Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Why does Malaysia Airlines' recent volte-face over checked baggage bother us so much?

It's not just the comedy and irritation of telling passengers heading to Europe in mid-winter they can't bring check-in luggage, and then reversing course less than 24 hours later. Nor is it only about the carrier's sorry history over the past few years, encompassing two fatal crashes and subsequent rescue by the country's sovereign wealth fund.

It's also reflective of a creeping inconvenience and opacity in the aviation industry that increasingly makes air travel feel as complex and pitfall-ridden as winning a government contract in Nigeria.

Comparing checked-baggage policies at major airlines shows Malaysia Air currently has some of most straightforward rules in the sky. Loyal passengers hoping that will persist may be unsettled to discover that Aer Lingus, run by Christoph Mueller before he took over as the Southeast Asian carrier's chief executive last March, has one of the most byzantine, with about 47 cost buckets varying according to cabin class, route, weight, whether it's high or low season, and whether the luggage allowance is booked online, over the phone, or at the airport:

Industrial Complex
Some airlines have a bewildering array of checked baggage rules
Source: Company websites
Note: Shows number of checked baggage price options for business and standard economy international adult fares. Additional options for frequent fliers haven't been included.

In some ways, the above comparison actually understates the complexity that starts to show up when you consider the other ways airlines like to slice and dice their cabins. One wheeze is to give frequent fliers a few extra kilograms in return for their loyalty: Qantas has three additional classes of free baggage available to various levels of its frequent-flier program, resulting in 12 different allowances across economy, business and first class seats on standard routes.

Or you can discriminate geographically. Fly the 1,200 kilometers from New York to Bermuda with two checked bags in Delta Air's economy class and you'll pay a $65 fee. The flight to Jamaica's capital Kingston is about double that distance, but strangely, Delta's baggage fee drops to $40. Then again, for $75 you could take the same luggage all the way to Mumbai, about 10 times the distance of the New York-Bermuda flight.

Suitcase in Hand
Free checked baggage allowances on standard international flights with select airlines, kgs
Source: Company websites

That's not even getting into all the other ways carriers pander to key customer groups. United Airlines provides extra free baggage to U.S. military personnel and their families. Malaysia Air allows pilgrims returning from Mecca to carry up to 10 kilograms of water from the city's sacred Zamzam well -- but only if they're connecting in Kuala Lumpur to an onward flight.

This complexity isn't accidental. Airlines are experts at the art 17th-century French politician Jean-Baptiste Colbert once recommended to tax authorities as "plucking the goose so as to obtain the largest amount of feathers with the least possible amount of hissing." The trick is to maximize the money carriers can extract from passengers, without anyone noticing what's happening.

Here's an example: Someone looking to travel between London and Amsterdam can find at least a dozen different airlines offering direct routes by shopping around on price-comparison websites -- not to mention ferry and railway companies. That's an incentive for carriers to price their tickets keenly and win a customer. Once the passenger is on board, however, there's only one entity that can sell them a glass of sav blanc and a sandwich, so the sky's the limit.

Such ancillary revenues are making up an ever-increasing slice of airlines' profits. Baggage fees, frequent-flier points, deals on hotels, rental cars, insurance, credit-card charges, food, duty free, priority boarding and onboard Wi-Fi -- as a whole, such non-traditional services amounted to $59.2 billion of revenues last year according to an annual survey conducted by IdeaWorksCompany and CarTrawler. Sales of such services have increased from 4.8 percent of total revenues in 2010 to 7.8 percent last year, the survey shows, outpacing the growth rate of the industry as a whole:

Clipping the Ticket
The growth rate of airlines' ancillary revenue is outpacing total revenues
Source: IdeaWorksCompany/CarTrawler, Bloomberg calculations

Such revenues look even more attractive when you consider how high margin they can be, and how low margin airlines' core business is. The cost of providing priority boarding or the right to choose a window seat, for example, is approximately zero.

Loyalty's Rewards
Until recently, underlying Ebit at Qantas's frequent-flier program consistently outperformed its airline units
Source: Company reports
Note: Qantas Domestic and Qantas International have reported results as separate units since the December 2012 half-year

If ancillary revenues aren't quite the future of aviation, it's only because in many ways that future has already arrived. While such practices originated among low-cost carriers, major U.S. airlines such as Delta and American now generate 11.3 percent of their sales from the category, not far behind the discount airlines' 11.8 percent, the survey found. Qantas could even be considered a loyalty program hitched to an airline, given that its Frequent Flyer unit's earnings in nine of the past 12 half-years outstripped those from its freight unit, its Jetstar discount carrier and its main-brand full-service airline.

While it's satisfying to gripe, it's hard to blame carriers. An industry that's generating profits above its cost of capital for the first time since the dawn of the jet era is simply trying to make money the only way it can. Those who don't want to find their tickets clipped should get used to studying the fine print.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net