Profits From Airline Baggage Fee

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?

baggage_fee_profit

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.

6 thoughts on “Profits From Airline Baggage Fee

  1. Thanks for the response. I think that would be a great point to make, I’m just not fully sold that the data as presented does that. To be convinced I’d like to see evidence that airlines that unbundled their baggage fees became more profitable. If they didn’t, this I’m not sure it matters. It would just be a framing gimmick.

    Or, if it does matter, maybe Southwest picks up share in clients that travel with bags while losing share with people who don’t.

  2. Did airlines hold their ticket prices constant when adding checked bag fees? My impression was that the baggage fee move was more likely to be able to show ticket prices that were more competitive with low fare carriers such as Southwest, and then make some of the lost ticket revenue back up from the people who value checking their luggage for whatever reason.

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