Airline Fees: You Hate 'Em, Stocks Don't

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CHARLOTTE, N.C. -- People may complain about airlines charging fees for bags and other extras, but they are paying them anyway, to the tune of hundreds of millions of dollars annually.

Combined with unprecedented capacity cuts, the new charges could help to turn the industry profitable in 2009. UAL(UAUA Quote), for instance, says new fees will likely boost next year's revenue by $750 million. US Airways(LCC Quote) expects a revenue gain of $400 million to $500 million.

"These fees do seem to work," Brad Tilden, CFO of Alaska(ALK Quote) said at a Calyon-sponsored investor conference last week.

"A lot of times you see a $50 fare increase, then you look back at the end of the quarter and the average ticket price didn't go up at all," Tilden said. By contrast, he said, projected revenue from the fees actually materialize.

US Airways President Scott Kirby said fees result not only in new revenue, but also in operational benefits. "We've seen huge improvement in baggage numbers from having 10% fewer bags go through the system," he said.

Baggage handling has historically been a challenge for airlines, which are expected to transfer thousands of bags between aircraft in narrow time windows at hub airports. Not only is it time consuming, but "it's where we fail the most," Kirby said. Those failures are costly, leading to re-accommodations, deliveries beyond the airport and lost bag claims.

So far, US Airways is the only carrier to charge for drinks -- $2 for soda, juice and bottled water and $1 for coffee. As a result of the charges, which began Aug. 1, "the cabin environment is much calmer and more efficient," Kirby said.

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