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United: It's in the Bag Fees

The "core product" concept was developed within a group of five to 10 top United managers, headed by President John Tague, who meet weekly, Foland said. He could not recall who originally suggested a bag fee, but United was already making money by charging for better seats as well as for snack boxes. "We talked about the concept for awhile," he said. "We (envisioned) a different way of selling (because) the industry has been unable to extract value from the travel experience."

Foland noted that Lufthansa, United's Star Alliance partner, sells products such as enhanced airport lounges, from which passengers are driven to their flights. Other possibilities could emanate from the frequent traffic on United's Web site, which gets about 3 million hits each day. After all, McDonald's (MCD) has found a lot of ways to sell products beyond hamburgers, and hotels sell products beyond rooms. "We're not the first industry to do this," he said.

So far, United shares have not derived much benefit from the innovation. Following Monday's close, shares were down about 30% year to date. While not pretty, the number puts United in the middle of the pack among its peers. Continental (CAL) is down 21%; Delta (DAL) is down 28%; American is down 43% and US Airways (LCC) is down 52%.

John Gebo, managing director of investor relations, notes that United has been hurt more than its competitors by two trends: travel declines in the Pacific, where United is the second largest player, and a decline in business travel. Now, both areas are showing signs of recovery.
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