Fees go up, up - not away - as airline profits grow

Hsampson@miamiherald.comNovember 12, 2013 

Anyone traveling by air this holiday season can book tickets, choose seats and check bags with confidence that they have a good sense of how much they'll have to pay -- as long as they do their research.

All bets for next year are off, however, with the already lengthy list of airline fees likely to become even longer and more complicated.

Recently, the CEO of Spirit Airlines said the low-cost carrier is considering charging more (or less) for baggage and seat assignments based on demand. And the head of Southwest Airlines, famous for its "bags fly free" policy, acknowledged that "we'd be crazy not to provide our customers with what they want" if passengers prefer to pay à la carte.

Those attention-grabbing discussions follow increases in reservation change fees by major carriers earlier this year and moves by smaller airlines such as Frontier to add charges for everything from soda to carry-on bags for customers paying the cheapest fare. At the beginning of the year, Southwest introduced a $40 upgrade that allows passengers to board early.

Over the past five years, airlines have grown increasingly dependent on non-ticket revenue -- including baggage fees, seat assignment charges and food and beverage sales -- as a way to turn a profit despite rising fuel costs and consumer resistance to big fare hikes.

And industry observers say they don't ever expect those fees to disappear.

The federal Bureau of Transportation Statistics reports that airlines collected nearly $1.7 billion just in baggage fees in the first half of

the year, and almost $3.5 billion in 2012 -- a 654 percent increase from the $464 million collected in 2007.

In addition to $6 billion a year in baggage and reservation change fees, U.S. airlines also collect $9 billion more from selling extras like frequent flier miles, early boarding and seat upgrades, according to The Associated Press. Together, the fees account for 10 percent of U.S. airlines' revenue and are the reason airlines are profitable, the AP reported; without the fees, experts say fares would be 15 percent higher.

Since 2008, global ancillary revenue reported by airlines has increased more than 164 percent from $10.25 billion to $27.1 billion worldwide last year, according to consultancy IdeaWorksCompany. In the report, ancillary revenue includes bag charges, other à la carte fees, sales of frequent flier miles, advertising sold by the airline and other charges but not change fees. Extrapolating from the reported figures, the company estimates that worldwide ancillary fees will hit $42.6 billion in 2013.

"The game is really changed because global and network airlines are on board with this now," said Jay Sorensen, the president of IdeaWorksCompany, which helps airlines build frequent flier programs and create á la carte products to sell. "At the point when major airlines begin to rely upon this, it really moves the needle in terms of overall results for the entire industry."

Legacy airlines in the U.S. started charging checked baggage fees in 2008 "out of sheer desperation," Sorensen said: Fuel prices were soaring and fares were not able to cover the increasing costs. While airlines had charged for overweight or numerous bags, the first one or two pieces of checked luggage previously had been free.

"Out of that brutal economic need, they scrambled to put together some solution and it happened to be bag fees," he said. "And that opened the door for them to charge fees in other areas."

Boosted in part by the addition of a variety of fees, air carriers have steered toward healthier financial results. The U.S. airline industry was profitable in the third quarter of the year although observers warn there is still room for improvement.

"Despite the fact that the airlines are making money finally, they still are a relatively low-margin business," said Mark Drusch, chief supplier relations officer at the travel site CheapOair and a former executive with several airlines. "The money they generate from the ancillaries are all helping to build those bottom lines. Although the airlines are profitable now, they are still relatively not making a whole lot of money."

Robert Mann, president of airline industry analysis firm R.W. Mann & Co., said the costs associated with things like checked bags remain in place, so fees allow airlines to "try to make it a quasi profit center and then price that option accordingly so they in effect get a return on having long ago made that investment."

Fees are also not subject to the 7.5percent excise tax levied on base fares. "They are more or less gravy," Mann said. "So it's like 99 percent straight to the bottom line."

While observers believe there's little left that airlines can charge extra for without risking a passenger revolt, they expect airlines to continue to experiment when it comes to extra revenue.

"There are obviously other things they could charge for," Mann said, citing Spirit's carry-on fees. "The question maybe is have they reached a point where the likelihood of pushback exceeds the likelihood of incremental revenue?"

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