Three Carriers Report Results--And A Note About Checked Luggage Policies

Alaska Air, US Airways, and JetBlue all reported first quarter earnings today. Alaska and US Airways reported quarterly losses, whereas JetBlue reported a profit, albeit a small one. The results were hampered by fuel hedge losses recorded in the quarter, though most carriers have detached themselves from most of their fuel hedge obligations, so in future quarters these losses will diminish (assuming the price of oil stays low). The results were a bit better than expected, and a promising sign for the upcoming summer months.

I wouldn't post about these earnings, because I don't have too much insight into them, except for one thing I found interesting in the results of both Alaska and US Airways. Both carriers used the date of their earnings releases to announce revisions to their baggage policies, and both policies will ultimately result in greater revenue for each carrier. US Airways will offer the option of online payment for checked baggage fees. If a passenger chooses not to pay online, there will be an additional $5 fee at the airport. Alaska will add a $15 fee for a first checked bag, bringing it in line with legacy carriers, though distancing itself from Southwest, which currently permits passengers to check two free checked bags. However, the nature of these moves differed.

US Airways added an additional restriction in their policy without adding any value to it whatsoever. Customers that had checked bags before for $15 or $25 will now have to pay more if they don't pay online. Not only is there no value added, but ostensibly, there is no reason why US Airways needs to add this charge now. The summer travel season is coming, meaning higher revenues, and fuel prices are at low levels. The economic crisis has been hurting airlines for the past several months, and though it's not clear things will get much better anytime soon, the business travel environment doesn't seem to be getting significantly worse. A more reasonable policy that would have added some value might have been to add the charge, but then offer customers who pay online a discount on the bag fee or bonus frequent flyer miles for the first few months. That way, US Airways could have seen whether the charge would be added by other carriers and either retreat from it if they were at a competitive disadvantage, or get rid of the discount after other carriers had added it.

What this new policy indicates is US Airways' aggressiveness to nickel and dime its passengers. In a similar move to add a new fee without adding any benefit, US Airways added fees for onboard soft drinks several months ago. The carrier was forced to retreat from this policy after the charge wasn't adopted by other carriers and frequent flyers complained. Nevertheless, US Airways is basing its survival on being able to charge customers for added services, and will continue to try and take the lead in adding new fees and charges in order to raise ancillary revenues without giving customers anything in return.

Contrast this with Alaska's new policy that will charge customers $15 for a first checked bag. What is interesting is that, although Alaska may be putting itself at a competitive disadvantage against Southwest, the carrier is offering their customers something for that extra fee--namely, a $25 discount off future travel or bonus frequent flyer miles if a customer checks in a bag and it arrives at the carousel more than 25 minutes late. Yes, customers are paying for a first checked bag, but at least the carrier has made an attempt to save face, to offer a perception of value even though the value of discounted travel certificates and frequent flyer miles awarded under this policy will be far far less than the new bag revenues collected.

Adding ancillary fees does not mean that airlines cannot do it in a customer-friendly manner, where customers feel that they received something extra for a service that was previously free, even if that something extra is only a nominal cost to the airline. This is something Southwest might want to take note of. Southwest could still maintain a consumer-friendly image even while moving to make itself competitive with other carriers. They are the ones that are putting themselves at a disadvantage, by having to match the fares of their competitors without the lucrative ancillary revenue streams their competitors use. I wouldn't be surprised if in the not-so-distant future, Southwest adds some limited new fees, though not necessarily for checked bags. Perhaps when they report Q2 earnings, airlines seem to like to appease their investors that way...

Alaska Takes on Allegiant in Bellingham

Bellingham, WA has been one of Allegiant Air's most successful markets, drawing traffic from both sides of the US/Canada border, and even becoming an operations base for the company. But now, the market is being assaulted by the local heavyweight, Alaska, which dominates traffic at Seattle's airport, roughly 2 hours south of Bellingham. Alaska announced today that it will offer nonstop service on the Bellingham-Las Vegas route, one that Allegiant serves daily for much of the year. Alaska will serve the route three times weekly, and the carrier will continue to offer connections to Las Vegas via Seattle every day of the week. While some airlines have tried and failed to battle Allegiant (such as Northwest offering competing services between parts of the Dakotas and Vegas a couple years back), Allegiant has shown remarkable resilience and has managed to fend off its competitors.

However, Alaska may offer tougher competition than Allegiant has seen before. Not only is Alaska a well-regarded carrier in the region, but the lure of letting customers mix and match nonstop flights and connecting ones (if I want to, for instance, travel on a day when neither Alaska nor Allegiant serves the route nonstop) will help make Alaska's service more attractive. Moreover, as explicitly stated in this press release, though absent from most others, Alaska notes its free services in contrast to Allegiant, namely: "online reservations and advance seat selection... water, soft drinks, coffee, tea and snacks, or the use of pillows and blankets." Wow, you can select your seat, get a free snack, and don't have to go to the airport to buy your ticket if you want the lowest price! It sounds like a winning combination. But Allegiant has a big head start in the market, and the company has engendered loyalty in its own right, posting load factors of well over 90% in recent months, something Alaska can only dream of. Even after Alaska starts its nonstop Vegas service, Allegiant will offer more flights on the route and combined with the company's wide array of tour packages, many price-sensitive customers who couldn't care less about where they sit would fly with Allegiant.

One thing, however, is clear. Allegiant tries to avoid picking fights. The airline has a good sense of which fights it will win and which it will lose. It beat Northwest in the Dakotas, but it withdrew quickly when JetBlue and AirTran added service to Orlando at Newburgh/Stewart. Allegiant has a lot invested in Bellingham, and it probably won't give up anytime soon. But Western Washington is also a key market for Alaska, unlike the Dakotas were for Northwest, and Alaska, even if it loses money for awhile on the route, probably will be in for the long haul. Is this market big enough for the two of them? The answer, sadly, is probably not, and while Allegiant may continue to offer some services on some other, thinner routes, such as to Palm Springs, I worry about Allegiant's future in Bellingham. Yet I have been wrong about Allegiant before, they have been more resilient than I have expected, and they may surprise me yet again.