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Why airline luggage fees carry a lot of baggage

As WestJet Airlines Ltd. toys with the idea of imposing a U.S.-style charge on all checked baggage, the obvious question is whether the potential financial gains outweigh the potential for alienating customers. The U.S. experience suggests baggage fees aren't kryptonite to passengers – but the revenue bonanza ain't all it's cracked up to be, either.

U.S. Department of Transportation statistics show baggage fees generate about $3.6-billion (U.S.) in annual revenues for the U.S. airline industry – a nearly eightfold increase from prior to 2008, when U.S. air carriers began ramping up such charges. But the number isn't as big as it sounds. For most U.S. airlines that charge a fee on customers' first checked bag, baggage fees typically make up between 2 and 3 per cent of revenues.

And only a portion of that represents additional revenues from first-bag fees. The U.S. airline that WestJet most closely compares itself with – Southwest Airlines Co. – doesn't charge any fees on the first two checked bags, and it still gets about 1 per cent of its revenues from baggage charges (due to overweight luggage, additional bags, etc.).

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So, about the best WestJet could reasonably hope for is a 2-per-cent bump in revenue. Now, 2 per cent may be nothing to sneeze at. But consider that just last week, WestJet imposed a 2-per-cent, across-the-board fare increase – and didn't even announce it.

Part of the reason the boom in baggage fees has had such a small financial impact is because many airlines exempt their best customers from paying it. The likes of Delta, United, American and US Airways waive their $25 first-bag fee for travellers in the elite levels of their frequent-flier programs. WestJet has indicated it would want to offer a similar perk in its frequent-flier and credit-card reward programs.

Airlines have often characterized first-bag fees as not a money grab, but rather as a means to offset the high cost of jet fuel. After all, the argument goes, extra weight requires extra fuel, and the airlines are just asking the customers who add the most luggage weight to bear some of the costs. But a recent analysis from the Detroit Free Press estimated that the extra fuel cost for the typical bag is only $2 – for which the airlines are collecting $25.

There are, however, other costs involved in baggage beyond fuel costs – and these strengthen the financial case for them. Higher baggage fees have typically translated into reduced amounts of checked baggage, which means fewer baggage-handling staff and reduced incidence of lost luggage – which save the airlines money.

On the other side of the equation, of course, are the customers. "I don't know if that we'd assume we'd lose any," said Gregg Saretsky, WestJet's president and CEO, in the company's quarterly conference call with analysts Tuesday.

He bases this on load-factor numbers, which indicate airlines that charge first-bag fees are still filling their planes just as much as those who don't, including WestJet. Indeed, Spirit Airlines, a discount carrier that charges fees even for carry-on bags, has one of the highest load factors in the business; Southwest, which boasts its "Bags Fly Free" policy in its marketing, has one of the lowest load factors among big U.S. carriers.

Surveys have shown most U.S. travellers don't find baggage fees onerous, and the fees haven't hurt overall airline satisfaction. After the initial grumbling, people have gotten used to them.

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Still, nothing is going to change overnight at WestJet. The company is waiting for its information technology providers to confirm they can deliver systems that can allow it to implement new bag fees in different ways to different tiers of customers, in a cost-effective way. Only then will it decide if first-bag fees are a good fit for its business strategy.

But in Mr. Saretsky's words, "Hard to say we're getting any advantage in the market by not charging for a bag."

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