U.S.-Style Bag Fees Finally Arrive in Canada. Is Europe Next?

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Air Canada (AC/B:CN) announced a new $25 domestic checked-baggage fee on Thursday, three days after its main Canadian rival, WestJet Airlines (WJA:CN), said it would adopt the practice, which is now more or less standard for U.S. carriers.

For Wall Street analysts and many travelers, the only question following WestJet’s announcement on Monday would be how many days—if not hours—Air Canada would wait before following suit. Air Canada said today that the fee on its cheapest Tango fares will “align it with prevailing North American industry practices.” Both Air Canada and WestJet say the charge would affect only about 20 percent of their domestic passengers, those who purchase the cheapest fare. “Canada was fashionably late” to the baggage fee party, Cowen Group (COWN) analyst Helane Becker wrote in a client note today, predicting that the move will increase Air Canada’s annual revenue by C$60 million ($55 million) and 20¢ per share of income.

The industry’s growing ardor for baggage fees has been addressed differently among North American airlines and those across the Atlantic. The large European carriers still don’t charge travelers to check bags on many of their shorter flights, but they segment their fares in a way that factors in baggage. British Airways (IAG:LN) has created what it dubs a “hand luggage” fare for day-trippers or those who squeeze their things into a bag small enough to fit into the cabin. Spain’s Iberia offers five fares for most domestic flights, from Basic—the cheapest—to Business Flexible. The Basic fare does not include a checked bag; opt to check one at the airport, and the fee is €15 ($19).

Air Canada does something similar. It sells five types of fares—and that’s just for economy class—plus two for business class. American Airlines (AAL) has adopted a similar approach with three economy fares, although the price increase between the cheapest fare (Choice) and the next tier (Choice Plus) bundles a free checked bag with priority boarding, reducing the transparency of each product’s price.

The segmented-fare approach is more elegant from a merchandising perspective, given that the traveler’s baggage charges are addressed online and not at the airport. “Pre-booking your hold luggage online is much cheaper than at the airport, and much less hassle,” EasyJet (EZJ:LN) tells people booking tickets on its site. That method on bag fees seeks to avoid any type of retail surprises—one reason that JetBlue Airways (JBLU) President Robin Hayes praised the European method this summer during a conference call with analysts eager for details on when and how JetBlue would introduce a checked-bag fee.

In May, Porter Airlines inaugurated Canada’s first domestic bag fee, charging $25. Its network is smaller than both WestJet’s and Air Canada’s, and WestJet’s technology infrastructure did not allow for checked-baggage charges until recently, leaving Air Canada unable to assess a domestic bag fee for competitive reasons. In a news release, WestJet said the new fee would keep fares low, “which benefits you and liberates even more Canadians from the high cost of air travel.” Thus, consider bag fees in a new light: They can set you free.

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