Airlines

Bag Fees Make One Man Absolutely Gleeful (And He's Not Even an Airline Executive)


An Alaska Airline jet before taking off at Seattle-Tacoma International Airport on April 23 in Seattle

Photograph by Elaine Thompson/AP Photo

An Alaska Airline jet before taking off at Seattle-Tacoma International Airport on April 23 in Seattle

Every traveler you know may share your disgust with airline fees, but Wall Street analysts love them—and few get as giddy over new or higher fees than Hunter Keay, a senior analyst with Wolfe Research in New York.

Alaska Air Group (ALK), parent of Seattle-based Alaska Airlines, rolled out higher fees today: First and second checked bags will cost $25 each, a $5 hike; a third bag will cost $75, a $55 jump. The cost to change a ticket will rise from $75 to $125. The airline said the higher charges, which take effect on Oct. 30, will generate $50 million in annual revenue. The airline industry has embraced such “ancillary revenue” measures because the fees are almost 100 percent pure income—collecting them costs virtually nothing.

“This is remarkable, really,” a nearly breathless Keay told Alaska executives Thursday on a conference call held by the company to announce a new quarterly dividend, the larger fees, and a five-year contract approved by Alaska Airlines’ pilots on Wednesday. Earlier today, Keay sent a note to clients titled, “Exciting and accretive new fees from ALK; Buy the stock.” For analysts, “accretive” is another word for “sexy.” The note opened with the observation that “we’ve been waiting for this,” conjuring visions of a youngster on Dec. 25 perched beside his toy-laden Christmas tree. And while Alaska Air pegs the revenue at $50 million, Keay figures the windfall could be twice that: “We view these fees as >100 percent margin due to associated cost savings.”

Alaska also announced a new dividend of 20¢ per share, payable next month. In May, Delta Air Lines (DAL) said it would resume its quarterly dividend in September, at 6¢ per share. “We think that most good companies pay dividends,” Alaska Air Chief Executive Officer Brad Tilden said.

“The fee news alone is reason enough to get excited about the stock,” Keay wrote. Alaska Air’s shares have gained 36 percent so far in 2013.

Bachman is an associate editor for Businessweek.com.

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Companies Mentioned

  • ALK
    (Alaska Air Group Inc)
    • $49.34 USD
    • 0.33
    • 0.67%
  • DAL
    (Delta Air Lines Inc)
    • $37.23 USD
    • -0.22
    • -0.59%
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