Fees for your first checked bag have become the norm ever since American Airlines introduced the first one back in 2008. But even as these fees spread across the industry, a select few airlines have resisted charging this fee.
But WestJet Airlines (TSX:WJA) (NASDAQOTH:WJAFF) has finally joined the broader industry and adopted this policy with major implications for WestJet, Air Canada (TSX:AC.B), and the North American airline industry.
The Southwest Airlines of Canada
On a long-term basis, Southwest Airlines (NYSE:LUV) is one of the most successful airlines in history, having avoided bankruptcy and posted decades of straight profits. Its discount model, policy strategy, and fleet management strategy have been mirrored in Canada's WestJet so much so that WestJet may even serve as a model for international expansion by Southwest Airlines.
Among the things shared between the two carriers was a lack of a first-checked-bag fee, which is something that has become a staple of ancillary revenue at other carriers. But WestJet announced this week that it will now charge a $25 fee on travelers' first checked bags.
There are some exceptions to this fee for passengers purchasing higher fare classes and those not traveling within Canada or on Canada to U.S. routes. But this change is a major shift in discount airline policy and could have major effects beyond WestJet.
Change at Southwest Airlines?
Currently, Southwest Airlines and JetBlue Airways (NASDAQ:JBLU) are the only two large U.S. carriers that do not charge a fee for the first checked bag, but this could change. Last October, Southwest Airlines CEO Gary Kelly discussed the possibility that Southwest would introduce such a fee if customers preferred a la carte pricing. At the time, Kelly said any such move was at least a year away, if it ever happens at all, so we may get a better feel for this in the coming months.
Meanwhile, JetBlue Airways is being pushed by Wall Street analysts to stop being so nice to passengers and make the airline more profitable. Considering the revenues checked bag fees generate, instituting this measure may be necessary to satisfy these analysts. But JetBlue's future is far from decided since current management seems to be in no hurry to change the airline's brand image.
This move by WestJet shows that even airlines marketed as flyer-friendly and lower priced can make major changes if they feel such action is necessary.
Canada's airline industry
The history of the Canadian airline industry has almost always revolved around a duopoly design with smaller competitors operating fewer flights, often in niche markets. Prior to 2000, the players of the duopoly were Canadian Airlines and Air Canada. Following the merger of these carriers, WestJet began to rise to greater prominence and eventually became the smaller discount rival to Air Canada today.
For most of their rivalry, Air Canada has held the route network and size advantages while WestJet has held the cost and investor confidence advantages. However, these differences have narrowed over time as WestJet's costs increase and its route network expands.
Since Air Canada and WestJet are the only two major airlines in Canada, fares in Canada are greatly influenced by how much competitive pricing these airlines choose to engage in. By initiating a first-checked-bag fee, WestJet is effectively increasing what it charges for many passengers, helping to push the average cost to fly to a higher price point.
This news was viewed as positive by investors with shares of WestJet and Air Canada both gaining around 6% on the day of the announcement as several analysts noted the potential for Air Canada to match WestJet’s new policy.
And on Sept. 18, Air Canada proved these analysts correct by copying WestJet’s first checked bag fee of $25 for economy class passengers on domestic Canada flights.
How will it affect you?
Most airline passengers today have experienced and are probably used to first-checked-bag fees so this change will not be that big a deal for them. But the era of free checked bags on major Canadian airlines for domestic Canada flights is coming to an end as both WestJet and Air Canada have changed their policies in the same week.
With the amount of money being made from checked bag fees, it's becoming increasingly difficult for airlines to pass this revenue up. Over the next few years it will be interesting to see if Southwest Airlines and JetBlue Airways maintain their current policies or make changes in pursuit of more ancillary revenue.
Alexander MacLennan owns shares of Air Canada and AMERICAN AIRLINES GROUP INC. Alexander MacLennan has the following options: long January 2015 $17 calls on AMERICAN AIRLINES GROUP INC, long January 2015 $32 calls on AMERICAN AIRLINES GROUP INC, and long January 2015 $40 calls on AMERICAN AIRLINES GROUP INC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.