Is United Airlines' Bag-Fee Increase Sustainable?
Late last month, JetBlue Airways (NASDAQ: JBLU) increased a variety of fees, including the cost to check a bag. For fares that don't include a checked-bag allowance, JetBlue now charges $30 for the first checked bag and $40 for the second one, up by $5 in each case. This move gave it the highest checked-baggage fees in the U.S. airline industry.
United Continental (NYSE: UAL) quickly moved to match its smaller rival with a $30 fee for the first checked bag and $40 for the second checked bag. However, unless American Airlines (NASDAQ: AAL) and Delta Air Lines (NYSE: DAL) increase their baggage fees as well, this move could backfire for United Airlines.
United has been on a roll
Year to date, United Continental has been the best-performing U.S. airline stock. While United spooked investors earlier this year with a plan to accelerate its capacity growth to regain market share, that strategy hasn't sparked an all-out fare war, as many analysts and investors had feared.
Indeed, United Airlines posted solid unit revenue growth in the first half of 2018, and passenger revenue per available seat mile is set to rise about 6% year over year in Q3. The improving unit revenue outlook has caused United Continental stock to spike 30% just since July 11.
Raising baggage fees may seem like an attractive way to drive further unit revenue growth, as long as most airlines join the fee increase. Unlike fares -- which can fluctuate wildly based on supply, demand, and airlines' pricing strategies -- fee revenue tends to be quite stable.
American and Delta haven't joined in
After United announced that it would match JetBlue's bag-fee increase, many people expected American Airlines and Delta Air Lines to quickly jump on the bandwagon. Yet two full weeks have now passed without any action by either carrier.
At the very least, it appears that American and Delta are taking a wait-and-see attitude to evaluate if booking trends change in their favor because of United's higher bag fees. They may even be planning to use their (slightly) lower checked baggage fees as a point of differentiation for marketing purposes.
United is out on a limb
Many air travelers are extremely price-sensitive, such that very small differences in fares can drive their purchase decisions. While fees don't have the same level of pricing transparency as airfares, United Airlines still risks losing its market share momentum by being out of step with its two largest rivals in terms of fees.
Moreover, JetBlue sells its "Blue Plus" fares (which include a checked bag) for a $25 premium over its baseline "Blue" fares. The $30 first-bag fee applies only if you buy a Blue fare but later decide to bring a bag anyway. Thus, in effect, JetBlue still charges the same amount as American Airlines and Delta Air Lines for the first checked bag -- unlike United.
Further complicating matters, United Airlines is now the only major airline (excluding ultra-low cost carriers) to charge extra for domestic travelers who want to bring a full-sized carry-on bag.
Initially, United and American both barred most basic economy-ticket holders from using the overhead bins. By contrast, Delta's basic economy fares had a regular carry-on bag allowance. However, a policy change went into effect at American Airlines earlier this month. After finding that it was losing customers -- presumably to Delta -- because of its basic economy carry-on bag restrictions, American decided to allow all customers to bring full-size carry-on bags once again.
In other words, in the past two weeks, United Airlines has diverged from its closest competitor, American Airlines, in terms of carry-on bag policies and checked bag fees. Perhaps the extra fee revenue it generates will more than offset the potential loss of customers to American and Delta. But it seems more likely that United will endure unacceptable market share losses if it maintains its current baggage policies and fees. This situation could lead to a hiccup in its unit revenue results as soon as next quarter -- and eventually force the carrier to adopt policies more in line with its top rivals.
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Adam Levine-Weinberg owns shares of Delta Air Lines and JetBlue Airways and has the following options: long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.