Last Wednesday, Delta Air Lines (NYSE: DAL) quietly raised its checked bag fees, matching increases previously implemented by two of its rivals. It now charges $30 for the first checked bag and $40 for the second checked bag for travel within the U.S. and to Central America and the Caribbean, up from $25 and $35, respectively. The first bag fee for travel to Canada and Mexico also rose from $25 to $30.
American Airlines (NASDAQ: AAL) -- the last holdout among the top three global airlines -- quickly matched the increases. This virtually guarantees that higher checked baggage fees are here to stay for U.S. air travelers.
Continue Reading Below
The other two network carriers fall in line
Late last month, JetBlue Airways (NASDAQ: JBLU) became the first U.S. airline to raise fees for the first two checked bags by $5 each. (That said, JetBlue still charges only $25 to upgrade to a "Blue Plus" fare that includes one checked bag.)
United Continental (NYSE: UAL) almost immediately matched JetBlue's bag fee increases. Unlike JetBlue, it doesn't offer any discount for buying the bag as part of a fare. The only ways to avoid United's checked bag fees are through elite status or holding a United Airlines co-branded credit card. Furthermore, United Airlines' cheaper "basic economy" fares don't even include a carry-on bag allowance.
For more than two weeks after United and JetBlue raised their baggage fees, their two largest rivals stood pat. That raised a risk that American Airlines and Delta Air Lines would use lower baggage fees as a tool to regain market share from United Airlines in particular.
However, it appears that they were just testing the waters -- and perhaps each waiting to see if the other would move first. After Delta raised its bag fees last Wednesday, it took just 24 hours for American Airlines to follow suit.
Airlines are desperate to pump up unit revenue
Steadily rising fuel prices have put pressure on earnings across the airline industry. American Airlines and Delta Air Lines both had to cut their full-year EPS forecasts when they reported their second-quarter earnings in July, due to higher-than-expected fuel costs. To make matters worse, the cost of crude oil has spiked by 15% since mid-August.
Thus, it is more important than ever for airlines to achieve strong unit revenue growth to offset continually rising jet fuel costs.
Most of the necessary unit revenue gains will have to come from higher airfares. However, fares are driven largely by supply and demand in individual markets. In contrast, raising baggage fees by $5 will provide an immediate and more sustainable revenue boost for JetBlue, United, Delta, and American.
While four of the six largest U.S. airlines have now raised their baggage fees -- and Southwest Airlines is determined to stick with its "bags fly free" policy -- it's unclear what the rest of the industry will do. Some ultra-low-cost carriers were already charging $30 or more for the first checked bag, but they could see this as an opportunity to push bag fees even higher.
Meanwhile, No. 5 airline Alaska Air is still charging $25 for the first checked bag. It may opt to match the rest of its competitors at $30, given that the carrier has faced severe margin erosion over the past year. That said, its second bag fee of $25 has been out of step with the rest of the industry for years, so there's a chance that Alaska will stand pat.
Hawaiian Holdings has also been hesitant to follow its larger peers. So far, it has maintained its $25 fee for the first checked bag and $35 fee for the second checked bag for domestic itineraries. Given that the Hawaii-based leisure airline competes directly with Alaska on most of its North America-Hawaii routes -- and expects new competition from Southwest soon -- it may see this as a bad time to risk alienating customers with higher baggage fees.
Yet even if other airlines don't immediately follow JetBlue, United, Delta, and American, the trend toward a $30 fee for the first checked bag fee is now firmly entrenched. Sooner or later, they will likely see higher baggage fees as the surest path to better unit revenue results.
10 stocks we like better than Delta Air LinesWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Delta Air Lines wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018
Adam Levine-Weinberg owns shares of ALK, Delta Air Lines, HA, JetBlue Airways, and LUV and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends ALK, HA, JetBlue Airways, and LUV. The Motley Fool has a disclosure policy.