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United: It's in the Bag Fees

CHICAGO ( TheStreet) -- It hardly seemed epochal when top managers at United (UAUA) came up with a new idea near the end of 2007: Why not charge passengers $25 to check a second bag?

For United, the fee represented a small piece in a far-larger effort, as fuel prices soared, to more closely align airline costs and revenue. It seemed unlikely to impact many passengers, because just one in four checked a second bag, and some of those would be exempt due to having elite status in United's frequent flier program. Additionally, the idea was not unprecedented: while no major carriers had bag fees, low-cost carrier Spirit (S) and some international carriers did.

Announced in February 2008, United's fee triggered some passenger protest, but most competitors gradually matched. Eventually, American (AMR) went further, adding a first bag fee in June 2008. And this year, each of the three largest carriers will collect more than $1 billion in new revenue from fees, with bag fees as a major component.

FTN Equity Capital Markets analyst Mike Derchin says United not only pioneered bag fees, but also has had success marketing seat upgrades through Economy Plus, extra-legroom seating, starting in 2006. "In the past few years, they've definitely been thinking outside the box," he said.

In imposing the second bag fee, United's focus was that "transportation is the core product, point A to point B," said Jeff Foland, senior vice president for sales and marketing. Extras, such as food, better seats and faster airport experiences should cost extra: In particular, checking bags involves additional costs such as increased fuel burn and maintenance of a costly baggage handling infrastructure.

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