U.S. carriers are piling up profits
Airlines are saving billions thanks to lower fuel costs, but they’re not ditching the bag fees they began charging years ago when fuel prices skyrocketed.
“I don’t think that is something they can put into the market then take out because fuel is so un- predictable,” Houstonbased airline consultant Pete Garcia said.
U.S. passenger airlines collected $3.8 billion in bag fees last year, up 8.1 percent from 2014, data released this week by the Bureau of Transportation Statistics show. Revenue from passengers chang-
ing or canceling their flights increased 2.4 percent to $3 billion. Such fees have proved to be a reliable source of revenue and entrenched themselves in carriers’ business structure.
“It’s an important part of their revenue stream now,” said Joe DeNardi, a U.S. airlines analyst with financial services firm Stifel.
United Airlines, which operates a major hub at Bush Intercontinental Airport, made $672.2 million from bag fees and $ 798.3 million from reservation change fees. Even local rival Southwest Airlines, which prides itself on allowing passengers to check two bags at no additional charge, collected $43.6 million in bag fees last year. The airline said this could come from overweight luggage or fliers who checked additional bags.
Overall, U.S. passenger airlines had a stellar 2015, reporting a combined net income of $25.6 billion, up from $7.5 billion in 2014. This increase is largely attributed to a 37.9 percent drop in fuel costs. Airlines spent $27 billion on fuel last year, down from $43.4 billion in 2014.
Operating revenue, however, edged down to $168.9 billion last year from $169.3 billion in 2014.
Bag fees and reservation change fees remain a relatively small portion of airlines’ operating revenues, 2.3 percent and 1.8 percent, respectively. Threefourths of operating revenues were generated by fares.
Bureau of Transportation Statistics data released in late April show the average domestic fare decreased to $363 in the fourth quarter of 2015. That’s down 8.3 percent from $396 during the same period in 2014 and the lowest inflation-adjusted level since 2010.
“I think, in general, the industry has been pretty good about holding pricing but not as good as people expected,” DeNardi said, referring to investors who hoped fares wouldn’t drop as far as they have.
DeNardi said airlines receive unfair pressure to adjust pricing based on the current cost of fuel. Taxi companies, or Uber, for example, aren’t pressured to adjust their rates.
Michael Boyd, president of aviation consulting firm Boyd Group International, agreed that it doesn’t make business sense to lower fares when there’s demand and people are willing to pay the higher prices.
“They have no business lowering their profitability or lowering fares unless they’re going to get something from it on the other end,” Boyd said.
Experts said the carriers are using their cost savings to pay down debt and invest in more fuel-efficient planes. They’re also spiffing up terminals and giving money back to employees and shareholders.
George Hobica, president of airfarewatchdog.com, applauded airlines for investing in their fleets.
“Personally, I would rather see them improve service and fly in new planes rather than the rust buckets we used to fly in,” he said.
Hobica also expects bag fees to be permanent because airlines “don’t know if they may need them to pad the bottom line in the future.”
He understands bag fees because there is an actual cost associated with someone moving luggage to the plane. Charging someone to change a flight, however, is a different story.
“I think the change fees are just kind of nasty,” he said. “They have gone up for no good reason.”