Luggage Forward Flying: How To Restore Passenger Confidence And Carrier Profitability

Includes: FDX, UAL, UPS
by: Victor Cook

You may know of Peter Greenberg's baggage handling philosophy. In a post on solving the lost baggage blues he famously said "There are two kinds of baggage: Carry on and lost." His comment pokes fun at the airlines' "mishandled baggage" problem. But there is another option. Must airlines carry passengers' baggage on the same plane?

My last post in this series on airline mergers was 'Power Offers': Turning Airlines' Mistakes into Value-Added Services. In it I reported that reuniting passengers with their mishandled baggage cost the airlines $3.8 billion in 2006. That represented about two-thirds of their 2007 profits. And the cost of mishandled baggage is bound to be greater in 2008. The way things are going with fuel prices it likely will exceed worldwide profits. This makes mishandled baggage a major problem. Not to mention the passenger frustration generated by mishandling their baggage.

The idea of 'Power Offers' is right out of the pages of a new book by J.C. Larrache: The Momentum Effect. My posts based on this concept have produced some serious thought by readers. For example, a Senior Business Analyst [S.B.A.] for one of the legacy carriers sent an email to me with a lot of really interesting comments on airline services in general and baggage handling in particular. For historical perspective the S.B.A. offered these thoughts:

If you look at the history of airline service, you can go back to a day when airlines HAD to provide as many incentives as possible to get people to use an airplane in the first place. I think a lot of these services are rooted in the days when air travel was not as reliable, and there was a "risk" associated with it. Airlines needed to provide a service level that may have been above what was really required. Once the precedents are set, it's hard to peel back any services.

In my last post I also suggested that Continental Airlines management should explore a partnership with Luggage Forward. Their services could be bundled into CAL's online reservation system to create a value-added baggage handling option and thereby increase revenues as well as customer satisfaction. It suddenly became clear from the comments of my readers that an incremental step by a single carrier would be too little too late.

In this post I propose a bold bid for luggage forward flying: Remove passengers' baggage from the air transport system worldwide. Suppose all the major carriers were to enter into a partnership with FedEx (NYSE:FDX), UPS (NYSE:UPS), DHL and the other shippers with Luggage Forward operating as the corner stone in a worldwide baggage handling solution. This would remove passenger baggage handling from airports and passenger carriers altogether. You should check out their baggage booking technology on the company's website.

Why propose this bold step? The extraordinary challenges faced by the air carriers demand an extraordinary solution. For now let's call this a worldwide Luggage-forward Express Shipping [LES] service. And keep in mind the double meaning: LES means more -- less hassle combined with more profitable air travel.

I know it sounds unrealistic to move baggage handling our of the passenger air transport system into the express shipping system. But then again it must have sounded unrealistic to remove mail delivery from the US postal system. Here's what the S.B.A. from a legacy carrier had to say about this idea when I suggested it to him in an email:

If we started with a clean sheet today, I could see how airlines would save a bunch of money by not accepting personal luggage. Not only would this save money, but the cargo area of the plane could be used for legitimate revenue generation. Air cargo is a good business for the airlines, so the win would be twofold - reduced costs, increased revenue. Plus, by not carrying luggage, the airlines could eliminate a real pain point for travelers. I admit, there seems to be little downside to it.

Not only would these advantages accrue, but the considerable governmental infrastructure and personnel dedicated to inspecting passenger baggage could be shifted to another pressing need in air travel: Inspecting existing cargo plus all that revenue earning cargo that would replace passenger baggage.

A whole host of questions pop up. The first ones are operational issues. The others are potential deal breakers.

Here are nine operational questions that must be answered as part of the planning process. All of these questions (in italics) were raised in private email correspondence with the S.B.A. cited above. The answers are my own first take on each question.

1) What about bad weather days? The LES option avoids this problem because baggage never enters the air transportation system. If the passenger doesn't travel, the bags are returned. If his or her travel is simply postponed, the baggage will be there when the passenger arrives.

2) Can passengers get their baggage back without paying for the shipment? Yes, this kind of risk can be covered by a "failure to fly" insurance fee built into the price. The fee would be based on the actuarial tables of cancelled flights. It would be far less than the shipping costs themselves.

3) How does the DOT or the airline track "lost baggage"? They are no longer responsible for lost baggage. It's insured by LES for full value in partnership with a top rated insurance company. The cost would be a function of declared value.

4) How are changes to the contract of carriage handled? The agreement would release the carrier from any contractual liability for baggage handled by LES.

5) What about itineraries involving multiple airlines? The LES option avoids this problem because baggage never enters the passenger air transportation system.

6) What if a carrier is not willing to accept this as a standard practice? A consortium agreement in which all major carriers participate would be necessary.

7) Can't passengers book their own baggage shipment with one of the express services? Yes, but they could not free-ride - consortium rates would be available only through an airline reservation system.

8) How would migration from the current model to an LES model be handled? Momentum would need to built quickly in the airlines' partnership with LES for it to be successful. The technologies are available to support a rapid migration.

9) Would airlines be stuck with the sunk costs of all the processes built around baggage handling? No, their infrastructure would be sold to governments at fair market value to increase their capacity to inspect cargo.

Here are three questions that speak to the feasibility of the LES proposal:

Express Shippers' Capacity. Could express shippers scale up to handle worldwide passenger baggage delivery? At first blush it seems likely they could since the top three shippers had combined revenues in 2007 just over $158 billion USD and employed 1.2 million people. That's nearly $44 billion more revenues than the nine carriers included in my analysis of airline mergers and over three times the number of employees. What's needed is an estimate of the number of "passenger baggage equivalent" deliveries of these express shippers.

International Consortium. What organization would have the stature within the industry to develop and administer performance standards? IATA is a likely candidate since its mission statement includes helping "airlines help themselves by simplifying processes and increasing passenger convenience while reducing costs and improving efficiency."

Affordability. Would LES scale economies, coupled with increases in carrier cargo revenue and the elimination of mishandled baggage, drive down the cost of an express baggage service enough to make it affordable when bundled into airline reservations? This is the toughest nut to crack.

With your help I'll try to provide more substantive answers to these questions in my next post. In the meantime, thanks for visiting.

Full disclosure: I do not hold a position in Luggage Forward or any commercial carrier or shipper. I am not being paid for these posts, nor do I have any prospect for future payments from any of the companies that might be involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.