Are Baggage Fees Here to Stay?

Canada, Commentary, Mary-Jane Bennett (historic), Transportation, Uncategorized

Last week, WestJet announced that it will begin charging a $25 to $29.50 fee for the first piece of checked luggage on some domestic flights. Days later, Air Canada announced matching fees. WestJet defended its move claiming that about a quarter of its passengers do not check bags and the move responded to their concerns. The idea came from passengers themselves “who wanted to keep the fares low” said Gregg Saretsky, its C.E.O., adding that the fee shift “reinforces our culture as a low cost carrier.”  

Although there is a marginal cost in luggage handling, tying the new fee to a “low cost culture” is a stretch. WestJet is no longer a no-frills, short-haul carrier. The Calgary-based airline has spent most of the past decade muscling into the territory of the major players, spending more on distribution and new ticketing arrangements and forging relationships with major airlines. All of this is reflected in its ticket price and fee structures. WestJet’s “low cost culture” is a marketing fiction. Domestically, it is hard to distinguish from Air Canada in the fares it charges or the services it offers.

WestJet’s new corporate strategy is partly the result of an industry-wide reorganization that occurred in the wake of 2008’s financial crash. The recession took a huge hit out of the profits of the legacy airlines. Around the globe, the major airlines not only lost an astonishing six years of premium growth but— when other events, like SARS are added on—about $50 billion in profit within the span of a decade. The hot towels, complimentary meals, airport lounges and magazine racks quickly disappeared as the major airlines began aggressively cutting costs. The U.S. major carriers also turned to baggage fees, a cornerstone of the budget market, to provide relief.

But once the legacy carriers began shedding their traditional perks and adopting some of the traits of their low cost cousins, it became hard to distinguish between the two. So much so, that KPMG’s James Stamp, a partner in its global aviation team called the 2013 airline sector “in a state of flux like never before and the old categories of ‘legacy’ and ‘low cost’ are becoming increasingly blurred.”

For their part, many of the low cost carriers, who had weathered the decade in better shape than the major airlines, moved on and into a new class of airline, called the hybrid.  WestJet is firmly in that category.

But the bleeding has long since stopped. Although baggage fees helped the airlines navigate the turbulence of the financial crisis, their balance sheets are showing profits once again.  In other words, stop gaps like baggage fees are no longer needed to keep airlines afloat. But they are a welcome new revenue stream. It’s no surprise that the stock of WestJet jumped on the news of the new fees, which are expected to generate $87.5 million for the Calgary-based airline in 2015. Fully 85 per cent of Delta Airline’s profits come from baggage fees and reservation cancellation fees.

But travellers, WestJet is well aware, are a fickle bunch. Though social media is awash with complaints over WestJet’s new baggage fees, consumers have already begun paying them. And it turns out that baggage fees and costly ticket prices aren’t even the traveller’s biggest complaint with air travel—it’s leg room, according to one recent industry survey.

There are a couple of cautionary notes. Passengers don’t mind paying for some things, like preferred seating, lounge access or hotel and car rental upgrades. But as baggage fees are supposed to be part and parcel of the fee they already pay, passengers see them as an irritant.

And throw into the mix the courtship by Canadian airports with U.S. Southwest Airlines for expansion to the Canadian market and things may change. Accounting for about a fifth of U.S. airline traffic and at about twice the size of Air Canada, the Southwest giant would bring with it its “Bags Fly Free” policy; and potentially a rethink by Canadian airlines about their commitment to baggage fees.