Airlines Putting on the Squeeze

Airlines Putting on the Squeeze

The airport departure lounge used to be a relaxing oasis--at least by post-9/11 air travel standards. Safely past security and its gauntlet of X-rays, metal detectors and body scanners, travellers sipped coffees, flipped through magazines and stared idly at the planes taxiing past floor-to-ceiling windows.

Lately, though, the gate has a more frantic feel. Passengers try to board early. Frazzled agents remind everyone to wait until their row is called. Once on the plane, the source of the angst becomes clear: too many bulging backpacks and overloaded carry-on suitcases and not nearly enough overhead bins in which to stow them.

An ugly battle in the aisle ensues.

It's a predictable response to the INDUSTRY's latest money-making gambit: charging passengers to check in their luggage--any piece of luggage. Even seasoned travellers admit they're guilty of contributing to the mess. "If you're allowed two carry-ons, I generally have one fairly aggressively sized carry-on and a smaller bag for my laptop or whatever I'm working on," says Rick Erickson, a Calgary-based airline consultant who regularly flies all over the globe. "So I get there early and get into a good spot where I can dash to the front of the line. That way I can get my bag into an overhead bin where it's not going to be inconvenient."

Yet even as the chaos mounts, cash-strapped airlines are digging in their heels. Spirit Airlines, a U.S. discount carrier, recently drew the wrath of consumers when it said that, as of November, it plans to charge customers $100 if they show up at the gate with a carry-on bag destined for the overhead bin. Bringing aboard the same bag will cost $25 if the payment is made prior to checking in, while anything that fits easily under the seat remains free. Allegiant Air began charging a similar $35 fee earlier this year. Alaska Airlines, meanwhile, charges $25 to passengers who exceed carry-on limits when they show up at the gate, and there are rumours that American Airlines may be considering similar penalties. All those airlines already charge for checked luggage.

In Canada, WestJet and Air Canada say the carry-on problem is less pronounced--mostly because both airlines still allow one free piece of checked luggage on domestic ?ights (although Air Canada also charges $25 for the first bag and $35 for the second on flights to the United States). Even so, WestJet now has agents who roam the gates looking for oversized carry-on bags, while others are strategically stationed to intercept travellers before they reach security, says WestJet spokesperson Jennifer Sanford.

The reprieve for Canadians could be short-lived. With fuel prices near record highs and the global economy teetering, it's inevitable that the country's airlines will eventually follow their U.S. and European brethren by charging for all checked luggage. And at least one new study shows neither airline is doing nearly as much as they could to generate new sources of revenue. "We just don't have that naked aggression in terms of squeezing every single dollar out of passengers that you see in the United States," says Erickson of Air Canada's and WestJet's comfortable duopoly. "But let's see what happens if the market takes a downturn, or when Air Canada launches its low-cost carrier." (The country's largest airline recently won a key labour ruling that would allow it to pay employees of its planned discount subsidiary lower wages and benefits.)

Though passengers may grumble, what's emerging is a whole new model for the industry--one where the price of actually flying is cheap, but everything associated with it costs money. In the U.S., the list of airlines that now charge passengers to check even a single piece of luggage grows longer each day. It now includes: Air Tran, Alaska Airlines, American Airlines, Delta Air Lines, Spirit Airlines, United Airlines, U.S. Airways and Virgin America. The prices vary, but generally passengers can expect to pay $60 to check in two bags on a domestic flight.

On the surface, it seems like a cruel twist on the already miserable experience of flying. But many airlines believe it's a necessary one given the industry's economics--high fixed costs and competition, and severe exposure to swings in fuel prices--which have led to dozens of bankruptcies and restructurings over the years. "Airfares haven't kept pace with the increased expenses," says Jay Sorensen, the president of Wisconsin-based airline consulting firm IdeaWorks. "Airlines know that if they're $5 out of line, they're not going to get any business."

So far, the strategy of piling on extra fees and charges appears to be working. Delta, which left Chapter 11 just five years ago, collected $863 million in baggage fees last year (passengers pay $25 for the first bag and $35 for a second on domestic flights, while those on flights to Europe can be charged as much as $100 for a second checked bag). And that was on top of another $767 million generated in reservation change and cancellation fees. Delta forecasts it will add another $1 billion worth of "ancillary" revenue, as it's known in the industry, by 2014.

Closer to home, Air Canada once led the industry in implementing a pay-as-you-go strategy, charging for formerly free items like meals, pillows and blankets as far back as 2004. But when Calin Rovinescu took over as CEO in 2009, he dialled back some of the more unpopular fees, including a charge for bookings done over the phone. Now Air Canada lags its U.S. peers by a wide margin, according to a recent study by IdeaWorks. It estimated that Air Canada generated about $12.54 per passenger in ancillary revenue last year, with a big chunk of that coming from payments made to it by its former frequent flier program Aeroplan, now owned by Aimia. That's roughly four per cent of its total revenue. WestJet, meanwhile, generated $7.22 per passenger last year, which also accounts for about four per cent of its total. By contrast, Delta managed $15.04 per passenger (seven per cent), U.S. Airways brought in $17.36 (eight per cent) and United-Continental recorded $35.46 (14 per cent). Spirit Airlines topped the bunch by generating $40.59 per passenger, which accounts for fully one-third of its total sales.

Air Canada spokesperson Peter Fitzpatrick says the airline, which lost $96 million in the second quarter, continues to look for ways to grow its ancillary revenue streams, but is constrained by what its competitors do.

But can airlines really make a living from fees alone? The answer is yes--providing they have a thick skin. Dublin-based discounter Ryanair, among Europe's most profitable airlines, has long prided itself on advertising ridiculously low fares and then piling on extra fees and charges for everything from checking in ($6 if the flight is booked online, $25 if it was booked over the phone) to bringing aboard an infant ($25). The approach has frequently led to bad publicity, though Ryanair doesn't seem to mind. Take passenger Suzy McLeod. She recently complained publicly when she was forced to pay the equivalent of about $375 for forgetting to print out boarding passes for herself and four other passengers (Ryanair charges 60 euros, or about $75, to reprint a boarding pass at the airport). Ryanair boss Michael O'Leary was characteristically unapologetic. "We think Mrs. McLeod should pay 60 euros for being so stupid," he told the Telegraph.

Back in the U.S., Miramar, Fla.-based Spirit generated similar nasty coverage for its proposed $100 penalty for passengers who show up at the gate with large carry-on items. One observer called the move "skyway robbery." But Spirit isn't backing away from its business plan, even in the face of a recent class action lawsuit that targets its controversial "passenger usage fees." The fees range from $8.99 to $16.99 each way and are charged to customers who book tickets online or over the phone, instead of at an airport counter.

Such steep penalties aren't always a cash grab, however. Many are also meant to discourage unwanted behaviour. Airport check-ins cause longer line-ups. Heavy suitcases mean heavier planes, which burn more pricey jet fuel. And fliers who struggle to stow their giant carry-ons slow down the already cumbersome affair of seating 180 people inside a metal tube, leading to costly delays. "It's easy to throw rocks at these airlines for these practices," says Sorensen. "But as a passenger who has flown Spirit, I can tell you it's the smoothest boarding process I've ever witnessed." He adds that the extra-fee model will likely become an industry standard, "not because it's glamorous, or easier. But because it gives the consumer what they want, which is the lowest possible [base] price."

For individual airlines, though, the challenge remains finding a balance between pay-as-you-go and leaving customers peeved. That's why some of the industry's more innovative players have tried to soften the blow by also promising better service. Alaska Airlines, for example, now guarantees passengers that their checked luggage ($20 each for the first three pieces) will arrive on the carousel no more than 20 minutes after they land. Otherwise, they're entitled to a $20 coupon toward a future flight, or 2,000 frequent flier miles. "We're kind of putting our money where our mouth is," says Marianne Lindsey, a spokesperson for the Seattle-based carrier.

As for the unintended consequences of all those fees--including the increasingly nasty battles for overhead bins--air travellers may just have to get used to the new, less comfortable reality. Flying in the low-fare age has often been compared to riding in a cattle car, says Erickson. The difference now? "The car is full of aggressive cattle."

Maclean's October 1, 2012