Southwest Says Passengers Flee Bag Fees


The discount airline says passengers are switching to escape checked-bag fees at other carriers. Wall Street isn't convinced

The $15 you fork over at the airport to check a suitcase helps a financially ailing airline's bottom line. Perhaps it persuades some families to drive instead. But can this $15—and the other fees airlines are piling on—be prompting passengers to switch airlines?

That, at least, is what some fee-less airlines are reading into September passenger traffic figures. All U.S. carriers aggressively pushed cheap fares this summer to fill seats. They largely succeeded, even if profits suffered. For much of the industry, traffic last month fell off, as vacations wound down and most legacy airlines cut seats from their networks. The bulk of U.S. airlines are likely to report losses for the summer, quarter while a few are expected to show small profits.

But there were a couple of notable outliers in the traffic data for last month: Southwest (LUV) and JetBlue (JBLU) saw outsize traffic gains. Southwest reported an 8.8% increase in revenue passenger miles (RPM), while JetBlue saw a 9.8% jump in passenger miles. (An RPM is a standardized industry metric of one paying passenger flown one mile.) Southwest's load factor, the percentage of seats that were filled, surged more than 11 percentage points from a year ago, to 74.7%—a stunning increase for a month in which schools reopen and summer vacation travels stop.

"That was an incredible load factor," says Stifel Nicolaus analyst Hunter Keay, considering that Southwest for years had September loads of 60% to 67%. JetBlue's load factor rose about one percentage point from the prior year, to 77.6%.

Southwest and JetBlue are also the most prominent airlines to eschew first-checked-bag fees.

Wall Street favors airline bag fees

"You're starting to see that connecting of the dots" between bag fees and traffic, contends Kevin Krone, Southwest's vice-president for marketing and sales. "That's something we're seeing here, and it's bolstering our resolve."

It's in Southwest's interest to make that connection: The airline has built its marketing strategy around its "Bags Fly Free" message, drawing a bit of a pounding from some Wall Street analysts who question why Southwest would forgo revenue others are collecting. (The company has imposed new fees in recent months, covering set assignments and pet travel.) Those questions may return on Oct. 15, when Southwest reports its third-quarter results.

Back-of-the-envelope math—the sort Krone says most analysts fail to look beyond—suggests Southwest is forgoing as much as $500 million per year by eschewing bag fees. "I do think when you're an airline our size, it's pretty easy to do the math pretty quick and say: 'Wow that's a lot of money,'" he says. "Unfortunately, I think that's where a lot of people stop."

The Dallas company says it has commissioned several comprehensive market studies that show the public has not accepted baggage fees, even as it pays them. Company officials also believe that passengers are still sorting out the idea that not every airline charges a fee for luggage, and they believe Southwest ultimately will benefit as public awareness spreads. "If [bag fees] were accepted, then I think we'd have to think really hard about it," Krone says. "But our research shows that people are upset by [fees]. It is emotional. It's hard to avoid it."

fee-charger: "Is this a joke?"

Travel writer Joe Brancatelli has gone so far as to suggest that baggage fees are harming airlines' overall revenues as the traveling public demonstrates its displeasure. In a recent column, he says passengers are penalizing carriers that pile on bag fees. Brancatelli quotes an anonymous airline executive who calls the fees shortsighted because of the risk that people will book elsewhere. According to Brancatelli's reasoning, the airlines are missing the entire revenue picture, adding $15 and $25 charges willy-nilly while the general public votes with its feet, and it's all reflected in the industry's overall revenue decline.

Fee-charging airlines, of course, consider that argument specious. "Is this a joke?" asked one spokeswoman for a large U.S. airline. "I like to compare Joe's columns to talk radio," says another. "If the host doesn't come up with a strong, polarizing statement on one side or the other, no one cares and no one calls in."

In fairness to the legacy carriers' position, the traffic falloff comes amid a deep, brutal recession. U.S. Corporations have not returned to their traveling ways. The biggest airline, Delta (DAL), saw traffic slip 5% on its mainline operation, while the airline trimmed the total number of seats it flew by 5%. American's (AMR) traffic fell 2.6% domestically, while capacity was down 6.9%. US Airways' (LCC) traffic was down 6.8% domestically, on a 5.9% drop in capacity. United's (UAUA) North American traffic fell 6.1%, on an 8% capacity drop.

Business travelers are staying put

It is inaccurate to lump the flying public into a homogeneous mass. People who fly week-in, week-out and have bulging mileage balances are largely exempt from bag fees. Those who fly occasionally for their work probably just put the fees down as reimbursable expenses. People who fly once or twice yearly may grumble but pay up anyway, although they may contemplate another carrier next time. American, the No. 3 U.S. carrier by passenger count, says the percentage of customers who don't check a bag—about half—has not changed since it added a $15 charge in June 2008. "The bag fee is one component" of traffic performance, says Christopher White, a spokesman for AirTran Airways (AAI), which assesses a $15 fee for the first bag. "The bag fee is not the totality of the story."

What's more, a shift in market share by itself does not necessarily concern airline executives: If a price-sensitive college student or a grandparent on a fixed income books elsewhere because of baggage fees, the legacy carrier loses what is likely an unprofitable customer. Think of the cable company or wireless provider that culls unprofitable subscribers. There's no evidence that Southwest or JetBlue have yet siphoned off significant numbers of business travelers—the customers for whose lucrative trade airlines compete viciously—and most analysts consider that prospect unlikely.

Still, all airlines try to mitigate fallout from the new fees and they have been pleased that consumers haven't revolted much. "Change is hard," US Airways told workers in its Oct. 8 employee newsletter. "When airlines first introduced charges for checked bags and a la carte-style pricing, customers resisted the change. Now, with the majority of major airlines collecting these fees for more than a year, customers are less likely to complain to the DOT."

But a larger question persists: Is the public forming a general perception that it will be treated marginally better by a Southwest or JetBlue than by a legacy carrier, with luggage fees serving as the first measure of customer service? It's not a simple question to answer, and a busy month for two airlines is hardly definitive. But Southwest says it won't budge on bag fees—even if much of Wall Street remains skeptical. Says Krone: "If we're trying to get people to travel, we should probably let people take their suitcase."


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