THE FOREST, THE TREES AND THE BAG FEES
By Joe Brancatelli
April 23, 2009 -- When I talk to an airline executive, I'm usually the one ranting about a stupid trick or unfair policy that the carrier has imposed.
But not a couple of weeks ago. In the middle of a conversation about cabbages and kings and meaningless things, an airline guy I speak to frequently went off on "ancillary revenue," the airline-industry euphemism for inventing fees for everything from checked luggage to in-flight coffee.
Accountants have rigged the system. They create a stream to track the ancillary revenue from fees and they look like heroes when they can report they earned the airline millions of dollars of "new" revenue. But ask them if they can track the revenue we lose because passengers booked away or chose not to fly and they look at you like you have nine heads.
I was scribbling furiously, trying to keep up. Before I could even ask a question, the airline executive, normally a very calm fellow, was off again.
The bean counters can't track the revenue dilution of all these new fees. They don't want to. We miss the forest for the goddamed trees all the time. And the CEO acts as if fees are found cash. Meanwhile, no one asks why our overall revenue is plunging and we're losing money quarter after quarter. Everyone acts as if one thing has nothing to do with the other.
I thought about his rant this week as the nation's largest carriers reported first-quarter earnings. Or, more accurately, first-quarter losses. Except for AirTran and JetBlue, they all lost money. The legacy airlines--Delta/Northwest, American, United, Continental and US Airways--lost a lot of money. Collectively about $1.9 billion, in fact. Their revenue plummeted, too.
And do you know what most of them wanted to talk about? You guessed it. The baskets of ancillary revenue they're harvesting by charging us fees for checking bags, choosing coach seats or whatever. Forget that their houses are burning down. They found a tap in the bathtub with some water leaking out, so they're thrilled.
"We've had great success with à la carte pricing," boasted US Airways chief executive Doug Parker. No matter that the airline lost $100 million in the first quarter and saw its revenue drop 13.5 percent. Same thing at United Airlines, where a 21 percent year-over-year revenue plunge was twinned with a $579 million quarterly loss. All United wanted to talk about was the $14 a passenger in ancillary fees it now claims to generate.
To celebrate the victory of fees over profit, several airlines used their first-quarter reporting to add still more ancillary revenue initiatives:
+ Delta Air Lines, which lost $693 million in the first quarter and suffered a 15 percent decline in revenue, will now charge you $50 if you check a second bag on an international flight.
+ Alaska Airlines will charge a first-bag fee of $15 on domestic flights.
+ US Airways is raising its checked-bag fees by $5 each if you don't prepay on the Web.
As you can see by the chart, United Airlines was the first major carrier to begin unbundling checked bags from the basic coach fare. On February 4, 2008, it created the $25 fee to check a second bag. Other legacy carriers fell in line within 90 days. American Airlines was first with a $15 charge on the first checked bag, announcing the fee on May 21, 2008. The other legacy carriers matched by the middle of the fourth quarter.
Those five had the largest revenue decline by percentage in the first quarter of this year. You can draw a straight line: The faster they added fees, the more their revenue fell.
On the flip side, JetBlue Airways had the smallest revenue decline. Its year-over-year sales fell just 2.9 percent and it turned its first first-quarter profit in four years. And guess what? JetBlue was among the last carriers to adopt a second-bag fee and it still allows all passengers to check their first bag free.
The airline with the second smallest decline? Southwest. Its revenue dropped just 6.8 percent--and Southwest still permits all passengers to check two bags for free. (Southwest had a $91 million first-quarter loss, rare for the airline, but still smaller than any legacy carrier.)
The only other large airline to avoid a double-digit revenue decline in the first quarter was AirTran. It was slow to add the second-bag charge, didn't reach the industry "standard" fee of $25 for a second bag until last August and didn't impose the first-bag fee until November.
And then there's the case of Alaska Airlines. Not only did Alaska have a smaller revenue decline than any of the legacy carriers, it cut its first-quarter loss in half, to $19 million. And until today, Alaska permitted all passengers to check the first bag for free.
Alaska almost apologetically imposed the first-bag fee and promised passengers bonus frequent flyer miles or a $25 discount coupon if the bag arrives at the carousel more than 25 minutes after the aircraft parks at the gate. But that misses the point.
Like too many other airlines, in fact, Alaska misses the forest for the revenue trees. There may, indeed, be ancillary revenue to be generated by charging for bags or coach-seat selection. There may be a few bucks to be made if you try what US Airways tried last year: to charge for coffee or water or a bag of pretzels. You can do what United Airlines is doing: invent ways to sell everything, including line cuts, bonus miles and upgrades to prime coach seats. It looks great on the ancillary-revenue line.
But the overall numbers don't lie: The faster airlines add fees for basic services like checked bags, the faster their total revenue declines. And as my airline-executive friend ranted a few weeks ago, it's the forest that matters, not the trees or the fees.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
THE FINE PRINT All of the opinions and material in this column are the sole property and responsibility of Joe Brancatelli. This material may not be reproduced in any form without his express written permission.
This column is Copyright © 2009 by Joe Brancatelli. JoeSentMe.com is Copyright © 2009 by Joe Brancatelli. All rights reserved.