A billion reasons to charge for luggage

The money-losing airline industry reaped more than $1 billion last year from excess baggage fees

By Aaron Smith, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The round of baggage fees that came last year may have annoyed the heck out of customers, but according to government figures, they were a billion-dollar lifesaver for cash-strapped airlines.

Baggage fees from the U.S. airline industry totaled $1.15 billion in 2008, according to the U.S. Department of Transportation.

0:00 /Airline earnings grounded
Traditionally, airlines would not charge for the first two pieces of checked luggage unless they exceeded weight limitation. But in February of 2008, United Airlines, owned by UAL Corp., (UAUA, Fortune 500) began charging $25 for the second checked bag. In July of that year, US Airways (LCC, Fortune 500) started charging $15 for the first checked bag.

Many of the competing airlines followed suit. This was in addition to a whole host of other fees for once-free services and products, such as meals, snacks and non-alcoholic drinks, as well as ordering tickets via phone and redeeming flight miles.

American Airlines, owned by AMR Corp., (AMR, Fortune 500) topped the industry, according to the DOT, gleaning $278 million in baggage fees during 2008, followed by US Airways, with $187 million, and Delta Air Lines (DAL, Fortune 500), with $177 million. The baggage fees for United Airlines totaled $133 million last year, while Northwest (which merged with Delta in 2008) totaled $121 million and Continental Airlines (CAL, Fortune 500) made $97 million.

Southwest Airlines (LUV, Fortune 500), which avoided much financial hardship through successful hedging of fuel prices, totaled $25 million in excess baggage fees in 2008, the DOT said, the least among the seven major carriers. Southwest promotes itself as not charging excessive fees.

"I am positive consumers don't like the fees but they have little choice other than to change their behavior," said Rick Seaney, chief executive of Farecompare.com. "Southwest is the lone holdout on this point."

Seaney was speaking from the A-La-Carte Pricing Conference in Miami on Tuesday. The conference host, a company called Airline Information, estimates that excess luggage fees could total $3.5 billion in 2009.

"2008 was only a partial year for bag fees," said Seaney. "These numbers will be up dramatically in 2009 and are here to stay even though the justification to add these fees was related to the run up in fuel prices early last year."

0:00 /2:05United's new 'big' policy
While the added charges have fueled resentment among some passengers, airlines blamed the price of fuel, which escalated to unprecedented levels. In the U.S.-based airline industry, fuel costs averaged more than 30% of all operating costs in 2008, according to the DOT, compared with five years before, when it was 14%. But while fuel prices in 2009 have come way down off their highs, the fees are still there.

"We think the passengers are being gouged by these baggage fees," said David Stempler, president of the Air Travelers Association, an advocate for passengers. "They initially came into effect from the high fuel costs. But since the fuel costs have fallen off, they haven't rescinded these fees."

A decline in business and vacation travel stemming from the recent recession has also posed serious threats to the industry, which has met the drop in demand by cutting capacity in scaling back its least fuel-efficient flights.

David Castelveter, spokesman for the Air Transport Association, an airline industry group, defended the baggage fees as necessary to the survival of a money-losing industry.

"The first quarter for the industry is still a multi-billion dollar loss," said Castelveter. "I don't know of a business model that calls for a company to lose money. I fail to understand why the industry is demonized for trying to return to profitability."

Castelveter also said the "a la carte" nature of the baggage fees favors the light travelers who don't have to "subsidize" the passengers with lots of luggage.

Harlan Platt, a finance professor at Northeastern University College of Administration in Boston who follows the airline industry, said that a checked bag costs an airline $15 on average, so the fees are designed to alleviate that cost.

"It's hard to argue with user fees," he said. "Why should a guy who's not bringing luggage on the plane pay for the guy who's bringing too many bags?"

Stempler disagreed. He said that travelers have limited control over their luggage-toting behavior, considering certain restrictions, like those applying to liquids.

"Passengers can't always carry their luggage on board because of the strict [Transportation Security Administration] rules," he said.

First Published: May 12, 2009: 12:04 PM ET