Felix Salmon

Airline revenue datapoint of the day

By Felix Salmon
October 7, 2009

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?

6 comments so far | RSS Comments RSS

Do airlines lose customers because of fees or do airlines that are losing customers impose fees?

Posted by foosion | Report as abusive

repeat after me “correlation does not imply causation”.

Maybe they’re raising baggage fees because other revenues have been declining. Maybe people fly less since the crisis began. This isn’t rocket science stuff.

Posted by jonners | Report as abusive

Reading the article, the word “Econotard” comes to mind. I’m referring to the author, not the airlines.

Posted by Gregor | Report as abusive

jonners, it does not, but in this case there is at least one fact suggesting there might be correlation.

“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.”

Posted by Xeter | Report as abusive

Charging bag fees only works for an airline if everyone does it, otherwise as above, you lose share.

There are a certain amount of dollars travellers are prepared to spend and that is for sure declining.

The question is how much cost you save by having customers carry on far more than the share gaining airlines.
Since these airlines can’t save costs to save their lives, I suspect not much.

Posted by Tiny Tim | Report as abusive

If your looking for ways to avoid airline baggage fees, click on the link below for some easy ways to fight back.
http://www.leaptocheap.com/2010/06/avoid ing-expensive-airline-luggage-fees/

Posted by leaptocheap.com | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/