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«Table of Contents A la carte fees are a product of turbulent times Baggage fees have been a revenue success story United expands baggage fees to more ...»

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Billions of Dollars in Baggage Fees Travel the Globe

IdeaWorks Analyzes the Largest a la Carte Component

Table of Contents

A la carte fees are a product of turbulent times

Baggage fees have been a revenue success story

United expands baggage fees to more global destinations

Baggage fees throughout the world are amazingly consistent

Online fee information is almost universally confusing

Maximizing bag revenue in a time of trouble

Disclosure to Readers of this Report IdeaWorks makes every effort to ensure the quality of the information in this report.

Before relying on the information, you should obtain any appropriate professional advice relevant to your particular circumstances. IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for, the accuracy, currency or completeness of the information.

Issued August 2011 by the IdeaWorks Company Shorewood, Wisconsin, USA www.IdeaWorksCompany.com The free distribution of this report is made possible through the sponsorship of Amadeus.

Baggage Fees Travel the Globe The IdeaWorks Company © 2011 Page 1 About Jay Sorensen, Writer of the Report Jay Sorensen„s research and reports have made him a leading authority on frequent flier program development and the ancillary revenue movement. For 2011 he is a speaker at the World Low Cost Airlines Congress in London.

His published works are relied upon by airline executives throughout the world. The 2010 Guide to Ancillary Revenue was the third edition of this popular report; it is regarded as a global resource on the topic of a la carte pricing.

IdeaWorks also published its first Guide to

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Checked baggage and frequent flier programs represent the largest sources of airline ancillary revenue. Income from a loyalty program largely depends on the size of the carrier‟s co-branded card portfolio. Some airlines have the advantage of operating in markets that offer abundant credit card potential. However, for most of the world‟s airlines, the largest revenue opportunity is provided by a universal component of the travel experience - - checked baggage. In this report, IdeaWorks evaluates how baggage fees are spreading across the globe, describes how these fees are on track to become the industry‟s largest source of ancillary revenue, and recommends strategies to boost baggage revenue.

A la carte fees are a product of turbulent times

Baggage fees became a newsworthy topic in 2008 when the majority of US-based airlines introduced first-time fees for the second piece of checked luggage. This was quickly followed by the addition of fees for a passenger‟s first piece of baggage. By the end of 2009, the time-honored domestic travel benefit of two free checked bags was eliminated by every major US carrier with the exception of Southwest Airlines. The tipping point occurred when jet fuel approached an unprecedented price of $4 per gallon.

Jet Fuel Price per Gallon (US$) Data: US Energy Information Administration - Gulf Coast Spot Fuel $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Three years later the price of fuel is again a significant challenge for airline profitability.

With political and social revolutions affecting many oil-producing countries, airlines are anticipating another attack on their financial statements. This compels airline executives to consider adding new a la carte services, increasing existing fees, and boosting existing ancillary revenue products.

Baggage Fees Travel the Globe The IdeaWorks Company © 2011 Page 4 Baggage fees have been a revenue success story The bounty provided by bag fees has been spectacular and has encouraged the growth of these fees. Before the advent of first and second bag fees, US-based carriers reported baggage revenue of $464 million for 2007.1 That amount largely represents charges for overweight and oversized baggage. Baggage fee revenue jumped above $3.4 billion for 2010, a year that saw the full effect of a mature fee environment in the US. Amazingly, the revenue was accompanied by lower costs. According to a US government study,2 when faced with fees, travelers checked 40 to 50 percent fewer bags on some carriers. This decrease lowered bag handling costs such as ramp labor and mishandled luggage expenses.

And so US-based airlines discovered a revenue solution. During 2009 the two-bags-fly-free tradition largely disappeared on transatlantic routes between the US and Europe. Delta Air Lines originally planned dramatic changes when it announced a $50 second bag fee for all international flights in a April 2009 press release. The fee was later scaled back to only affect transatlantic flights. Other US-based carriers found the transatlantic plan more acceptable and matched Delta. Eventually global alliance partners were compelled to match the fees because of the confusion caused by codeshare activity on transatlantic routes.

Fees for the second bag became pervasive throughout the Americas. Travelers flying between the US and Canada, Mexico, the Caribbean, Central and South America can expect to pay fees for the second bag... and sometimes even the first. Certain destinations, such as Brazil, largely maintain the two-bags-fly-free tradition.

All of this a la carte activity has saved the bottom line of the US airline industry. 2008 was a terrible year with industry-wide losses in excess of $27.3 billion.3 The industry made slow headway during 2009 but still posted a loss. During 2010 the baggage fee revenue nearly equaled the $3.6 billion total profit posted by the US airline industry. Without the contribution from baggage fees - - along with other a la carte revenue - - the US airline industry would have lost money.

United expands baggage fees to more global destinations

United Continental understands the financial benefits derived from baggage fees. It disclosed baggage fee revenue in excess of $654 million for 2010.4 The company reported net income of $253 million for the same period.5 The presence of baggage fee revenue delighted shareholders and management; it allowed the newly merged company to post a profit for the year. And so it shouldn‟t be surprising United Continental announced on 14 July 2011 a major baggage fee initiative. The new policy takes effect immediately for travel on or after 15 August 2011 with fees for second bags now in place for travel to practically every United Continental destination.6 USDOT Bureau of Transportation Statistics, Form 41 data reviewed July 2010 at www.transtats.bts.gov.

US Government Accountability Office, “Commercial Aviation: Consumers Could Benefit from Better Information about Airline-Imposed Fees” dated 14 July 2010 reviewed at www.gao.gov.

USDOT Bureau of Transportation Statistics, Form 41 “net income” data reviewed July 2010 at www.transtats.bts.gov.

USDOT Bureau of Transportation Statistics, Form 41 data reviewed July 2010 at www.transtats.bts.gov.

“United Continental Holdings, Inc. Form 10-K for 2010 reviewed at United.com.

“United Continental Holdings Announces New Checked Bag Polices” press release dated 14 July 2011.

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The new revenue will help offset the $1.1 billion fuel bill increase the company experienced during the second quarter of 2011 compared to the prior year.7 Past practice indicates the latest move by United Continental will surely be the first of many more to come. Major USbased competitors, such as American and Delta, will be inclined to match the increase.

They too fear the economic impact of fuel price increases.

Global partners all over the world are also digesting the news. United Continental is a key member of the Star Alliance. Pacific-based members, such as Air China, Air New Zealand, Singapore, and Thai Airways, will consider the bag fee opportunity associated with flights to Asia, Australia, and New Zealand. Partners on transatlantic routes, such as Lufthansa, SWISS, and South African, will evaluate the financial potential associated with Africa and the Middle East. Once again, history will likely repeat itself as these airlines opt to match the fees rather than swim against the tide by not charging for a second bag.

The fee introductions are prompted by the same industry nemesis as before... the economic threat posed by rising fuel prices. There is little evidence to suggest the price of oil will stop its upward trajectory. Consumers and airline executives outside the US should prepare for an inevitable addition of first bag fees for international travel. IdeaWorks believes these will begin to creep into the market - - courtesy of US-based airlines - during the latter half of 2011.

Baggage fees throughout the world are amazingly consistent

Network airlines, such as United, British Airways, and Japan Airlines, seek to align baggage fee structures. This occurs primarily due to the desire to match the prices charged by competitors. But increasingly, the fee matching is also prompted by participation in a global alliance such as SkyTeam, or a joint venture in the manner of British Airways and American Airlines. These relationships involve codeshare operations and a promise to deliver a seamless travel experience to travelers. By definition, these parameters virtually require the participating carriers to coordinate prices and policies related to checked baggage.

United Continental Quarterly Earnings Webcast on 21 July 2011.

Baggage Fees Travel the Globe The IdeaWorks Company © 2011 Page 6 But change does occur and US-based airlines have become leading proponents for bag fees.

The a la carte revolution was initiated by low cost carriers in Europe in the 1990s.

However, it seems fate has US-based carriers leading the introduction of a la carte methods all over the globe through the implementation of baggage fees.

IdeaWorks researched baggage policies of top carriers operating in five major global air travel markets: 1) New York to Rome, 2) Los Angeles to Tokyo, 3) London to Tokyo, 4) within Europe, and 5) within the United States. Baggage fees for ten leading airlines are provided in each table along with a summary of how many bags may be checked free of charge. Each carrier‟s policy was applied to an example of a first piece weighing 15 kilograms (33 pounds) and a second piece (also weighing 15 kilograms) checked by an economy class traveler. The per-piece weight is based upon a European passenger survey which found 16.7 kilograms was the average weight checked by passengers.8 Notes in each table describe special features offered by airlines. For example, some carriers provide a more generous free baggage allowance for full fare economy class travel; this is designated by “Full fare benefit.” Air France/KLM and Cathay Pacific allow frequent flier program members to redeem miles for an additional baggage allowance; this is noted as “Pay with miles.” The Flying Blue program allows Air France/KLM members to redeem 10,000 miles for one additional baggage item and 40,000 miles for two additional pieces. 9 Most airlines also provide checked baggage benefits to frequent flier program members who hold elite status. These members may enjoy a higher weight allowance, or the ability to check one or two bags, free of charge. The benefits described apply in general to the carrier‟s program members and may vary by elite status such as silver and gold levels.

The first market is transatlantic - - travel from New York JFK to Rome. The prices listed apply for one way travel originating from New York. The point of departure typically defines the currency used by airlines to describe fees.

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“Survey on standard weights of passengers and baggage” dated May 2009, European Aviation Safety Agency (EASA), reviewed at www.easa.europa.eu.

“Earn and spend Flying Blue miles” at www. AirFrance.com reviewed July 2011.

Baggage Fees Travel the Globe The IdeaWorks Company © 2011 Page 7 Among the carriers listed, all offer the same free checked baggage allowance. Alliance membership can be discerned by the fees charged for the second bag. For example, Air France/KLM, Alitalia, and Delta belong to the SkyTeam alliance and charge the same $75 fee.

This consistency also appears to hold true for the benefits provided to elite members.

Some network airlines have borrowed methods used by low cost carriers and offer a 15 to 20 percent discount when checked bags are prepaid. Bags are not prepaid during the booking process, but rather are paid prior to departure by retrieving the reservation. This is good policy to encourage as pre-payment removes the fee collection burden from the airport environment. Low cost carriers have learned to “ask for the sale” during the booking process and usually provide a larger discount. For example, AirAsia offers a 30 percent discount and EasyJet promotes savings of 50 percent when consumers pay for bags during the flight booking process.

The checked baggage policies for the Los Angeles to Tokyo market offer a more generous allowance of two bags, with each weighing up to 23 kilograms (50 pounds). The ten carriers researched are perfectly aligned with no fees charged for two checked pieces. Policy alignment of this type exists throughout other transpacific routes. United‟s new second bag fees deliberately omit the Japan market - - but this omission will likely be short-lived.

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The Asia Miles frequent flier program associated with Cathay Pacific allows members to redeem miles for an additional weight allowance, extra piece, and even oversized baggage.

The reward uses zones which are based upon flight distance. For example, 6,500 frequent flier miles are required for an extra 10 kilograms (22 pounds) of baggage between Hong Kong and Shanghai.

While travelers flying London to Tokyo can still check two bags free, they can face significantly tighter weight restrictions that are wildly different. On some routes a 20kilogram weight limit means that passengers with two 15-kilogram bags - - which would fly free between Los Angeles and Tokyo - - must pony up an astounding $600 in excess bag weight plus piece charges. In some cases that is more than the cost of the flight itself.

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