTAs and metasearch sites have begun doing a better job of displaying the true flight costs in their responses to ticket queries. In July, for example, American CEO Doug Parker said that improvements in the way flight search engines, especially Google, ferret out the full cost of a basic economy fare was a key driver in the carrier's decision to do away with its basic economy carry-on prohibition.

Hobica is more circumspect than Surry about the impact baggage fee hikes will have on revenue at JetBlue, United and any carriers that follow their lead.

"In some ways, I think bag fees are a little bit like a sin tax," he said. "When they raise the cost of cigarettes, people buy less cigarettes. It may make more people say, 'The hell with it. I'm going to pack light and fight for space in the overhead bin.'"

Meanwhile, an executive at Southwest, the lone major U.S. carrier that does not charge for checked bags, said last week that he welcomes bag fee increases by competitors. 

Southwest chief revenue officer Andrew Watterson said, "Customers like our no nickel-and-diming, so we find that when our competitors use customer-unfriendly policies, it drives more business our way."


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