US airlines cashing in on baggage fees..

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Fransw
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US airlines cashing in on baggage fees..

Unread post by Fransw » Mon May 13, 2019 2:44 pm

Baggage is BIG Business!...
chartoftheday_17963_baggage_fee_revenue_by_airline_n.jpg
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evanb
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Re: US airlines cashing in on baggage fees..

Unread post by evanb » Mon May 13, 2019 2:53 pm

Fransw wrote:
Mon May 13, 2019 2:44 pm
Baggage is BIG Business!...
It depends what the base is. American Airlines earned $1.22 billion in baggage fees in 2018, but it's total revenue was $44.54 billion, so less than 3% of total revenue.

That said, the big increase in bag fees in 2018 has very much been driven by the expansion of Spirit and Frontier and the legacy airlines reaction by increasing the market segmentation with what the call "economy basic" fares.
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Re: US airlines cashing in on baggage fees..

Unread post by Fransw » Tue May 14, 2019 10:16 am

evanb wrote:
Mon May 13, 2019 2:53 pm
Fransw wrote:
Mon May 13, 2019 2:44 pm
Baggage is BIG Business!...
It depends what the base is. American Airlines earned $1.22 billion in baggage fees in 2018, but it's total revenue was $44.54 billion, so less than 3% of total revenue.

That said, the big increase in bag fees in 2018 has very much been driven by the expansion of Spirit and Frontier and the legacy airlines reaction by increasing the market segmentation with what the call "economy basic" fares.
True, not much compare to the total revenue. But I think at least a third of that 3% is profit. An extra 1% on profit is huge! But I'm only guessing here.. :)
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Re: US airlines cashing in on baggage fees..

Unread post by Jack Welles » Tue May 14, 2019 11:25 am

Fransw wrote:
Tue May 14, 2019 10:16 am
evanb wrote:
Mon May 13, 2019 2:53 pm
Fransw wrote:
Mon May 13, 2019 2:44 pm
Baggage is BIG Business!...
It depends what the base is. American Airlines earned $1.22 billion in baggage fees in 2018, but it's total revenue was $44.54 billion, so less than 3% of total revenue.
That said, the big increase in bag fees in 2018 has very much been driven by the expansion of Spirit and Frontier and the legacy airlines reaction by increasing the market segmentation with what the call "economy basic" fares.
True, not much compare to the total revenue. But I think at least a third of that 3% is profit. An extra 1% on profit is huge! But I'm only guessing here.. :)
I would agree with you, Fransw. The profit on the 3% (presumably a decent margin involved there) should be compared to the net profit on their total revenue. AIUI in some years airlines can operate on very slim margins (and even make losses?) which could make the profit on baggage fees significant?
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Re: US airlines cashing in on baggage fees..

Unread post by HJK 414 » Tue May 14, 2019 11:45 am

evanb wrote:
Mon May 13, 2019 2:53 pm
Fransw wrote:
Mon May 13, 2019 2:44 pm
Baggage is BIG Business!...
It depends what the base is. American Airlines earned $1.22 billion in baggage fees in 2018, but it's total revenue was $44.54 billion, so less than 3% of total revenue.

That said, the big increase in bag fees in 2018 has very much been driven by the expansion of Spirit and Frontier and the legacy airlines reaction by increasing the market segmentation with what the call "economy basic" fares.

Correct.

I do not think there is a significant change in operating revenue or profit ...
The airfare difference between LCC's and "normal carriers" caused the "baggage fee" and seat cost appearance.
Per example :

You could fly for 100 bucks on Spirit (with no bags or seat allocation) or for 180 bucks on American - (with bags and seat always included ) - yet in the advertising the average passenger only looked at the 100 vs 180 bucks "difference".

So - American "lowered" their fare to 120 or so - ("decreasing" the perceived difference in advertised fares) - and started charging for baggage and seat - ending up in the old price range again

Therefore their "revenue" / and margin on flights may have ended up the same.
The only difference is that the revenue has become fragmented …..

JK
The wisest mind has something yet to learn. ...
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Re: US airlines cashing in on baggage fees..

Unread post by evanb » Tue May 14, 2019 1:47 pm

Fransw wrote:
Tue May 14, 2019 10:16 am
True, not much compare to the total revenue. But I think at least a third of that 3% is profit. An extra 1% on profit is huge! But I'm only guessing here.. :)
You're assuming that that 3% is extra profit, with no cost attached or with no revenue cannibalization attached to it. That, I'm afraid, is wrong. Airlines certainly have costs attached to handling baggage. But secondly, as HJK has already indicated, they're doing this because of competitive dynamics of how some airlines are pricing fares. These dynamics are causing the legacies to lose far more revenue than the bag fees are bringing in.

What I do like about this model is that it's allowing costs/prices to be segmented and the passenger is given greater choice. Previously, it was a choice between a bare bones ULCC and a legacy, now it's a choice even within the legacy of what you want.
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Re: US airlines cashing in on baggage fees..

Unread post by Fransw » Tue May 14, 2019 2:52 pm

evanb wrote:
Tue May 14, 2019 1:47 pm
Fransw wrote:
Tue May 14, 2019 10:16 am
True, not much compare to the total revenue. But I think at least a third of that 3% is profit. An extra 1% on profit is huge! But I'm only guessing here.. :)
You're assuming that that 3% is extra profit, with no cost attached or with no revenue cannibalization attached to it. That, I'm afraid, is wrong. Airlines certainly have costs attached to handling baggage. But secondly, as HJK has already indicated, they're doing this because of competitive dynamics of how some airlines are pricing fares. These dynamics are causing the legacies to lose far more revenue than the bag fees are bringing in.

What I do like about this model is that it's allowing costs/prices to be segmented and the passenger is given greater choice. Previously, it was a choice between a bare bones ULCC and a legacy, now it's a choice even within the legacy of what you want.
No, I'm assuming that a third of that 3% is profit and two thirds expense.. In other words 1% extra on total profit. Which is a lot if its true. But I'm only guessing...
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Re: US airlines cashing in on baggage fees..

Unread post by evanb » Tue May 14, 2019 5:09 pm

Fransw wrote:
Tue May 14, 2019 2:52 pm
No, I'm assuming that a third of that 3% is profit and two thirds expense.. In other words 1% extra on total profit. Which is a lot if its true. But I'm only guessing...
I'd say it's a net loss leader or just a loss minimizer, the cheap fares they're being applied to are a loss leader for legacies in a battle for market share with Spirit and Frontier.

For example, when Spirit are selling a return ticket ORD-LAX-ORD for $169 (total flight time of about 8 hours), and American Airlines have to compete with that with an economy basic fare of $183, the $30 each way they charge for the bag doesn't mean it's profitable. However, they're only offering that basic fare one out of ten flights, why is that?

Spirit are only flying ORD-LAX-ORD twice daily, whereas American Airlines are flying the route 10x daily. So American will segment the market and sell those economy basic fares (including bag fees) at a loss to ward off Spirit eating too much into their market share an ensuring good yields for the segment that Spirit are not competing with (e.g. business class, international connecting traffic, passengers with fixed or time sensitive schedules, passengers who wish to pay for greater flexibility or benefits, corporate contracts, etc). They only offer these economy basic fares on a very narrow range of routes.

One thing that is interesting is that the American legacies have been charging checked bag fees on most domestic short haul tickets for years, but there were so many exclusions (e.g. international connections, frequent flier status, credit card exemptions) that hardly anyone ended up paying them. However, what Spirit and Frontier did was started charging for carry-on bags (I <<moderated - language>> you not). Only a personal item that could fit under the seat in front of you could be carried on for free. The legacies started doing this on the "economy basic" fares to compete with Spirit and Frontier. This is what has caused the increase in bag fees (and the usual exclusions like international connections, frequent flier status and credit card exemptions were not applied). Again, I'm very confident that the legacy airlines are not making money off these economy basic fees. Their cost base is just too high.
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