Just over a week ago United became the first big US airline to increase first checked bag fees to $30. Leslie Josephs of CNBC asks, is there anything left to charge passengers for?
The problem airlines face is that charging for things that are included in a ticket now, or raising fees, is really just a price increase. And passengers may not be willing to pay more, some may stay home or drive.
If a price increase meant more money for the airline, airlines would raise prices. Some passengers may be willing to spend more money to travel than others, yet they’re all offered the same fare. So charging separately for the services that price inelastic passengers want can make great sense. Checked bag fees are most often paid by price-sensitive leisure travelers, though.
Even if an airline targets their price increase narrowly on the subset of customers willing to pay more they still need to hope that other airlines match or else customers might just buy from someone another airline that’s offering a better deal.
The alternative here is to introduce new services they can charge for that passengers will actually value. In other words, earn a revenue premium by delivering greater value to customers.
- Just raising price in a competitive industry is unlikely to work. Airfare prices have been trending down, not up.
- Just raising fees pulls money out of the fare, it doesn’t mean people become willing to spend more for their trip.
There was a time maybe when higher fees would catch consumers by surprise. Since checked bag fees were new once a year travelers might not have expected them. They’d buy a ticket and ultimately spend more than they planned to because they’d get to the airport and have to pay another charge. Everyone knows about checked bag fees today which is why they’re unpopular.
And there was a time when customers might not have been able to do the math, but the reason American Airlines is bringing back carry on bags to basic economy is because they discovered customers could do the math (or sites like Google could do it for them) and so they were losing business to Delta which offered similar fares but allowed carry on bags. That meant the basic economy carry on restriction made American Airlines more expensive for the same service Delta was offering and they saw customers book away.
Airlines didn’t really make $4.5 billion in checked bag fees last year. They charged $4.5 billion in checked bag fees, but that’s an accounting game. Airfares fall and fees go up, it’s the net of the two that matters.
And domestic airfares including fees are lower today than they were in 2008 [inflation adjusted dollars]. 2008 is the year American Airlines became the first major US airline to introduce first checked bag fees.
Source: Airlines for America
Of course the tax code incentivizes airlines to move money out of the fare and into fees, because for domestic travel that saves them the federal 7% excise tax. If they can move $1 billion into checked bag fees for the year that means they save $70 million in taxes.
Raising checked bag fees will further incentivize passengers to try to bring even more onboard the plane, further delay boardings, and create less efficient airline operations. That can cost an airline as much or more than they take in in bag fees.
A few minutes here and there is a big deal to an airline, Southwest’s CEO claimed “It would cost us approximately 8 to 10 airplanes of flying per day if we were to add just a couple of minutes of block time to each flight in our schedule.”
That’s because you don’t just push your schedule later into the night, you have to schedule flights when passengers want to fly and at times they’re most.
Delta and American will have a hard time not matching United’s price increase on checked bags, which followed JetBlue’s price increase, because they need to look like they’re doing something and most observers aren’t sophisticated enough to realize that raising fees isn’t the same as generating more revenue.
American though knows that they have a problem with premium revenue. The question is whether they’ll figure out the way to generate more revenue is to provide greater value to customers, rather than expecting customers to pay more and get less.