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Last Wednesday, Delta Air Lines (NYSE: DAL) quietly raised its checked bag fees, matching increases previously implemented by two of its rivals. It now charges $30 for the first checked bag and $40 for the second checked bag for travel within the U.S. and to Central America and the Caribbean, up from $25 and $35, respectively. The first bag fee for travel to Canada and Mexico also rose from $25 to $30.
American Airlines (NASDAQ: AAL) -- the last holdout among the top three global airlines -- quickly matched the increases. This virtually guarantees that higher checked baggage fees are here to stay for U.S. air travelers.
The other two network carriers fall in line
Late last month, JetBlue Airways (NASDAQ: JBLU) became the first U.S. airline to raise fees for the first two checked bags by $5 each. (That said, JetBlue still charges only $25 to upgrade to a "Blue Plus" fare that includes one checked bag.)
United Continental (NYSE: UAL) almost immediately matched JetBlue's bag fee increases. Unlike JetBlue, it doesn't offer any discount for buying the bag as part of a fare. The only ways to avoid United's checked bag fees are through elite status or holding a United Airlines co-branded credit card. Furthermore, United Airlines' cheaper "basic economy" fares don't even include a carry-on bag allowance.
For more than two weeks after United and JetBlue raised their baggage fees, their two largest rivals stood pat. That raised a risk that American Airlines and Delta Air Lines would use lower baggage fees as a tool to regain market share from United Airlines in particular.
Delta did not match United's bag fee increases right away. Image source: Delta Air Lines.
However, it appears that they were just testing the waters -- and perhaps each waiting to see if the other would move first. After Delta raised its bag fees last Wednesday, it took just 24 hours for American Airlines to follow suit.
Airlines are desperate to pump up unit revenue
Steadily rising fuel prices have put pressure on earnings across the airline industry. American Airlines and Delta Air Lines both had to cut their full-year EPS forecasts when they reported their second-quarter earnings in July, due to higher-than-expected fuel costs. To make matters worse, the cost of crude oil has spiked by 15% since mid-August.
Thus, it is more important than ever for airlines to achieve strong unit revenue growth to offset continually rising jet fuel costs.
Most of the necessary unit revenue gains will have to come from higher airfares. However, fares are driven largely by supply and demand in individual markets. In contrast, raising baggage fees by $5 will provide an immediate and more sustainable revenue boost for JetBlue, United, Delta, and American.