Just when Continental airline decided to extend its baggage fees from US flights to international flights, SouthWest stepped up its campaign against airlines charging extra for bags. Is SouthWest following the right strategy to not only choosing to implement unbundled pricing but also align their messaging around this? How much profits are they leaving un-captured?
In Q2 of 2009, rest of the airlines brought in close to $670 million baggage revenue. Last year it was just $178. (Data source WSJ print edition, 9/22/2009, page B4). Since there is no significant marginal cost per bag and almost all the costs are fixed and paid for, we can conclude that most of the increase from $178 to $670 is pure profit. There was one study last year (I am unable to find the reference) that put the cost per bag at $15. This must include fixed allocation and not just marginal cost. This gives a margin of 40%. But since the costs are mostly fixed, we can assume that margin in 2009 is close to 80%. So the decision to charge for bags brought in about $536 million in profit for all the airlines combined.
For SouthWest, leaving its share from that profit is a better decision only if they captured higher profit from increase in utilization from passengers choosing the airline because of its no-fee policy. Judging from their last earnings statement we can safely say that has not been the case.