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Airline Fees

New airline charges taking off

TERRY MAXON  Mar 10, 2010

Baggage fees, the golden goose for airlines desperate for more cash, are bringing in billions of dollars in revenues for U.S. airlines.

But evidence may be mounting that that particular goose can't be plucked much more than it already has.

Consultant Andrew Watterson said an operations executive at a large airline told him Monday that customers are carrying on many more bags and checking far fewer. As a result, it was taking his airline more time to unload and load an airplane as the staff deals with the issue of too many carry-on bags.

With customers not liking the fees and airlines facing operational issues, "those are dual indications to me that we're kind of reaching the end of this," he said.

If so, airlines will need to be creative, aggressive and relentless to come up with new ways to wring more money out of existing customers, he said.

"They have to find more things that customers want rather than saying, 'Here's something you used to get for free; now we're going to charge you for it," said Watterson, a Dallas-based consultant for Oliver Wyman.

Even as airlines have been losing billions of dollars a year, they've used the ancillary fees on a variety of services and products to lessen the damage, and baggage fees have paid off the most.

Two years ago, you could fly on any U.S. airline and check two bags at no cost. Today, the standard rate on many carriers is $25 for the first bag and $35 for the second checked bag, a total of $120 for a round trip.

Take a family of four very bad packers, and the bag fees could rival a couple of days of admission to Disneyland.

Fewer checked bags

Continental Airlines Inc. chairman and chief executive Jeff Smisek sees fewer checked bags as a good thing.

The airline's operations are improving because customers are checking fewer bags – with a 65 percent drop in second checked bags, he said. Even so, Continental is raising a lot of money from the bag fees, he told a New York City investment conference Tuesday.

Continental is raising funds from a wide variety of sources now, from offering premium wines and other drinks in its airport clubs to making unsold first-class seats available at the airport right before the flight.

"And these are not trivial things when you add these together," Smisek said. "Take a look at bag fees. We expect bag fees to generate over $350 million for us this year. That's a considerable sum that basically wasn't there before."

The term used in the industry is "unbundling," that is, taking apart the travel product and charging for each part – change fees, checked bags, better seats, food, blankets and many other items. Each airline has picked its own list of services to put a fee on.

Beginning next Wednesday, Continental will offer customers the option to buy seats with at least 7 additional inches of legroom, with fees varying by flight.

American Airlines Inc. last month said it will begin selling a blanket and pillow set on flights in May, replacing the free but shared bedding now provided.

In both cases, the carriers were following the lead of other major carriers who pioneered the charges.

Impulse buys

Watterson said airlines increasingly will need to offer goods or services as they're selling the airline ticket. He likened it to putting impulse-buy items by the checkout counter at a convenience store, or the candy aisle at the grocery store.

"Say, now that I've got you in the store, what else can I put in your shopping basket?" he said. "It could be selling service features like getting into the [airline's airport] club."

One of his European clients is putting things like the hotel, airport transportation and excursions into the booking process, he said. It's important to offer those choices before the consumer finishes buying the airline ticket.

"People often go to the airline first to see if there are flights available at a reasonable cost," he said. "If you can get people hooked on buying other things from you at that point, that's very powerful to sell that store window."

United Airlines became the first carrier to charge a fee for the second checked bag in February 2008. United "really launched a paradigm shift unbundling our product," chief financial officer Kathy Mikells said at the JPMorgan conference Tuesday.

"And we continue to look for additional opportunities," she said.

Mikells said United leads the U.S. industry in pulling in ancillary revenues at roughly $13 per passenger last year.

"We continue to see opportunities to offer customers products and services that they value, and importantly, that they're willing to pay for," she said.

Jay Sorensen, president of consulting firm IdeaWorks, said United is offering an example of where airlines might see a source for new money.

Right now, most airlines exempt their elite customers, such as first-class passengers or upper-level members of their frequent-flier program, from many of the fees. But Sorensen noted that United is allowing non-elite fliers to enjoy some of the same privileges, such as a priority line for check-in, a faster line through security and early boarding of the aircraft – as long as they pay a fee.

As more customers decide not to check luggage and instead carry an increasing number of bags onto airplanes, the ability to board earlier than other passengers becomes more important, Sorensen said.

"Make no mistake – priority boarding has been defined by one particular advantage it provides, and that is early access to overheads," Sorensen said.

"I was asked at one point if I thought airlines will start charging for carry-ons," he said. "I said, 'Well, they already do when they charge for early boarding.' "

New airline charges taking off
Image via AP/M.Spencer Green


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