How Major Airlines Won the Battle of Checked Bag Fees
THURSDAY, MAY 16, 2019 -- Assuming airlines are venal and airline executives will do the repulsive thing has served me well over decades of business travel and related punditry. Doing the wrong thing at the wrong time for the wrong reasons is a hallmark of airline management--and a wise way to analyze an historically dysfunctional industry.

But when I get it wrong, it's a whopper. Consider, for example, my 2008 commentary about the major carriers' decision to impose a fee for checking a bag.

"Baggage must seem like an easy target for quick cash," I said when American Airlines became the first major carrier to saddle flyers with a first-bag fee. I suggested the initiative would fail, cause all manner of operational and reputational woes and be another financial mirage for airlines. American, I noted, "couldn't say how many checked bags will fall into the charge-to-check category" and was "vague about the revenue target."

AIRLINE CHECKED BAG REVENUE

Airline

     2007*

     2018

American Airlines

$154 million

$1.22 billion

United Airlines

$98.1 million

 $888.7 million

Delta Air Lines

$134 million

 $788.4 million

Spirit Airlines

n/a

 $638.2 million

Frontier Airlines

$5.7 million

 $366.4 million

JetBlue Airways

$16.4 million

 $321.2 million

Alaska Airlines

$18 million

 $279.6 million

Allegiant

n/a

 $219.6 million

Hawaiian Airlines

$5.8 million

   $85.0 million

Southwest Airlines

$30 million

   $50.0 million

Sun Country

n/a

   $36.1 million

All Airlines

$464.2 million

$4.89 billion

Notes: 2007 is the last full year before major airlines adopted fees for first checked bag. * 2007 figures include revenue for carriers later merged into 2018 airlines. Defunct 2007 carriers not listed. Numbers are rounded.
Source: Bureau of Transportation Statistics

A decade of results for U.S. airline bag fees became available last week and the numbers are eye-popping. In 2018, the 11 largest U.S. airlines generated about $4.9 billion from baggage fees. That is more than ten times the $464 million airlines collected in 2007, the last full year that checked bags were free.

As fees have risen to $30 for the first bag and $200 for oversized/overweight items from the $15 that American imposed in mid-2008--at least my contemporaneous commentary correctly predicted airlines would keep jacking up rates--the myths surrounding bags have grown, too. Much of what is being said by today's commentators is as wrong as my 2008 take.

For starters, let's dispel the notion that the airlines knew what they were doing back then. They didn't have a clue--about whether passengers would accept the charge, whether they could execute, about how much cash they might raise. My column back then specifically noted how foggy airlines were on specifics. They took a shot. They got lucky.

In fact, the airlines had no idea how lucky they were going to be. Consider the very happy--for them--unintended consequences.

TURNING A COST CENTER INTO A REVENUE CENTER
Before airlines unbundled bag fees, they'd unbundled meal service from coach fares. They predicted large profits from food sales. It never happened. So they couldn't have expected much from bag fees. But it's hard to argue with nearly $5 billion in revenue in 2018. In 2008, baggage was a cost center. It's hard to know if major airlines profit from baggage fees--handling luggage is a cost-intensive venture--but at least carrying our suitcases is a revenue center now.

REDEFINING 'FARES' ON MAJOR AIRLINE TERMS
It's hard to remember, but the 2008 airline landscape had plenty of discount competitors. Those low-cost/high-fee carriers were charging for bags, imitating a practice already in effect in Europe and Asia. The major airlines were competing on fares with low-cost carriers and faced the apples-and-oranges conundrum. The mostly higher fares charged by the majors were being compared to lower, bags-are-extra basic prices charged by the low-cost carriers. By stripping bags from their "fare," major carriers were able to profitably compete with the low-cost lines. This race-to-the-bottom was bad for us, but it allowed the majors to compete more effectively than ever before.

GAMING THE TAX CODE
Airline "fares" include a 7.5 percent federal excise tax. So whatever amount of the bundled fare airlines attributed to carriage of our bags was naturally taxed at that rate. But since excise tax is not imposed on ancillary charges, airlines stumbled on a nice little tax shelter when they began charging separately for bags. It's not small change, either. American Airlines, which started it all, collected about $1.2 billion in bag fees last year. If all that revenue was collected as part of the "airfare" instead, American would have handed $90 million of it over to the feds as excise tax. Instead, it keeps all $1.2 billion for itself.

LESS FOR THEM, 'MORE' FOR US
As I said when airlines created Basic Economy fares and more than a decade before that, less for them isn't more for us. When airlines take a perk or a privilege--or checked bags--away from infrequent flyers, we business travelers don't get more. That is a literal, indisputable fact. But that does not stop carriers from promoting "free" checked luggage as a perk of elite status. From the start, elite flyers were exempt from basic baggage charges. As airlines continue to chip away at the valuable privileges of elite status--upgrades, reasonably priced award travel--free checked bags are one of the few "perks" remaining.

IT'S IN THE CARDS NOW
Airline credit cards were big business in 2008, of course, but it's mega-business now. As Delta Air Lines said last month, American Express paid $3.4 billion for the dubious privilege of issuing SkyMiles cards in 2018. The bedrock perk of even the most humble SkyMiles plastic? Free checked bags. Again, this is another self-evident case of "less for them isn't more for us," but practicality must rule. If you only fly a particular airline once or twice a year, your best investment is the basic plastic because it'll get you the free bag and some limited boarding privileges. It's a slick protection racket, really. We pay credit card firms annual fees to protect ourselves against bag fees on carriers we don't frequent and then the issuer funnels some of that money to the airline. That means we pay bag fees even when don't check bags.

All this is not to say that the major airlines, by luck or design, have turned bag fees into an unvarnished victory. Passengers hate the fees and they go quite a way to staining airline reputations. It is one of the reasons why we despise airlines. They keep inventing crap like this and we don't forget small slights.

Other majors also have turned baggage fees into the bedrock marketing strategy of Southwest Airlines, the most consistently profitable carrier in the world. By promising free checked bags and eschewing change fees--the carrier calls it "transfarency"--Southwest has grown stronger and more profitable in the last decade. It didn't even do anything new, just stayed its course. Southwest looks like a winner just by standing still on fees--all while it bundles the fees into higher average fares. Competitors have handed Southwest a formidable win-win.

Yet here at the bottom line, it's hard to argue with the real world: U.S. carriers have turned bag fees into a bonanza. The fact that they didn't know they were creating a bonanza in 2008 is beside the point.

They've won on bags. We've lost on bags--and we're paying for them one way or the other.