The new fees apply to flights within and between the U.S., the U.S. Virgin Islands, Canada, and Puerto Rico
By Christopher Hinton
Wall Street Journal
Delta Air Lines (DAL) and Continental Airlines (CAL) will begin charging customers the highest fees in the industry this week for checked bags, tempting other legacy carriers to follow suit.
The new fees apply to flights within and between the U.S., the U.S. Virgin Islands, Canada, and Puerto Rico. Excluded are premium-class fliers, frequent fliers and active U.S. military members.
With a recovery in passenger revenue growth projected for later this year, the airlines appear to be taking no chances with coming up short with the cash they need to turn a profit. Ancillary fees, such as those for check-on luggage, have become an important driver for revenue growth.
Putting pressure on the industry is a recent jump in benchmark crude prices, which hit a 15-month high earlier this week.
"We have a real focus on growing the ancillary revenues in our business to act as a temper against the volatility of the business," said Delta Chief Executive Richard Anderson, during an investor meeting last month.
Anderson reckons total ancillary revenue, which include baggage fees, administrative fees, the frequent flier program, global services and ground handling businesses, will be in excess of $4 billion this year.
For 2010, analysts polled by FactSet Research predict Delta will swing to a profit of $1.13 a share on sales of $30.9 billion, on average, up from an estimated $28 billion in 2009.
Continental is expected to swing to a profit of $1.36 a share on sales of $14 billion, up from an estimated $12.7 billion last year.
Altogether, the global airline industry faces a $5.6 billion loss in 2010, an improvement from the estimated $11 billion loss last year, according to data provided by the International Air Transport Association.
Delta Air Lines raised its checked-on luggage fees to $25 for the first bag and $35 for the second, from $15 and $20, respectively. Continental said it later matched them.
The carriers offer a small discount for passengers that check their luggage on line, but they are still the highest in the industry. Delta and Continental have been trail blazers in past when raising their checked-on fees, with United Airlines, American Airlines and US Airways (LCC) raising their fees soon afterwards.
Last year, domestic airlines raked in more than $700 million from checked-bag fees during the third quarter, up 111% from last year, according to the U.S. Bureau of Transportation Statistics.
For Delta, the new rules apply to standard economy-class tickets purchased on or after Jan. 5 for flights beginning Tuesday. Continental's rules apply for tickets purchased on or after Jan. 9 for travel beginning Saturday.
Legacy carriers have the biggest check-on baggage fees in the industry in part because they focus more on the premium-paying business traveler and not the budget-conscious holiday traveler. Vacationers are often able to get discounted tickets when the airlines scramble to fill vacant seats, but airlines try to make up for the cheaper fare through extra charges such as the check-on baggage fees.
That's why budget carriers, who rely more heavily on leisure travel, often have the lowest check-on bag fees. And carriers such as Southwest Airlines (LUV) and JetBlue Airways (JBLU), avoid the extra charges altogether, at least for the first bag.
The airlines also don't offer discounts for checking bags online because most leisure travelers book their tickets through the carriers' websites, rather through a global distribution system such as Sabre or Amadeus, which are popular among corporate travel offices.
American and United are units of AMR Corp. (AMR) and UAL Corp. (UAUA), respectively.