Southwest Airlines is the last carrier in the U.S. that allows passengers to check their baggage for free, a differentiator that the carrier has highlighted in many ad campaigns. The hint that it may start charging—though not until 2015 at the earliest—shows just how lucrative baggage fees and other ancillary charges have proven themselves, and how tempting it is for Southwest to follow its competitors' lead.
Ancillary revenue has made “the difference between profitability and loss in the airline industry,” said Jay Sorensen, president of IdeaWorksCompany, a consultancy that began analyzing nonfare sales in 2007. “It is here to stay, and is only going to grow. It is no longer the frosting, it's part of the batter.”
Checked bags added $3.5 billion to U.S. airlines' revenues last year, according to the Bureau of Transportation Statistics. And fees for priority boarding, aisle seats, food, blankets and other services boosted that nonfare figure even higher, though the bureau does not track the total.
Globally, ancillary revenue more than doubled in the four years through 2012, to $27.1 billion, and will add another 57% this year to reach $42.6 billion, according to Sorensen's group.
European carriers Flybe and Ryanair were the first to start charging baggage fees; the U.S. industry did not jump onboard until a few years later when higher fuel prices and the recession in 2008 made an impact, Sorensen says. Since then, all major U.S. carriers except Southwest have begun charging to check bags in some fashion.
And that is not all. Airlines have become creative in finding other ways to keep published fares low, helping them to compete in an increasingly cost-conscious environment.
Low-cost carrier Spirit Airlines has been the most aggressive with its business model of breaking up the product—stripping out costs and reducing the fares by a commensurate amount—says Bob Mann, a former airline executive who is now an industry consultant. The majority of carriers, though, have added extra fees only onto their fares.