Winging It: Baggage fees, 'other' revenue seem here to stay

Oh boy! It's one of my favorite times of the year: airline earnings season.

Though only three major carriers have reported their 2009 fourth-quarter and full-year results so far, already there are some bottom-line surprises and some eye-popping numbers in what the industry calls "other revenue."

That's where you see why the five largest carriers just raised their fees again for checked bags, and why all carriers - including "bags fly free" Southwest Airlines - are working diligently to find more revenue from sources other than selling tickets.

From an airline's point of view, selling tickets was unquestionably a bust last year as the recession drove down demand.

According to a statement by the airlines' trade group, the Air Transport Association, 2009 passenger revenue "declined 18 percent compared to 2008, as a result of a 6 percent drop in passenger volume and a 13 percent drop in the average price paid to fly one mile."

The decline in passenger revenue from 2008 to 2009 is the largest on record, easily exceeding a 14 percent decline from 2000 to 2001, the group said.

Continental Airlines and Southwest provided the surprises. Continental made a little in the last three months of the year, and Southwest made money in the quarter and extended its string of annual profits to 37 years.

American Airlines' parent, AMR Corp., reported losses of $344 million in the fourth quarter and almost $1.5 billion for the year.

The three airlines, and most others that haven't reported yet, would have been far worse off had they not parked airplanes and laid off thousands of employees. American's capacity, measured by available seats for sale, was down 7 percent compared with 2008. Southwest's was down 5 percent.

The airlines would have been in even worse shape were it not for that "other revenue" category, especially for those carriers that charge for checked bags.

American reported that 15 percent of its total revenue was "other," which besides bag fees includes charges such as food onboard, premium seats, fees for changing tickets, and commissions on travel services such as hotels sold through its Web site.

Continental got about 10 percent of its $11.1 billion in total revenue last year from the non-ticket sources, including about $200 million from bag fees. That's welcome money given that the airline lost $282 million for the year.

Even Southwest, which is determined to stick with its policy of not charging for the first two checked bags, got about 3 percent of its $11 billion in 2009 revenue from non-ticket categories.

Southwest is particularly proud of making money by charging extra for things that it says add value to a trip, such as $10 for jumping to the head of the line to board a flight. (On Southwest, all seats are unreserved.)

The airlines' ability to find ancillary revenue is a simple matter.

IdeaWorks, a Shorewood, Wis., consulting firm, looked at what five airlines (American, Continental, Delta, United, and US Airways) will gain from raising checked-bag fees by just a few dollars this month.

The new fees are $23 for a first bag and $32 for a second if paid online, and $25 and $35 if paid at the airport.

The increases alone will mean about $117 million in additional revenue for the five carriers this year, IdeaWorks estimates.

"Major airlines now clearly consider baggage fees the holy grail of revenue treasure," said Jay Sorensen, head of IdeaWorks. "It's easier to announce a single nationwide fee increase and avoid the messy details of market-by-market fare hikes."

What's more, Sorensen said, "the design of online shopping sites makes these increases invisible to consumers. The price matrix is limited to airfares.

"Consumers may click to learn the a la carte fees charged by individual airlines before booking. It's a situation that benefits the airlines, frustrates the shopping sites, and represents a mystery for most consumers. Carriers have been emboldened by the lack of consumer backlash from prior baggage-fee increases."

That last part is important. Airlines that charge fees say their customers have largely accepted them and are checking fewer bags as a result. That, in turn, has helped most carriers reduce the number of bags that don't arrive when their owners do.

The IdeaWorks report also calculated that if Southwest were to abandon its policy of not charging for the first two checked bags, it could increase its revenue by more than $700 million a year.

"Southwest hopes its consumer-friendly policy will deliver big market share gain," Sorensen said. "Meanwhile, the rest of the airline industry hopes it is far from the tipping point where fee hikes bring diminishing returns and no longer deliver gushers of money."