“The economics are almost pure profit,” Mann says.
There is no added cost to an airline for it to charge an extra $15 for an aisle seat, and carriers have to pay for luggage-moving infrastructure and personnel whether they charge for bags or not, so ancillary revenues go straight to the bottom line.
That hasn't convinced Southwest yet, despite pressure from Wall Street, but the airline did soften its stance.
“Right now, it is our belief that we get more customers and more revenue by not charging for bags,” because passengers appreciate Sothwest's transparency and the brand image of “being different than the herd,” CEO Gary Kelly said on an Oct. 24 call with analysts.
“However, if over time, if customers prefer the unbundling approach, sort of an a la carte approach, and they understand it and favor that, well, we'd be crazy not to provide our customers with what they want,” Kelly explained. He added that no changes were planned through 2014 while the carrier focuses on its international expansion plans and integration of AirTran Airways.
Southwest's resistance may have begun to weaken because of industry surveys showing that passengers now expect to pay extra for their luggage, say Sorensen and Michael Derchin, an analyst with CRT Capital Group.
Bag-checking fees can actually strengthen a carrier's claim to have the lowest fares, Sorensen says. “If they want to foster a reputation for having the lowest fares out there, this works against them,” he asserts. “Consumers inherently have problems understanding that you can have the lowest fare and still provide something for free.”
Ancillary revenue helped boost the U.S. airline industry's financial performance last quarter. The country's seven biggest carriers reported combined third-quarter net income of about $2.87 billion, according to Aviation Week calculations, more than double the $1.29 billion earned a year ago. Delta Air Lines led the way with $1.37 billion of that, and only US Airways showed a decline. The group's revenue rose more than 6% to about $39 billion in the three months through September.
“They're doing extremely well,” with Delta, American and Southwest all reporting record numbers for the quarter, says Derchin. “The economy's not great, so it is impressive to have these results in a lackluster economic environment. The ancillary fees are certainly a part of the positive story.”