When a company has a captive customer, they have incredible pricing power. That's why candy, popcorn, and soft drinks cost exorbitant prices in movie theaters.
The same logic applies at airports because a person waiting for a flight or taking a transfer probably won't choose to leave the airport for lunch. The hassle of having to go through security, plus the expense of getting to an outside restaurant far outweighs the additional cost of getting some chicken strips at Chili's or some tacos at Chipotle.
Related: Beyond Biden and Taylor Swift, how deepfakes work
Theme park visitors face the same problem, especially at large theme parks like Disney World and Universal Studios. It may also seem ridiculous to pay $4 for a bottle of water or $7.50 for a pretzel at any of Disney's theme parks, but it's a hassle to even get back to your hotel room, let alone visit an outside location.
Airplanes, of course, are also a place where companies have a lot of control over their passengers. You can bring snacks on board, but you can't (legally) bring your own alcohol or WiFi.
Airline passengers also have very limited options when it comes to luggage. There are services that ship your luggage that might make sense for something like a set of golf clubs or a guitar, but few people do that with their clothing.
That means full-fare airlines have a lot of pricing flexibility when it comes to baggage, and the U.S. government has given them a compelling reason to increase checked baggage fees.
Shutterstock
American, JetBlue and United charge for checked baggage
In February, American Airlines (AAL) increased their checked baggage fee for your first checked bag to $40 (you get a $5 discount for paying before your flight). That was briefly the highest of any major company until (BLUE) It increased its first checked baggage fee to $45, something it did simply by changing prices on its website and did not communicate to its customers.
Delta Airlines (give it) has kept its checked bag fee at $30, while Southwest Airlines (LUV) does not charge for your first two checked bags. Southwest has included the price of checked bags in its fares, which generally remain lower than those of its big competitors.
That always seemed like a smart marketing strategy, but it's also the airline's conscious decision to give up a part of the business that has a higher profit margin than ticket sales. View From the Wing's Gary Leff explained why in a recent post.
Domestic airline tickets are subject to a 7.5% federal excise tax. Airline fee are not. Therefore, there is a huge incentive in the tax code to unbundle: removing features from the fare and increasing the price of those features, even when the total revenue between the trip and those features does not increase.
Each of the three largest airlines in the United States generates about $1 billion a year in checked baggage fees. That means a tax savings for each of around $75 million. (In fact, these fare totals are higher, but they are not all for domestic travel.)
Basically, the US government, which under President Joe Biden has opposed additional and hidden fees, is incentivizing airlines not to include checked baggage as part of the price of their tickets.
Southwest charges some fees
While Southwest includes checked bags in all of its fares, it also participates in the tax avoidance game. The airline sells a number of products, including Early Bird Seating and Business Priority, which allow passengers to board planes earlier.
Priority boarding fares are not subject to the 7.5% tax.
Southwest Chief Commercial Officer Ryan Green discussed the company's efforts to increase revenue per available seat mile (RASM) during his company's conference. fourth quarter results call.
“I think overall, RASM, obviously, we track that and how we compare relative to the industry, and we're working to improve that as we move forward here. I will say that the ancillary revenues, the majority of which are shipping products . . , our Early Bird product and our enhanced boarding product are performing very well. We are having record performance in ancillary services revenue,” he shared.
Southwest also made a small change last year that affected its ancillary revenue. The airline started charging for WiFi per flight segment instead of per day. Thar forced some passengers with connecting flights to pay the $8 fee multiple times if they wanted to stay connected.
