Alaska Will Pack More Profits With Higher Baggage Fees

by Trefis Team
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Alaska Air Group
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Alaska Air Group (NYSE:ALK) is driving growth in its revenues and profits by increasing its flying capacity, which in turn is lifting its passenger traffic. In the first half of 2013, the carrier raised its flying capacity by over 8% annually to drive 6% year-on-year (y-o-y) growth in its revenues and 29% y-o-y growth in its profits. [1]

Beginning October 31, Alaska’s revenues and profits will also benefit higher baggage and ticket change fees. The carrier will be hiking its baggage fee to $25 for each of the first two check-in bags and $75 for each bag beyond two bags compared to a fee of $20 per bag it charges at present for the first three check-in bags and $50 for each additional bag.

Alaska will also be hiking its ticket change fee to $125 for travel due within 59 days. Currently, the carrier charges a flat fee of $75 for a change made online and $100 for a change made through its call center. However, the carrier will not charge any fee from passengers who change their tickets 60 or more days prior to their day of travel.

Through these two hikes in baggage and ticket change fees, Alaska anticipates to generate incremental revenues of $50 million annually. [2] This compares to the carrier’s operating revenues of $4.7 billion last year. [3]

We currently have a stock price estimate of $66.35 for Alaska Air Group, around 5% ahead of its current market price.

See our complete analysis of Alaska Air Group here

Focus on Ancillary Revenue Growth

Though the incremental revenues from higher baggage and ticket change fee as a percentage of total revenues is small. They are significant when seen from the perspective of thin airline margins as these incremental revenues do not come at any additional cost and therefore directly boost margins.

On a higher level, we figure that Alaska in addition to growing its core passenger revenues is also focused on growing its ancillary revenues, which consist of baggage fee, ticket change fee and revenues from in-flight food and beverage sales. Last year, ancillary revenues contributed $516 million or 11% of Alaska’s top line. [3] This focus on growing ancillary revenues will boost the carrier’s profits through top line growth and margin expansion.

On the flip side, this hike in baggage and ticket change fee could put-off some customers, particularly when airlines like Southwest (NYSE:LUV) do not charge anything for the first two check-in bags. We believe Southwest’s Bags Fly Free campaign does help in bringing additional passenger traffic to it, though, Southwest also charges $75 for each additional bag beyond two bags. [4] It is interesting to note here that Alaska holds a dominant position in the west coast markets and service to and from the state of Alaska. These two markets also have more than half of Alaska’s total flying capacity. [3] It is in these markets on several major routes connecting Seattle, Portland and Anchorage that Alaska controls more than 50% of market share by passenger traffic. [5] We figure that due to this dominance in a significant portion of its network, Alaska is able to raise its baggage fee without worrying too much about upsetting customers.

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Notes:
  1. Alaska Air Group’s 2013 Q2 10-Q, August 7 2013, www.alaskaworld.com []
  2. Alaska Air Group’s investor update presentation for 8-K, July 11 2013, www.alaskaworld.com []
  3. Alaska Air Group’s 2012 10-K, February 14 2013, www.alaskaworld.com [] [] []
  4. Southwest’s checked bags policy, September 24 2013, www.alaskaworld.com []
  5. Alaska’s market share on major routes, September 24 2013, www.alaskaworld.com []
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