Airlines Need to Boost Revenue. They’re Coming for Your Bags.

Airlines facing tough financial comparisons after a bumper year have a plan to boost revenue that fliers will hate. They’re raising the price of checking your bag.

Delta Air Lines , the latest company to announce a price hike, announced last week it was increasing the cost of a passenger’s first checked bag to $35 from $30 and a second bag to $45 from $40. The company last increased checked baggage fees in 2018. American Airlines and United Airlines made similar changes, raising baggage fees by about $5, and JetBlue Airways and Alaska Airlines have also raised prices.

Airline companies are dealing with a double whammy. Higher labour costs and an uptick in maintenance costs are eating into revenue. Meanwhile, domestic demand has softened , hitting pricing power for airlines.

Fees are a significant and growing source of revenue for airlines. U.S. airlines generated $6.8 billion from bag fees in 2022, according to the Bureau of Transportation Statistics , up from $5.3 billion in 2021. American Airlines generated $1.4 billion from baggage fees that year, which accounts for less than 3% of its 2022 revenue. United made $1.1 billion, or 2.6% of its 2022 revenue; Delta pocketed $980 million, or 2.1% of its 2022 revenue.

It’s likely those figures grew in 2023, a record-breaking year for travel with six of the 10 busiest days in U.S. aviation history, according to the Transportation Security Administration. With airlines hiking prices on the first checked bag by an average of 17%, that number could rise again this year.

That should help offset the decline in airfare. Ticket prices were 6% lower in January compared with the year-ago period, according to January’s consumer price index data. Online travel agency Hopper expects domestic fares to remain below 2023 and pre pandemic levels for at least the first half of the year.

Hopper’s lead economist Hayley Berg said more planes in the air have helped bring prices down. “Price relief on domestic airfare comes as domestic seat capacity has maintained at least a 5% lift over 2019 levels throughout 2023,” she said.

Ultimately, baggage fees account for between 2% and 3% of revenue for the largest U.S. airlines. But the market will be judging United, American, and Delta against a strong 2023, so every little helps. All three stocks have risen between 7% and 10% in 2024. And there are other more important factors, such as costs, demand, and capacity constraints, that will have a larger impact on earnings.

Of course, earnings aren’t the first thing on the minds of travellers who are now getting hit with higher fees.

SYDNEY—Australian Treasurer Jim Chalmers will deliver the government’s 2024-2025 federal budget next Tuesday amid concerns that strong revenue growth will tempt him toward a jump in spending, stoking the case for higher interest rates.

Economists expect Chalmers to announce a budget surplus for 2023-2024, supported in part by high commodity prices and strength in the job market, with unemployment continuing to hover near its lowest level in half a century.

The question on the lips of the governor of the Reserve Bank of Australia, Michele Bullock , will be how much of that revenue will flow back into the economy by things like added measures aimed at easing a cost-of-living surge for consumers.

Bullock told reporters Tuesday that the RBA’s board had considered a further rise in interest rates, sending a shot across the bow of the center-left Labor government ahead of the budget.

The budget is being framed ahead of a federal election expected to be held in early 2025.

The public acknowledgment of the RBA board’s discussion of what would be a 14th interest-rate rise in two years signaled that the central bank has grown more concerned about the inflation outlook after first-quarter data came in above its own expectations.

Economists have warned that the RBA isn’t even close to a decision to cut interest rates, and the more likely outcome at the moment is that the central bank will need to tighten the policy screws further before the end of this year.

“The challenge fiscal policymakers face is that although they are flush with revenue, a cautious approach ought to be taken to additional spending because the economy is still operating at full employment, and inflation is still too high,” said Paul Bloxham, chief economist at HSBC Australia.

“Loosening fiscal policy settings at this point could mean that monetary policy would need to be tightened further yet—or that rates need to be higher for longer,” he added.

The RBA is conscious of the fact that significant income tax cuts will be delivered midyear and that they target low- and middle-income earners, who are more likely to spend added income than save it.

The government has already signalled its plans to spend in the area of subsidies for local manufacturing, including for the production of solar panels.

In addition, the budget will focus on business tax incentives, increased defence spending, funding for domestic violence support, changes to student debt policy and infrastructure.

Chalmers has played down the risk over the budget stoking the flames of inflation.

“It will be a responsible budget, a restrained budget, and it will maintain our focus on that inflation fight,” he said Thursday in a radio interview.

“There will be help for people with the cost of living, but we’ll make sure that that cost-of-living help is part of the solution and not part of the problem when it comes to inflation,” he added.

A risk that the RBA will also be alert to is the probability that the government will hold back some of its revenue gains to support added spending closer to the election.

Josh Williamson , chief economist at Citi Australia, said Chalmers will likely push new spending into the future to avoid overheating the economy now.

“The government does not want to be seen promoting policies that add to the risk of further policy tightening,” he said.

This suggests that new spending will be pushed into the government’s forward budgetary projections, while measures that directly reduce inflation could be announced virtually immediately, Williamson added.