U.S. Markets closed

Airlines Attempt to Offset Rising Costs Via Baggage Fee Hike

Zacks Equity Research
1 / 2

Airlines Attempt to Offset Rising Costs Via Baggage Fee Hike

Airlines grappling with high operating expenses are looking to boost revenue base through increased bag fees.

In a bid to counter the challenges posed by escalating costs, airlines are on a spree to raise fees for checked bags. Delta Air Lines, Inc. DAL is the latest carrier to have joined the bandwagon, following similar moves by other industry participants, namely JetBlue Airways Corporation JBLU and United Continental Holdings, Inc. UAL late in August.

Delta has hiked its first checked bag fee to $30 from the previous $25 and the second checked bag fee to $40 from $35 earlier on domestic routes. Earlier in April, the carrier started charging $60 for the first checked bag from basic-economy class passengers travelling to and from Europe.

United Continental and JetBlue too follow the same fee structure for domestic services except that the latter also levied an increase in fees to change tickets. JetBlue now charges $200 for changing or canceling a ticket valued at more than $200. Earlier it used to charge $150 for the same. However, passengers belonging to the highest fare class category are exempted from the renewed fee structure. The low-cost carrier’s fee policy for changing nonrefundable tickets on domestic routes matches that of the likes of American Airlines Group Inc. AAL, Delta and United Continental.

While Delta generated nearly $908 million in baggage fees last year (thrice the 2008 figure), the U.S. airline industry’s revenues from baggage and reservation change fees jumped to $7.5 billion in 2017 from $5.7 billion in 2010.

Following the footsteps of JetBlue, the first to make the fee-hike move, Canadian carriers like Air Canada and WestJet Airlines, too increased charges for bag checking.

Rising Fuel Prices Behind the Trend

The prime reason behind this strategic move by airlines can be attributed to escalating fuel prices. Oil prices have risen roughly 20% year over year. Since fuel expenses are significant for airlines, an increase in oil prices is detrimental to the health of the industry. Apart from fuel expenses, high labor costs are a drag on the sector participants. Of late, airlines have been engaging in frequent labor deals with pilots and crew members, giving in to their demands for a better pay structure among other benefits. In this regard, it is worth mentioning the recent struggles of the European carrier Ryanair Holdings plc RYAAY pertaining to a fair deal with its pilots and cabin crew. (Read more: Ryanair Faces Risk of Another Major Strike at Month-End)

US Congress Intervention in Baggage Fee Hikes

Amid several U.S. carriers raising baggage fees successively, the Congress is debating on whether the airline baggage and ticket change prices are “reasonable and proportional to the costs incurred by the air carrier.” If the existing fee structure is found unreasonable, the Congress will pass a provision that will reauthorize the Federal Aviation Administration to regulate the airlines’ current fee structure. The U.S. House of Representatives and the Senate have been holding sessions on getting a compromise bill passed by Sep 30.

Dismal Price Performance

The Zacks Airline Industry has declined 13.9% in the past six months against the broader Transportation sector’s 3.2% growth. This underperformance can be linked to the industry’s persistent battle due to rising operating expenses, mainly fuel.


Will American Airlines Follow Suit?

The immediate focus is now on whether American Airlines walks the path of its rivals in hiking baggage fees. Meanwhile, low-cost carrier Southwest Airlines Co. LUV exempts fee for two checked bags and executives further confirm the carrier’s intention not to change the same for the time being.

Other low-cost carriers like Spirit Airlines, Inc. SAVE and Allegiant Travel Company already charge $30 for the first checked bag on some routes. These airlines have separate bag fees on different routes.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report
Ryanair Holdings PLC (RYAAY) : Free Stock Analysis Report
Spirit Airlines, Inc. (SAVE) : Free Stock Analysis Report
Southwest Airlines Co. (LUV) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research