Airline profits dropped in 2016 despite making $4.2 billion in baggage fees
A new report shows that despite taking in more in fees in 2016, airlines still saw a drop in profit.
Passenger airlines collected $4.2 billion in baggage fees in 2016, according to the Department of Transportation (DOT). This accounted for 2.5% of total operating revenue, and was up from $3.8 billion in 2015. On Tuesday, several airline executives testified before the House Committee on Transportation and Infrastructure on the topic of customer service, following the April 9 incident when a passenger was violently dragged off an overbooked United Airlines (UAL) flight. During the hearing, United President Scott Kirby defended the use of airline fees. “We view charging for checked bags as the way to keep other fares low,” he said.
The group representing consumers challenged this statement, expressing their concerns over rising passenger costs.
“Every day there are higher and higher fees,” said William McGee, a former airline executive testifying on behalf of Consumers Union. “Passengers are getting gouged.”
Even though airlines are cashing in on fees from bags, it’s not enough to match airline profits from previous years. US passenger airlines reported an after-tax net profit of $13.5 billion in 2016, down from $24.8 billion in 2015.
So why the sudden drop in profits? Seth Kaplan, editor at Airline Weekly, says the numbers aren’t really that surprising.
“For a year or two, the cost of fuel was low and airlines were making profits that they couldn’t realistically expect to keep up,” Kaplan told Yahoo Finance. “Profits are down off of really high levels, but airlines are still doing well.”
Kaplan adds that two key factors are contributing to the lower profits. “Today, fuel prices are rising again, and airlines are having to give workers the raises they promised them years ago,” he said.
Indeed, the average price for crude oil was about $45 a barrel in May 2016. Today, a barrel is hovering around $52, and some experts predict that amount could rise during the summer. As for employee raises, American Airlines (AAL) made headlines last month when it announced it was giving an 8% pay increase to pilots and a 5% raise to flight attendants. Delta (DAL) announced a 6% raise for eligible employees in November 2016, and United agreed to give 30,000 ground workers raises of 30% (over five years) last year.
Another explanation for the dip in profits is that airlines saw an increase in expenses. In 2016, airlines shelled out $143.3 billion in operating expenses, which included $22.4 billion on fuel. This is slightly up from 2015, when airlines spent $140.9 billion on operating expenses.
While baggage fees increased, other charges saw a slight decline. Reservation change fees fell to $2.9 billion, down from $3 billion in 2015.
Brittany is a reporter at Yahoo Finance.
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