Delta Air Lines Inc. and Continental Airlines Inc. will begin charging customers the highest fees in the industry for checked bags this week, setting other carriers up to do the same.
The new fees apply to flights within and between the United States, the U.S. Virgin Islands, Canada and Puerto Rico. Excluded are premium-class fliers, frequent fliers and active U.S. military members.
With a recovery in passenger revenue growth projected for later this year, the airlines appear to be taking no chances about the potential for coming up short with cash. Ancillary fees, such as those levied for checked luggage, have become an important driver for revenue growth.
Putting pressure on the industry is a recent jump in benchmark crude prices, which hit a 15-month high earlier this week.
“We have a real focus on growing the ancillary revenues in our business to act as a temper against the volatility of the business,” said Richard Anderson, chief executive of Atlanta-based Delta, during an investor meeting last month.
Anderson estimated that total ancillary revenue — which include baggage fees, administrative fees, frequent-flier programs, global services and ground-handling businesses — will surpass $4 billion this year.
For 2010, analysts polled by FactSet Research predict Delta will swing to a profit of $1.13 a share on sales of $30.9 billion, on average, up from an estimated $28 billion in revenue generated during 2009.
Houston-based Continental is expected to swing to a profit of $1.36 a share on sales of $14 billion, up from an estimated $12.7 billion last year.
Altogether, the global airline industry faces a potential $5.6 billion loss in 2010, but this would be an improvement from the estimated $11 billion loss it suffered last year, according to data provided by the International Air Transport Association.
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Against this backdrop, Delta raised its checked-baggage fees last week to $25 for the first bag and $35 for the second, up from $15 and $20, respectively. Continental said it matched these increases on Friday.
In August, US Airways Group raised its bag fees to $25 and $35.
Soon afterward, the carrier told Wall Street analysts that the baggage fees precipitated the loss of only a small number of customers — “so small we can’t measure it,” US Airways President Scott Kirby during an October conference call.
Carriers offer a small discount for passengers who check their luggage online, but the jacked-up fees are still higher than ever. United Airlines and American Airlines will likely mirror the move, as they charge just $20 for the first check-on bag and $30 for the second.
In the third quarter, domestic airlines raked in more than $700 million from checked-bag fees, up 111% from the same period during 2008, according to the federal Bureau of Transportation Statistics.
Altogether, the airlines collected at least $2 billion in ancillary fees for the third quarter, or 6.9% of total revenues, for the 26 domestic carriers reporting, the agency said.
For Delta, the new luggage rules apply to standard economy-class tickets purchased on or after Jan. 5 for flights beginning Tuesday. Continental’s rules apply for tickets purchased on or after Jan. 9 for travel beginning Saturday.
Legacy carriers have the highest checked-baggage fees in the industry, in part because they focus more on the premium-paying business traveler and not the budget-conscious holiday traveler. Vacationers are often able to get discounts when airlines scramble to fill vacant seats; the airlines in turn will try to compensate with extra charges as baggage fees.
That’s why budget carriers, which rely more heavily on leisure travel, often have the lowest fees for bags. Others, including Southwest Airlines Inc. and JetBlue Airways Corp., consciously avoid the extra charges altogether, at least for the first bag.
These airlines also don’t offer discounts for checking bags online, because most leisure travelers book their tickets through carriers’ Web sites — rather that through a global distribution system such as Sabre or Amadeus, which are popular among corporate-travel offices.