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:

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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?

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