Rising prices for Air Travelers (Market Watch)

TheStreet.com
Thursday September 25, 10:48 am ET
ByTed Reed, TheStreet.com Staff Reporter

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CHARLOTTE, N.C. -- People may complain about airlines charging fees for bags and other extras, but they are paying them anyway, to the tune of hundreds of millions of dollars annually.

Combined with unprecedented capacity cuts, the new charges could help to turn the industry profitable in 2009. UAL, for instance, says new fees will likely boost next year's revenue by $750 million. US Airways expects a revenue gain of $400 million to $500 million.

"These fees do seem to work," Brad Tilden, CFO of Alaska said at a Calyon-sponsored investor conference last week.

"A lot of times you see a $50 fare increase, then you look back at the end of the quarter and the average ticket price didn't go up at all," Tilden said. By contrast, he said, projected revenue from the fees actually materialize.

US Airways President Scott Kirby said fees result not only in new revenue, but also in operational benefits. "We've seen huge improvement in baggage numbers from having 10% fewer bags go through the system," he said.

Baggage handling has historically been a challenge for airlines, which are expected to transfer thousands of bags between aircraft in narrow time windows at hub airports. Not only is it time consuming, but "it's where we fail the most," Kirby said. Those failures are costly, leading to re-accommodations, deliveries beyond the airport and lost bag claims.

So far, US Airways is the only carrier to charge for drinks -- $2 for soda, juice and bottled water and $1 for coffee. As a result of the charges, which began Aug. 1, "the cabin environment is much calmer and more efficient," Kirby said.

In the past, because drinks were free, nearly every passenger had one. Now, carts no longer clog the aisles. Restroom lines have diminished. Less trash is left onboard. And it's no longer necessary to cater the aircraft every time it's on the ground.

Furthermore, "we've seen no market share impact," Kirby said. "We've looked at this closely."

AMR's American Airlines unit, which introduced the concept of a first-bag charge in May, has now been vindicated by widespread adoption of bag fees.

Three weeks later, UAL's United followed American, but the delay had allowed time for speculation that the charge might have to be rescinded if no one else implemented fees. "Four of our major competitors have now matched that fee, which I believe validates that decision," said AMR Treasurer Beverly Goulet.

Still, neither Southwest nor Delta has matched the move. Southwest, which carries the most passengers of any airline, touts its lack of fees in its advertising.

Delta, meanwhile, is poised to become the world's biggest carrier by revenue passenger miles pending approval of its planned merger with Northwest. (A report Thursday said shareholders of Delta and Northwest are likely to vote in favor of the deal.)

"While we're always keeping an eye on what's happening in the market, Delta customers can still check a first bag for free," said Delta spokeswoman Betsy Talton.

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