Airline Revenue Datapoint of the Day

Joe Brancatelli finds a wonderful inverse relationship when it comes to ancillary airline fees:

Here’s an indisputable fact: During the second quarter of the year, the nation’s largest airlines collected $669.5 million worth of baggage fees from the nation’s hapless passengers. That’s an attention-grabbing 275 percent increase from the second quarter of 2008.

But here’s an indisputable truth: The more baggage fees that the big airlines pile on their customers, the faster their overall revenue is collapsing. In fact, the only carriers that escaped a double-digit revenue decline in the second quarter were the two that still allow all passengers to check at least one bag for free.

Brancatelli makes a compelling case that for every dollar you gain in extra baggage revenue, you lose vastly more in revenue overall:

American Airlines, for example, generated an industry-leading $118.4 million in bag fees during the second quarter, a 219 percent year-over-year jump, says the BTS. Yet its total revenue in the second quarter dropped 20.9 percent to $4.88 billion from $6.17 billion in 2008’s second quarter.

That’s a drop of more than ten times the increase in bag fees. Even if bag-revenue margins are super-fat and seat-revenue margins are super-thin, this kind of thing can’t possibly be a good way of making money — especially not when it alienates your passengers at the same time. And even the airline execs know it:

“Baggage fees are the kind of shortsighted things that are killing us,” the top U.S. executive of a European airline told me recently. “The accountants we have are great at tracking the ‘ancillary’ revenue we generate whenever we invent something like a baggage charge. But they have absolutely no way to match that against our potential overall revenue exposure if travelers book away from us. And no one holds them accountable for their one-way accounting. It’s a scandal.”

You wanna blame the accountants? Feel free. But it’s the senior management which is really responsible. Do they really think that raising baggage fees is cost-free?

Comments

[Mark Bern:]

There are, of course, other factors contributing to the drop in airline travel. Businesses have cut back travel budgets and are relying more on teleconferencing. Businesses have reduced employee head count, and have fewer people traveling due to their own loss of customers who have gone out of business. Oh, and businesses that used to have employees travel a lot have closed down, gone bankrupt. Vacation travel is getting a lot less extravagant also, with more families staying closer to home and driving.

As for the difference in revenue drops comparing airlines that charge for baggage to those that do not charge, there may be other factors affecting customer loyalty. Did those same airlines (that do not charge for baggage) experience as big of a revenue drop as did those that do charge before baggage charges were adopted? If not, there could be other reasons. Some airlines have open seating, which is something some customers like (others do not, but presumably those who do are their more loyal customers). Some airline change rates from day to day, others don't (strangely enough some people don't like to always book their flights on Tuesday between 8 a.m. and 11 a.m. to get the best rate). Some airlines have superior customer service (I don't think I need to explain that one). Some airlines won't lose your checked bags every fourth trip (also obvious). Obviously, this list could go on (I haven't brought up food, blankets, on-line systems, frequent flier programson, on-time arrivals, waiting time on tarmacs before takeoff, etc.).

The point is that it may be very difficult to determine the impact of one change in service or additional charge (such as baggage) on the revenues of any one airline. The only certain way to do that is to add the charge for at least one year and, while holding all other factors stable, remove the charge with a lot of hype and publicity. Of course, that won't work either, because competitors will react and affect the change. In other words, to assign one factor all the blame within such a hostile environment for airlines is not very scientific, nor does it make much sense.

Having said that, I think airlines are getting away from being service oriented and personally hate the baggage charges. They could at least experiment with specials, dropping the baggage charges on certain city pairs for a limited duration to see if it affected traveler volume and overall revenue. Just charging extra for everything during a recession could end up killing customer loyalties for the recovery.

Oct 08 11:09 AM

[Don't Belie...:]

There's a word I learned in college called "correlation." Does one cause the other, or affect the other in some way? It's a nice intro to say that bag fees "cause" less revenue, but it's not true. There is no true inverse relationship. A drop in revenue by many carriers is not due to bag fees, it's due to a recession, and in some cases the drop is around 20%. To think there is a correlation is like saying bad weather causes the house to get dirty. I'm not out playing golf, and thus I'm in the house noticing how dirty it has gotten. I would venture to say terrorist activity has more correlation to economics than the bag fees have to an overall revenue drop.

Your source, Joe Brancatelli, is a former premium flyer who now runs a website whining about airlines. He is a good complainer, but certainly no expert on airlines, especially on how they generate or don't generate revenue. As for correlating things, Joe will laud Southwest and complain about American decreasing first class seats, and how awful that is, in the same sentence. This is not a person who understands math, just how to complain.

Ticket prices haven't changed much in 20 years. To make up most of the difference, airline labor has been gutted, internal maintenance is a thing of the past, and personal service may or may not only happen at the company's whose employee pension is still intact. That leaves, unfortunately, nickel and diming. Most companies do it, really to offset the 1992 ticket price you just got. Southwest doesn't bag charge, but it also gets the FAA to let it fly 82 planes around with non-approved parts. It also doesn't charge a "change fee," it just charges you the current price for the leg, and if it has gone up, that's just the "difference," not the "fee." I applaud them for this.

So, we are in a recession, worst since the depression, and travel is going to go down. Ticket prices are declining. Fees to make up the difference are a bad reality to offset the 20-year old ticket prices you are now paying in this recession. However, perhaps with small exception, people are not stopping traveling because of the "bag fees." If so, where's the offset for Southwest and Jet Blue? (Flat revenues and no big switch from AA or UA or CO).

Please look at your sources before using someone like Joe Brancatelli. He is not qualified to make a math argument, unless it would be to count pillows on airplanes. The fees are infuriating, yes, but the malcontents who try to "create" something out of them are simply preposterous.

Oct 08 06:20 PM

[William C:]

Baggage fees are one of the best things to happen to the airline industry in a long time.

The airlines are finally using ala carte pricing to charge for services. This is the way most businesses operate. If you go into a restaurant, don't you expect to pay for your drink, appetizer and dessert? Those don't come free with the price of a meal. The same applies to the airlines. If a traveler wants to take 3 suitcases, buy drinks and food, or sit in a premium seat, he/she should pay for it. Why should a traveler with a briefcase and a carry-on subsidize someone with 3 suitcases?

Oct 09 09:13 AM

[dswoope:]

While attending BoydGroup Aviation Forecast Conference in Lexington, KY this week, it was interesting to hear from both Low Cost Carrier's (LCC's) and Legacy Carriers on this subject. LCC's like SWA make a marking point of differing from Legacy Carrier's on charging for bags, but everyone agreed that United seem to be fairing extremely well with their à la carte pricing on economy plus leg room. Frontier, now part of Republic championed their à la carte pricing which seems to effectively straddle the question by offering tiers of service from full service, check your bags in for free to, strip down simple fare, fees to be collected for extras. I think we will continue to see A/L experiment with what the public wants in an airline and we will continue to see a continuing battle between LCC's and Alliance Member Feeder A/L while Allegiance Long Haul Carrier's gobble up key routes to and around the rest of the world.

Oct 09 10:23 AM

[Kozout:]

Joe and you conveniently forget to include the ACTUAL reason for AA's drop in passenger revenue, an 8% decrease in capacity.

Oct 13 05:46 PM