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Bag fees key to airlines' bottom lines

By Dennis Schaal, Skift
updated 11:40 AM EST, Tue December 18, 2012
STORY HIGHLIGHTS
  • Delta Air Lines collected the most bag-fee revenue in the third quarter of 2012
  • The airline took in $233 million in checked bag revenue
  • Overall, U.S. passenger airlines garnered $924 million in bag fees from July to September

(CNN) -- Bag charges may mean financial pain and aggravation to a lot of airline passengers, but they are a lifeline and profit-driver to formerly financially strapped carriers.

Recent numbers from the Bureau of Transportation Statistics show that Delta Air Lines had the second-highest operating-profit margin among U.S. airlines in the third quarter of 2012, and also took in the most checked bag-fee revenue: $233.1 million.

No mere coincidence there.

Prior to the airlines' current and growing ancillary revenue blitz, there was a lot of red ink going around as escalating fuel prices and competition from other carriers exacted much hurt on the airlines' bottom lines.

But in today's U.S. airline industry, the top 10 airlines all posted an operating profit during the third quarter, and bag fees, charges for premium seats and meals, and industry consolidation had much to do with the turnaround.

Delta's third quarter profit margin of 14.6% was only eclipsed by the much-smaller Alaska Airlines at 18.7%, according to the Bureau of Transportation Statistics.

Interestingly, Alaska's third quarter revenue from bag fees was more than $44 million, well up in the BTS ranking in sixth place ahead of Spirit, Allegiant, JetBlue and Frontier despite the fact that Alaska was only 10th in passenger enplanements over the first eight months of 2012.

Delta generally charges $25, $35 and $125 for the first, second and third checked bag each way, while Alaska charges $20 each.

Part of the reason that Delta took in more bag fee revenue than any other U.S. airline in the third quarter is it has been running second so far this year in enplaned passengers, behind Southwest and ahead of United. Southwest carried about 12 million more passengers than Delta did from January to August 2012, but Southwest's first-two checked bags fly free policy brought down its bag fee revenue in the third quarter to fifth.

After Delta, the remaining top 10 U.S. airlines in bag-fee revenue in the third quarter, in descending order, were: United, American, US Airways, Southwest, Alaska, Spirit, Allegiant, JetBlue and Frontier.

The key role of ancillary revenue initiatives to airlines' health can be seen in Southwest's announcement last week that it would be increasing its ancillary fees as it seeks to take in an additional $100 million or more in ancillary revenue in 2013.

The first two checked bags fly free on Southwest, but the combined Southwest and AirTran (with bag fees of $20, $25 and $50 for the first three checked bags, respectively) attracted $46 million in bag-fee revenue -- the fifth highest -- among U.S. airlines during the third quarter.

In addition to AirTran's bag fees, Southwest collects fees for third-checked bags ($50) and excess bags, and its numbers are pumped up by the fact that Southwest is among the largest U.S. airlines in terms of passenger traffic.

The BTS notes that U.S. passenger airlines garnered $924 million in bag fees from July to September 2012, and that comes on top of the $652 million they collected from a poor second cousin, change fees.

And, these numbers are only part of the airline ancillary revenue picture because U.S. airlines are not required to report other ancillary revenue, including fees for seat upgrades, food and beverage, and entertainment, including Wi-Fi.

That means that the airline fee frenzy is even more integral to carriers' financial health than is immediately apparent -- and most of them have plans to up the ante in 2013.

© 2012 Skift, Inc. All rights reserved.

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