The Math Behind New Baggage Fee

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The Math Behind New Baggage Fee

Post by Hanna » Sun May 02, 2010 10:23 am

APRIL 29, 2010

The Math Behind New Baggage Fee


One reason some airlines are eager to charge fees for carry-on bags: There's no room at the (overhead) bin.

To avoid checked-baggage fees, more travelers are carrying more bags onboard with them. At the same time, airlines have packed flights with more passengers, on average. That's led to a real-estate crisis in the cabins—not enough space in overhead bins to accommodate all customers. So more flights are delayed when customers struggle to cram bags into full bins and airline workers have to send bags that don't fit down to cargo compartments.

Despite consumer outrage, Congressional scorn and federal investigation, Spirit Airlines Inc. says it will press on and become the first in the U.S., perhaps the world, to charge carry-on fees of up to $45 per passenger on Aug. 1. Spirit was the first in the U.S. with checked-bag fees. The airline tries to offer eye-popping low ticket prices then get customers to pay for any "extra" service they use.

"We're not having any second thoughts. Right now, it still seems like a good idea to us," says Ben Baldanza, chief executive of Spirit, based in Fort Lauderdale, Fla.

Mr. Baldanza says Spirit will be able to trim five minutes off each flight—20 hours of airplane time per day. That's like having two extra $40 million planes in your fleet, and would let the airline add more flights without having to buy more planes. Today, without carry-on fees, Spirit is often gate-checking as many as 20 to 30 bags per flight that don't fit in overhead bins.

Part of the bin shortage is of Spirit's creation: The airline squeezes more seats onto its planes than competitors. Spirit has 145 seats on its Airbus A319s; US Airways Group Inc., by comparison, has 124. And when "properly packed," Mr. Baldanza says, the A319 has room for 130 bags. If each passenger puts only one bag in the bin, and every passenger packs the bin in the most efficient manner, then the last 15 people to board a full flight still are going to find bins completely full.

Spirit in March also began flying Airbus A320s with coach seats that don't recline so the airline can squeeze rows closer together. The no-recline planes have 178 seats, compared to 150 seats on A320s at JetBlue Airways Corp., but both plane configurations have the same number of overhead bins.

Spirit's carry-on fees will range from $20 to $45 to put an item in the overhead bin (you do get to put a small personal item under the seat in front of you, free). That's slightly higher than checked-baggage fees, which range from $15 to $45, to encourage customers to check bags rather than carry them onboard.

Right now, Spirit is collecting data on the number of bags it checks at the gate on each flight, the minutes of delay as flight attendants and ground workers tag the bags to destinations and load them in cargo compartments, and any injuries to crew and customers from carry-on bags. Once the fee goes into effect, Mr. Baldanza hopes those measures decline.

"The main reason we did this was to reduce gate delay," he says. By reducing each flight five minutes, "that's the way we would make money on this deal."

Fees are crucial to Spirit's bottom line. Through the first nine months of last year, according to Department of Transportation data, baggage fees alone accounted for almost 8% of Spirit's revenue.

The airline, which likens itself to budget carrier Ryanair of Ireland, charges fees for a host of services, including advance seat assignments. Soda costs $3 a can. The airline adds an $8 each-way "passenger usage fee" to tickets.

Spirit's push has once again raised the question: What do consumers get when they buy an airline ticket? Airlines once provided a lot more than just transportation from one city to another. But as the industry has flown through financial hardship, fees have been added to many services and perks, from switching flights on a standby basis at some carriers to getting a window seat or bottled water at others and to carrying pets onboard at most. Making a schedule change on a non-refundable ticket now costs $150—it was $100 in 2008 and $50 in 1997—and produces enormous revenue for airlines.

The fees, to some extent, have rescued an industry as it was saddled with the double-whammy of recession and high oil prices. Baggage fees alone tallied $2 billion for airlines in the first nine months of 2009, the latest data available, according to the federal Bureau of Transportation Statistics. Bag-fee revenue was up more than 205% compared to the same period of 2008, the year airlines began charging for first and second bags.

US Airways, for example, collected $310 million in baggage fees in the first three quarters of 2009, according to BTS, topping its operating income of only $103 million.

With baggage fees so vital, many wonder if other airlines will resist following Spirit in charging for carry-on bags—an opportunity for perhaps even bigger revenue than checked-baggage fees. On average, about half of all passengers check bags, airlines say. But most all of them show up with some number of carry-on bags.

Airlines and travelers alike say people are bringing more stuff onboard planes. AMR Corp.'s American Airlines was averaging 1.1 to 1.2 checked bags per passenger before it instituted baggage fees in 2008. It now averages about 1.0 bags or less, according to spokesman Tim Smith.

Mr. Smith says the biggest change in the carry-on-baggage bin squeeze has been the increase in load factor—more passengers on each flight vying for the same number of overhead bins. "The average flight will tend to have more customers onboard, and in turn more carry-ons overall," he says.

Five big airlines—Delta Air Lines Inc., American, UAL Corp.'s United Airlines, US Airways and JetBlue—pledged to Sen. Charles Schumer (D., N.Y.) after Spirit announced its new carry-on fee this month that they wouldn't put such a fee in place themselves. Others seemed firm in their commitment to not charge. Spokesmen for AirTran Airways Inc. and Frontier Airlines, a unit of Republic Airways Holdings Inc., said they had "no plans" to charge for carry-on bags; a spokeswoman for Virgin America Inc. said, "we can't foresee any circumstances where we would start charging carry-on bag fees." Alaska Airlines Inc. said it is "absolutely not considering" carry-on bag fees, and Southwest Airlines said it had ruled out such a fee.

Others were not as firm. "We have no immediate plans to charge for carry-on bags," said a spokeswoman for Allegiant Travel Co.'s Allegiant Air, which gets a comparatively high percentage of its revenue from fees, according to DOT data.

Spirit's Mr. Baldanza says rival airlines watched how customers adapted to his checked baggage fees for a year before following with their own fees, and he expects a similar watching period with carry-on fees.

"I think the jury on this idea is still out. We need to get into the operational phase and see how people react," he says.

Other CEOs agree. "I think airlines will look at it very, very seriously," says Mark Dunkerley, CEO of Hawaiian Airlines, a unit of Hawaiian Holdings Inc. His airline won't be "an early adopter," but he thinks others may try it as well as Spirit. "We've had some airlines charging for water, so there is no limit," he says.

Some in Congress believe airline fees should have limits. A bill has been introduced to outlaw carry-on baggage fees; another effort is aimed at taxing fees just as tickets are taxed so government doesn't lose out on revenue as airlines shift their charges from tickets to fees. And the DOT is looking closely at Spirit, mostly to see if the airline properly discloses its fees and other charges to consumers.

Transportation Secretary Ray LaHood has been vocal in his criticism of Spirit's carry-on fee.

"Charging passengers to stow carry-on bags in overhead bins does not strike me as good customer service," he said in a statement to this newspaper. "We will take up this issue as part of an upcoming rulemaking on consumer protection."

Mr. Baldanza is scheduled to meet with Mr. LaHood on Friday.

Write to Scott McCartney at ... 13420.html

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