aside WHY MAJOR AIRLINES ARE INCREASING PASSENGER BAGGAGE FEES?

Airline being loaded with cargo
Airline being loaded with cargo

Why are all the major airlines (excluding Southwest) seem to keep adding new fees for incidentals while providing less perks? We all know the answer is simple. These added fees revenue add to the airlines’ bottom line. According to a 11/10/15 SKIFT article by Marisa Garcia, “Airline Fee Revenue Expected to Reach Nearly $60 Billion in 2015,” this revenue is expected to reach $59.2 billion in 2015, as per IdeaWorks and CarTrawler’s  latest reports. She adds, “This figure represents an increase in ancillary revenue gains of 18.8% from 2014 and 163% from 2010.”

But many do not know about the other reason for why the airlines keep adding and increasing passenger baggage fees. The explanation has to do with these airlines also being in the cargo transport business.

AIRLINES CARGO baggage-is-loaded-by-conveyor-into-airplane-cargo-area-e1384266148626

Marisa Garcia explains this phenomenon of the airlines balancing the revenue from cargo v passengers well in her 8/4/14 SKIFT article, “When Airlines Worry More About Cargo Than They Do About Passengers.

“If, when you fly, you have the feeling that you are being treated like cargo, you’re wrong.”

“Cargo is treated like cargo. And cargo is nice to airlines. Cargo doesn’t quibble about crowded conditions or expect special treatment. Cargo doesn’t get rowdy and problematic in-flight. Cargo doesn’t require cabin crew to cater to its needs. Most importantly, cargo pays well.”

Jet #1 among lower cost carriers by 2015 JD Power
#1 among lower cost carriers by 2015 JD Power

“It represents between 15%-20% of the average airline’s earnings. Though that may not seem a lot, once a flight covers its costs with passenger capacity, any income from cargo goes to profits. Unlike more fare-sensitive passengers, cargo customers will pay a premium for the expedited and flexible point-to-point service afforded by an airline’s network.”

“Several factors affect just how much cargo an airline can fit on board: the type of aircraft, that aircraft’s tonnage capacity and available hold space, the weight of the fuel required for the flight and the space taken up by extra fuel storage, the weight of the mail the airline is committed to carry, and our luggage. Airlines ensure there’s weight capacity available for that profitable cargo by reducing the constant: the fixed weight load the aircraft with all its components and by managing luggage allowances.”

Alaska Airlines is # 1  among major carriers as per 2015 JD Power (Alaska Airlines transfer partner Cathay Pacific first class)

Optimized Cabin Design

“Airlines work hard to ensure that the fixed weight and volume of the aircraft are as light as possible and consider the revenue-use of the square footage and revenue-yield of the weight in the aircraft.”

“It’s a big job. Airlines choose to use the square footage in the limited cabin space available differently, according to their marketing strategy and business model. Some try to get every square foot to yield revenue. Think of Spirit Airlines using the lids on luggage bins as advertising space (something Ryanair did first). Those advertisements, though thin, add weight to the cabin.”

FIJI AIRLINES
FIJI AIRLINES

Because it’s revenue weight–it’s worth it.

“Airlines don’t always make weight decisions on capacity alone. Southwest and Ryanair switched over from lighter fabric covers to heavier leather covers in their interiors because the leather covers reduced maintenance costs and didn’t need to be replaced as often. Weightier cabin components can be justified, if they contribute to the bottom line in a different way.”

“Because cabin components represent a permanent weight and space burden, a mistake in judging the profitable lay-out of the cabin, and use of the aircraft volume, can cost airlines dearly. With a three- to five-year window for a cabin configuration change, airlines can’t just swap-out unprofitable configurations when they discover that they’ve got it wrong.”

Southwest Airlines is # 2 as per JD Power
Southwest Airlines is # 2 among lower cost carriers as per JD Power

“Once the fixed cabin weight is optimized, airlines have to optimize both their passenger loads and cargo loads to make a profit. These two can be at odds.”

“Passengers represent a net profit margin of $6.00 each to airlines. Using the median weight of a person at the world average of 62 Kilos (136.7 lbs), then adding the average approved weight for carry-on luggage of 23 Kilos (50.71 lbs), the average person who only travels with carryon luggage represents a weight burden of 85 kilos (187.39 lbs).”

Alaska Airlines cabin
Alaska Airlines cabin

“According to IATA’s most recent report, current global air freight yields $2.40 per kilo. The average passenger with traveling only with average carry-on luggage can represent a cargo-yield loss of $204 to the an airline—hardly a good exchange for those $6.00 of profit per seat.”

“Each carrier, according to its branding strategy, business model, and even according to a particular route, will have to sell around 80% of its seats to break even. IATA states the 2014 average at 80.4%, but this can vary. Airlines know these metrics and design their cabins accordingly, leaving available cargo capacity.”

Swiss Airlines interior
Swiss Airlines interior

Passenger Baggage

“To be profitable, airlines have to get the right amount of those $6.00 passengers in the cabin, without losing the opportunity to earn as much of that $2.40 per Kilo yield as they can store their cargo holds. This also drives the baggage allowance airlines make for passengers and the fees airlines charge for excess baggage.”

“Think of baggage charges as a cargo-offset, making up for lost freight revenue. A $35 charge by an airline for a second bag on board might seem like a lot, an overweight charge between $100-$200 might seem even more punitive, but with the approved weight of a bag at 50 lbs/23 Kilos, it’s equitable. Since an airline might lose an opportunity to carry rush cargo at a higher billing rate to accommodate an overweight bag, the overweight charges are easier to understand.”

Virgin America
Virgin America interior

Cargo load considerations are nothing new.

“Airlines have long benefited from optimizing capacity for a revenue mix between passengers and cargo.”

“Take American Airlines, which advertises it is “one of the largest cargo networks in the world,” and tells potential shippers:”

“American Airlines offers cargo service on virtually every flight we operate. Each week, we can carry more than 100 million pounds of cargo — including perishable foods, pharmaceuticals, flowers, automotive and machine parts, international mail, live animals and other general freight — to destinations around the globe.”

Korean Airlines
Korean Airlines

“Despite its significant global network, American Airlines competes with its peers for that cargo profit. It’s an important portion of revenue for airlines around the world. Airlines in the Gulf region, for example, capitalize on their network in beneficial trade routes. As Emirates, points out:”

“With Dubai as our hub, we’re uniquely placed to help you do business faster and more efficiently. From our strategic location at the crossroads of Europe, Africa and Asia – you can reach more than one and a half billion customers in less than eight hours.”

Seychelles Airlines economy
Seychelles Airlines economy

“Airlines also have dedicated cargo service operations and purchase aircraft wholly dedicated to freight on routes where there is highest demand. But, as American Airlines states, cargo is onboard virtually every passenger flight around the world today.’

Capacity management is just good business.

‘With an industry-average return on capital reported by IATA at 5.4%, the gains to airlines of what they spend on those new more efficient aircraft and their new cabins are still weak (though better than the 3.7% in 2012 and 4.4% in 2013). The average net profit margin projection for 2014, reported by IATA at 2.4% shows that airlines really do need to measure every inch and every pound, every comfort and every feature carefully.”

AIRLINES BAGGAGE0513_airlines_fees_970-630x420

“Even the leanest cabins are tons of weight airlines will not want to carry, unless doing so will turn a profit. A push to reduce the weight of cabin components has been an industry constant, long before the recent spike in fuel prices. Even if fuel prices dropped, airlines would still need to keep the weight of their cabins as low as possible, leaving room to carry that profitable cargo.’

“Each carrier, according to its branding strategy, business model, and even according to a particular route, will have to sell around 80% of its seats to break even. IATA states the 2014 average at 80.4%, but this can vary. Airlines know these metrics and design their cabins accordingly, leaving available cargo capacity.”

 This blog was updated on 2/3/16

3 comments

    • They are. They are currently being investigated by the DOJ. Of course, it is my opinion that the DOJ is a little late to the game as all the mergers have already been approved. It is going to be much harder to put the genie back into the bottle. My next blog will address this.

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