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Airline profits driven by higher fares, bag fees

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The U.S. airline industry is expected to earn a whopping $6.5 billion this year. Delta and Alaska Airlines just posted their best quarterly earnings ever, and U.S. Airways and American also reported strong figures. Airlines have built the record profits off increased fares, as well as charging fees for things like checking baggage and food.

But Southwest Airlines also reported record profits of $259 million this week. Southwest increased fares by 10 percent over the last year, but the discount carrier still doesn’t charge baggage fees, making them the lone holdout among major airlines.

Southwest’s CEO continued to insist yesterday in an earnings call that the airline won’t add bag charges, at least this year or next. He says it’s one of Southwest’s selling points. But, he also hinted that could change as passengers get used to all these a-la-carte fees.

Seth Kaplan at Airline Weekly says the writing’s on the wall. “I’ve heard stories of people showing up at Southwest — for example — realizing they don’t have to pay for their bags and saying, ‘Oh, that’s nice,'” Kaplan says. “In other words, Southwest and Jet Blue aren’t even getting the full benefit because people don’t care as much as they did five years ago when that was a real benefit to fly the airline that didn’t charge for bags.”

For now, Southwest is sticking with no baggage fees. But for its competitors, those fees, along with higher fares and lower costs for jet fuel prices have sent profits soaring.

Another thing driving profits is consolidation. We’ve seen airlines declare bankruptcy and merge. That’s given them the market power to consolidate routes, pack planes fuller, and make more money.

“We call it the three C’s: consolidation, capacity cutting, and charging for everything — the bag fees and all of that,” Kaplan says.

By the way, the airlines made $3.5 billion on those baggage fees alone last year.

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