Should United Eliminate Bag Fees?

United

It’s fun to sit back and ponder “what if” scenarios, so when I saw Holly Hegeman mention in PlaneBusiness a recent note from Wolfe Research analyst Hunter Keay, it caught my attention. The note is entitled “What if UAL adopts Bags Fly Free?” and Hunter was kind enough to provide me with a copy.

As Hunter says in the note, this isn’t meant to advocate for United to actually eliminate bag fees. Instead, the note reads like a bunch of smart avgeeks sitting around on a Friday night with a beer and a Cirium login. That’s my kind of party.

So what exactly is the thesis here? Well, it can be summed up like this. United has a strong need to either stimulate demand or steal market share in the next few years if it is going to fill up all that new capacity it’s bringing on. Making checked bags free would be a way to try to steal market share, especially since bag fees are less important to United than any of the other network carriers.

We already know that Southwest has no bag fees. EVERYONE knows that thanks to years of Southwest being the only airline with that policy. But Southwest was also the only airline with no change fees, and now others have followed there. United was the first to make that move, and it has been pointed out that Southwest’s increasing penetration into new markets along with a focus on growing business travel with friendlier policies makes the airline an increasing threat. Ditching change fees had a real benefit of soothing people during the uncertain COVID-19 pandemic, but it also put United on more even footing with Southwest.

Bag fees are admittedly quite different. They are less important to the all-important business traveler since those people usually have elite status, a credit card that waives fees, or they don’t check a bag anyway. No, this move would only indirectly benefit the business traveler. The idea is that if you can fill up enough of those seats in the back with a decent fare, you can fly more seats to more places where the business travelers need to go. And today, United’s domestic network lags, so there would be a good benefit. It all works together to try to solve that problem.

Let’s start with the biggest question. Does the math work? I’d say… it would require a leap of faith that I don’t think I’m ready to take. Let’s take a look at 2019.

Bag Fees as a Percent of Passenger Revenue

DOT data via Cirium

Hunter looked at bag fees as a percent of total revenue and noted that United had the lowest percentage of bag fee revenue of all the airlines that have first bag fees. (Southwest doesn’t count since with no bag fee, those are only excess or oversize bag fees you see there.) I decided to look first at bag fees as a percent of passenger revenue, because if you get rid of bag fees, you have to make up for it under the passenger revenue line item. The end result is the blue column.

And indeed, you see that United and Delta both sit at the bottom, virtually tied at 3.3 percent of passenger revenues. But this also doesn’t seem like the right way to look at it. After all, international skews the metric a lot. This would really be a domestic play anyway, and that’s where I isolated the data you see in the gray bars. In that case, Delta actually has a lower percentage of bag fee revenue, but both are lower than American. And yes, JetBlue and Alaska are higher with what is presumably a higher percentage of leisure passengers, especially JetBlue. I included those two since they are American partners.

If United were to eliminate bag fees, it would need to make that up in terms of higher fares. Southwest has made the argument time and time again that it was the right move for the airline and it continues to be, but the lone wolf always gets the advantage. United can’t get the same kind of bump that Southwest got being a standout.

The bigger question is really whether others would follow or not. Delta seems to think pretty highly of itself, so it might try to hold out. Then again, it wants to be seen as passenger-friendly, and the headlines pointing to Delta refusing to move might be too much to take. American has the most to lose among the big three, and it might try to hold out because that’s a lot to lose. After all, this isn’t like change fees where everyone caved quickly.

Sure, people hate bag fees, but if they really care about them, they probably fly Southwest or they already have them waived via credit cards or elite status. For everyone else, they’ll just book the airlines based on options up front and pay the fees they have to pay down the line if they need to check a bag. It doesn’t creep into the psyche the same way that change fees do in our current uncertain world. For that reason, airlines might try to hold out to see if they can justify a differentiated product like that. If everyone caves, then United loses any advantage it might have had.

Let’s say United does ditch the fees, and it’s able to make up the revenue. That won’t happen overnight, but let’s just pretend it does happen at some point. It’s still not that simple. Let’s not forget United’s favorite overlord… Chase.

Hunter brings this up in his analysis as well. Chase holds the United credit card, and all those cardholders who get free bags as a perk would need to be given something else to blunt the loss of a major benefit. United would have no choice here; its overlord Chase is too important to the airline’s business. I’m just not sure what would have to be surrendered and how much that would cost.

On top of that, United is probably going to have go out and rebuild baggage infrastructure as well as hire more people. If you don’t charge to check a bag, more people will check them. Hunter put up a chart showing that Southwest checks 0.75 bags per passenger flown. Of the big three, American is next at 0.6 and United is at 0.54. That could mean a LOT more bags flowing through the system.

All these costs will serve to make it harder to make up for that lowered fee revenue.

While I do like this thought exercise, I just have trouble seeing how it makes sense. Bag fees are different than change fees. People were holding back on booking tickets because of the uncertainty in their plans. Eliminating change fees helps with that. Nobody is holding back from booking due to the existence of bag fees.

That’s not to say it isn’t worth further discussion. For example, a nice hybrid option might be to make a checked bag free for regular economy but charge for those in basic economy. That creates further differentiation in the products, and it allows United to continue to use basic economy as a blunt force weapon to compete with ultra low cost carriers. I’m not sure if that makes sense either, but it’s fun to ponder all of these things.

18 comments on “Should United Eliminate Bag Fees?

  1. The real takeaway from the data is that Southwest doesn’t really have the advantage that they think they do. The fact that the global 3 have so much smaller bag revenue percentages on their domestic systems than AS and B6 show the amount of business travel the big 3 carry led by Delta. Business travel doesn’t need as much free checked bag allowance to begin with and also often has it included as part of negotiated fares.

    You also need only look at the ramp info screens that list passenger and bag counts (on airlines that display it but which are visible to the public) to see that the amount of checked baggage is very low compared to the percentage of carry-on baggage – which can also be seen in how stuffed overhead bins are and how long it takes to get off the back of an aircraft. (that percentage can also be calculated from the DOT’s Air Travel Consumer Report)

    United and the big 3 would have to spend tens of millions of dollars more on salaries to accommodate the percentage of checked bags that Southwest carries while they are and have spent more on larger overhead bins -which Southwest doesn’t have to the same degree. United isn’t chasing the leisure passenger with lots of luggage and it is doubtful they would see the value in dropping bag fees to chase a relatively small percentage of passengers for whom bag fees would make or break the equation. UA’s formula is based on running a larger, more reliable, higher value domestic operation with more onboard and in-terminal amenities than Southwest or any low cost carrier can or will provide.

  2. They need to generate not just incrementally more passenger revenue to offset the bag fees (which is really a fare cut aimed at leisure travelers) but also to offset the federal excise tax savings from moving revenue out of the fare and into fees that checked bag fees bring. Remember the bag fees aren’t subject to the federal 7.5% excise tax on domestic airfare, but more tickets sold or higher fares would be.

    1. Great points Gary. I think the effect of pleasing leisure travelers could be done more effectively and cheaply by increasing the number of basic economy markets and, of course, reducing those fares. Plus that can be targeted rather than systemwide.

      I’m not sure how much good PR United would get from this anyway. Like you said, it’s not a differentiator with WN having claimed this turf for years now Only the occasional traveler would find this to be much of a benefit and, as already noted, there are cheaper and more effective ways to target them.

      But in an unrelated note, they really need to drop the no carry on for basic economy nonsense. That actually does cause people to book away from United IMO since the others allow it.

  3. Airline pricing for seats is about pricing to demand, not cost. Fares are based on willingness to pay rather than the underlying costs involved to deliver that service. Why are bags priced to cost? Instead, airlines should be offering checked bags for a low rate and charging for carry-ons beyond the personal item. It would certainly be hated, but is the better way to drive revenue.

  4. What about the (I would think obvious) middle ground of lowering bag fees? Something like $10 or $20 instead of the current $35 for the first bag could differentiate themselves from the other airlines, yet still provide a bit of revenue and not open the floodgates of everyone checking bags just because it’s free.

    1. I think the problem here is that their competitors (AA, DL) would be far more likely to immediately match a decrease than they would an elimination (just a hunch, obviously). That probably makes the whole exercise pointless as it wouldn’t be a point of differentiation.

  5. If legacy airlines are going to change their bag fees, I think some form of your hybrid option is probably the best way to go. Basic economy could be completely unbundled, with charges for both carry-ons and checked bags. There could also be some form of family plan? Obviously, there are a number of ways the fees could be structured. Keeping some fees would give credit card companies something to offer, especially for those traveling in basic economy.

    1. Oof, hello Spirit. Flyers want the legacies to look less like ULCCs, not more.

  6. Important part in looking at the fare data and also data on point of sale from DB1B is that they don’t include baggage and other ancillary revenue. Need to keep in mind when examining these things.

  7. I fly Southwest as much as possible precisely because I am able to check two bags free of charge as well as put a carry on in the overhead bin without paying extra. If UA or any other airline was to do what Southwest is doing regarding bags I would consider giving them some of my business.

  8. If more bags are checked, passenger loading and unloading will be faster, reducing turnaround time. Need to factor in that benefit.

    1. That’s one of the justifications Spirit used when they started charging for carry-on bags. They wanted to reduce the number of carry-on bags which were slowing down boarding. When they introduced the carry-on bag fee, they also lowered their first checked bag fee, so that if you had one bag, it was cheaper to check it and carry it on.

      What everyone forgets when they use this justification though is that it was a situation of the airlines’ own making, when American started charging for the first checked bag in 2008. Prior to that, and especially with the TSA’s varying restrictions on what can be carried on after 9/11, a lot of people were just checking their bag. Overhead bins weren’t exactly full. But then with the bag fee, we started seeing people carry everything on again, with longer boarding times and also longer TSA checkpoint lines with more carry on bags to be screened and liquids to unpack.

  9. Why is it fair that a 135 lb woman has to pay a baggage fee for a 51 lb bag and a 300 lb man with a 49lb bag does not? It’s stupid

    1. Because baggage handlers don’t handle the people, they handle the baggage, and the airlines have put the line for “extra work” baggage at 50 pounds.

  10. Hum, when I fly and have to check a bag, I fly Southwest because they are usually close in price and cheaper once I factor in the others’ checked bag fees. I am actually closer to Dulles than BWI but the last time I flew United, it was overseas and had no bag fees anyways.

  11. I love the concept of this post and hope you can do an occasional a”What If” post going forward.

    1. Agreed! I’d love to see more posts like this, from Cranky and/or others, or even referenced/linked to in the weekly Friday “links” post.

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