Note to Congress: You Can Learn From Bag Fees

WASHINGTON ( TheStreet) -- Bag fees are unpopular and anti-airline hysteria consumes our country, so it is not surprising that some in Congress want to force airlines to stop charging fees to check a bag.

This is the wrong approach. Bag fees represent a learning opportunity.

In the past few years, the airline industry, which has lost money since the Wright Brothers first flew, has sought to create a profitable business model. It has done this by reducing capacity and adding fees -- primarily bag fees. A plus is that bag fees are paid only by people who use the service.

According to the Bureau of Transportation Statistics, the top three airlines in terms of bag fee revenue in 2011 were Delta ( DAL) with $864 million, American ( AAMRQ.PK) with $593 million and US Airways ( LCC) with $506 million. During the same year, Delta's net income was $854 million while US Airways made $111 million and American, which declared bankruptcy in November, lost $2 billion.

While the airlines believe the BTS numbers might be a bit on the high side, the fact remains that eliminating the revenue from bag fees could push at least two airlines into or close to a loss position.

Speaking of a loss position, isn't that what the U.S. government is in? Yet now Congress wants to bring its financial model to the airline industry. Perhaps it should be the other way around. Since 2003, airlines have moved to reduce costs and raise revenue, a comprehensive approach that seems to be working.

Cost reduction occurred in bankruptcy court, visited between 2003 and 2011 by every major network carrier. It wasn't popular or pretty. Thousands of workers were laid off, while wages, pensions and health care benefits were reduced. Also, trying to get it right, US Airways visited twice, United ( UAL) sat in court for three years and American, trying to be a moral company in an immoral world, resisted for too long. Now, American may be forced to merge with a smaller, less prestigious airline.

This is not to say that the U.S. ought to declare bankruptcy, despite the attractiveness of vesting decision-making authority in a single, bankruptcy court judge committed to a solution that is viable for all the parties. However, cost reduction has been a big part of the airline industry's momentum to a better future. While the industry remains overly dependent on oil prices, Delta is even trying to address this seemingly intractable problem by purchasing an oil refinery. Its new model provides sufficient capital that it can try something different.

In the case of the U.S., the model remains flawed: costs exceed revenue. The solution here isn't any different than the one the airlines have pursued: Cut spending and raise revenue. None of this is popular -- not higher ticket prices, not higher taxes, not bag fees, not reduced health care spending. But options are limited.

Sub-committees of both the House and the Senate are studying bills that would force airlines to drop the fee for the first checked bag and would prohibit fees for carry-on bags. The latter restriction would apply to a single carrier, Spirit ( SAVE), which innovates by charging rock-bottom fares and subsidizing them with fees for the services travelers use. Does that really need to be illegal?

The bills are misguided. Fees are unpopular, but they create revenue. Revenue keeps businesses and countries afloat.

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

>To follow the writer on Twitter, go to http://twitter.com/tedreednc.

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