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In response to increasing fuel costs, airlines began introducing baggage fees as a new source of revenue, fees which have since been increased. In this study, an event study methodology is used to examine the impact of these announcements on airline stock prices. The results indicate that the initial announcements led to negative abnormal returns for the announcing firm and other competing airlines, as they were interpreted as a sign of industry weakness. However, the results also show that subsequent increases in baggage fees, which had been shown to positively impact the airline’s financial performance, are associated with positive abnormal returns.
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Baggage Fees and Airline Performance: A Case Study of Initial Investor Misperception
Author(s): Gerhard J. Barone, Kevin E. Henrickson, and Annie Voy
Source: Journal of the Transportation Research Forum, Vol. 51, No. 1 (Spring 2012),
pp. 5-18
Published by: Transportation Research Forum
Stable URL: http://www.trforum.org/journal
The Transportation Research Forum, founded in 1958, is an independent, nonprofit organization of
transportation professionals who conduct, use, and benefit from research. Its purpose is to provide an impartial
meeting ground for carriers, shippers, government officials, consultants, university researchers, suppliers, and
others seeking exchange of information and ideas related to both passenger and freight transportation. More
information on the Transportation Research Forum can be found on the Web at www.trforum.org.
Transportation Research Forum
5
JTRF Volume 51 No. 1, Spring 2012
Baggage Fees and Airline Stock Performance:
A Case of Initial Investor Misperception
by Gerhard J. Barone, Kevin E. Henrickson, and Annie Voy
Inresponseto increasingfuelcosts, airlines began introducingbaggagefees as a new sourceof
revenue,feeswhichhavesincebeenincreased.In this study,aneventstudymethodologyisused
to examine the impact of these announcements on airline stock prices. The results indicate that
the initial announcements led to negative abnormal returns for the announcing rm and other
competingairlines, as they wereinterpretedas a sign of industryweakness.However, the results
alsoshowthatsubsequentincreasesinbaggagefees,whichhadbeenshowntopositivelyimpactthe
airline’snancialperformance,areassociatedwithpositiveabnormalreturns.
INTRODUCTION
Rapidly rising oil prices over the past several years have had a dramatic and sustained impact
on airline protability. In response to declining prots, airlines have increased their dependence
on revenue from service fees to counterbalance rising expenses.1 In 2008, a number of airlines
announced the introduction of baggage fees for passengers’ rst and second checked bags.2 Ex
ante, it is not immediately clear how introducing new baggage fees should affect the nancial
performance of an airline. On one hand, the new baggage fees could cause consumers to switch to
competing airlines that don’t require baggage fees, potentially causing a drop in the total revenues
of the announcing airline. Alternatively, fees on checked baggage could be a means to increasing
revenue, as passengers might not consider the additional cost associated with checking baggage
at the time of their ticket purchase. Further, revenue generated from baggage fees might allow
the airline to maintain competitive ticket pricing in spite of rising fuel costs. Indeed, Henrickson
and Scott (2011) nd that airlines implementing baggage fees often lower ticket prices to maintain
competitiveness, with each $1 increase in baggage fees causing rms to lower ticket prices by an
average of $0.24.
In this study, a traditional event study methodology is used to estimate the impact of these
announcements of baggage fees on airlines’ stock prices. Results suggest that announcements of
the introduction of baggage fees on passengers’ rst checked bags are correlated with large negative
and statistically signicant abnormal returns for both the announcing airline and, to a lesser extent,
competing airlines. These results are interpreted as investors viewing these additional baggage fees
as a sign of competitive weakness for not only the announcing airline, but for the airline industry
as a whole.
Despite these initial market reactions, however, it became apparent that baggage fees held
signicant revenue potential for cash-strapped airlines. In a July 2008 press release, United Airlines
(2008) stated that “…a $773 million or 54.1% increase in consolidated fuel expense caused the
company’s net, pre-tax and operating results to be signicantly lower year-over-year.” Just a month
prior, United, following a precedent established by American Airlines, announced they would begin
charging passengers for checked baggage, which they allude to as a way of establishing “new
revenue streams by charging for a la carte service” (United Airlines 2008). By the end of 2008,
the majority of the legacy air carriers in the U.S. had also announced new service fees charging
passengers for checked baggage. These fees, according to the U.S. Department of Transportation,
generated $1.15 billion in revenue for U.S. airlines in what amounted to half of 2008 (Smith 2009).
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Baggage Fees and Airline Stock Performance
6
By mid-2009, approximately one year after American Airlines became the rst U.S. airline to charge
passengers for their rst checked bag, airlines began increasing fees over and above the initial fee
for the rst and second checked bags.
In light of these new announcements, the event study methodology was extended to estimate
the effect of announcements increasing existing baggage fees on airlines’ stock prices. Interestingly,
the market responded differently to rms’ announcements of fee increases, with subsequent baggage
fee increases being associated with small, but statistically signicant, positive abnormal returns
for the announcing airline. This result stems from the fact that investors had several quarters of
nancial data from the airlines with which to learn about the revenue potential of these baggage
fees, causing them to view these increases as positive events rather than a sign of weakness.
As such, these results illustrate one part of the response to airlines’ changes in the components
of their airfares, something that impacts the airlines, their potential use of similar ancillary fees,
their ability to raise capital, and their passengers who pay these higher fees. In addition, the results
are important for both stock analysts and individuals who hold the stock of airlines, as the abnormal
returns associated with these announcements dramatically impact the market valuation of these
stocks. Finally, the results of this analysis shed light on the way in which the market and investors
perceive the level of competition between large legacy carriers and lower-cost carriers, as the initial
announcements are perceived by the market as a signal of weakness by the announcing airlines, and
to a lesser extent, the competing legacy carriers. Yet, the impact of these announcements does not
negatively impact their lower cost counterparts.
This paper proceeds as follows. The second section presents a review of related literature. The
third section presents the empirical methodology and describes the data used herein. The fourth
section presents the ndings and the last section concludes.
LITERATURE REVIEW
The existing stock market event study literature has made an important contribution to understanding
how rms providing transportation-related services are impacted by various events. For example,
Chance and Ferris (1987) examine the impact of air crashes on the return of the airline’s stock,
arguing that the best measure of the true impact of a catastrophic event is the airline’s stock return,
since the stock market will quickly incorporate this information into its assessment of a rm’s
valuation. Using data on air crashes between 1962 and 1985, it is shown that the impact of an
air crash is immediately incorporated into the valuation of the airline’s stock through a negative
abnormal return on the date of the crash, with no subsequent impact on the days following the
crash. In addition, Chance and Ferris (1987) nd that crashes do not impact other airlines or aircraft
manufacturers, a result related to the results presented in this paper, whereby the market reaction
to an announced baggage fee or a baggage fee increase impacts low-cost carriers and large legacy
carriers differently.
Similar to the ndings of Chance and Ferris (1987), Davidson, Chandy, and Cross (1987) use
stock market returns for airlines between 1965 and 1984 to examine the impact of air crashes.
The results of this analysis show that on the day of a crash there is a large negative return for the
airline, similar to the ndings of Chance and Ferris (1987), but that these losses are recovered within
ve days of the crash. One reason provided for this result is that air crashes are not necessarily
unexpected events in the airline industry, even if they are rare, and that the airlines carry insurance
for such events, potentially limiting their liability.
Walker, Pukthuanthong, and Barabanov (2006) follow the methodology set forth by the
aforementioned studies examining the stock market reaction to air crashes, but instead focus on
the reaction to railroad accidents. Analyzing the impact of accidents that occurred between 1993
and 2003, the results of this analysis show that the stock market reaction to such events may not be
efcient. Indeed, the ndings indicate that there was an initial negative return in the railroad stock
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JTRF Volume 51 No. 1, Spring 2012
price, which was followed by negative returns over the days immediately following the accident,
but that these negative returns are reversed within a short period of time. The Davidson, Chandy,
and Cross (1987) and Walker, Pukthuanthong, and Barabanov (2006) results are of importance to
this study, as both show that the market may initially respond to an event in one direction and then
reverse course over time, a result consistent with the effect of initial baggage fee announcements
having a different impact than subsequent baggage fee increases.
More recently, the impact of the 9/11 terrorist attacks, which used airplanes as weapons, has
attracted a great deal of attention in the event study literature. Drakos (2004) focuses on the impact
of 9/11 on both the systematic risk and idiosyncratic risk for airlines, nding a structural break
in systematic risk for airline stocks and illustrating the importance of portfolio diversication for
investors. Carter and Simkins (2004) focus instead on the potential for the market to differentiate
between different rms, nding that the impact of 9/11 differed from airline to airline based on their
cash reserves, a proxy for the rm’s ability to survive the aftermath of 9/11. In addition, Carter
and Simkins (2004) nd that the market believed that the subsequent Air Transportation Safety
and System Stabilization Act would benet the major airlines over small airlines. Finally, Flouris
and Walker (2005) look at the stock market returns of Southwest Airlines, Northwest Airlines, and
Continental Airlines to differentiate the impact of 9/11 on legacy carriers versus low-cost carriers,
concluding that the market had more faith in Southwest and low-cost carriers than in their legacy
competitors, and that 9/11 had a smaller impact on these rms. The results of Carter and Simkins
(2004) and Flouris and Walker (2005) are particularly important for this study, as they both illustrate
the propensity for the market to react to information differently based on whether the air carrier is a
low-cost carrier or a legacy carrier.
Within a decade of 9/11, airlines were faced with another challenge in the form of dramatically
increasing jet fuel costs. Figure 1 illustrates this impact by showing the spike in the average airline’s
jet fuel costs in 2008 along with the related decrease in rm protability.3 Carter, Rogers and Simkins
(2006) show that the impact of fuel costs can be reduced through the use of jet fuel price hedging,
and that the stock market values companies using such hedging strategies at a premium. However,
as Figure 1 shows, this hedging strategy cannot fully protect airlines from increases in jet fuel costs.
Figure 1: Average Airline Jet Fuel Costs and Prots/Losses Between 2007 and 2009
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Baggage Fees and Airline Stock Performance
8
In addition to increasing rm costs, these jet fuel price increases also exacerbate the competitive
pressure low-cost airlines place on their full service counterparts. Indeed, Dresner, Lin and Windle
(1996) nd that the entrance of a low-cost carrier reduces prices on the route in which the competition
increased as well as other competitive routes, implying a spillover competitive effect of the low cost
carrier’s entry. Likewise, Goolsbee and Syverson (2008) nd that the presence of a low cost carrier
at two airports reduces the prices on ights between the two airports even if the airline doesn’t offer
service between the two locations. Rather, the mere threat of competition from a low-cost carrier
causes the existing carriers to strategically lower their prices. Whinston and Collins (1992) use an
event study methodology similar to that employed in this study to examine the entrance of a low-
cost carrier on the stock market returns of existing rms, nding that the increased competition
has a negative impact on the incumbent’s returns. Similarly, Hergott (1997) uses an event study
methodology to show that mergers in the airline industry leading to increased concentration result
in increased market power within the industry. Finally, Windle and Dresner (1999) nd that the
entrance of low-cost carriers cause existing rms to lower their prices on competing routes, but that
these rms do not raise their price on non-contested routes to make up for the revenue lost due to
the increased competition.
This paper adds to the event study literature by examining the stock market’s response to the
introduction of new revenue streams. In particular, following 9/11 and increases in fuel costs,
airlines introduced baggage fees as a method of increasing their revenues. Table 1 shows the dates
and amounts of these fees by airline, with most of the fees being introduced in 2008 at a level of $15
for a rst checked bag. These fees were subsequently increased in 2009 and 2010 as shown in Table
2. Also notice that, as shown in Table 2, many airlines rst increased their baggage fees only for
customers checking their baggage at the airport in an attempt to get more customers to check their
baggage online, saving costs associated with the time needed to check customers in at the airport.
The results of this analysis indicate that the stock market initially viewed these fees as a signal of
weakness by the announcing rm and other legacy carriers, but not for low cost carriers. However,
the results also indicate that the market learned of the revenue potential of these fees over the rst
year, and reacted differently to the announced increases in baggage fees, with the announcing rm’s
stock receiving a positive abnormal return on the announcement date.
Table 1: Chronology of Initial Baggage Fees, by Date of Announcement
Announcement
Date Airline Effective Date Initial 1st
Bag Fee
May 21, 2008 American June 15, 2008 $15
June 12, 2008 United June 13, 2008 $15
June 12, 2008 US Airways July 9, 2008 $15
July 9, 2008 Northwest July 10, 2008 $15
September 5, 2008 Continental October 7, 2008 $15
September 12, 2008 Frontier September 13, 2008 $15
November 5, 2008 Delta November 5, 2008 $15
November 12, 2008 AirTran November 12, 2008 $15
April 23, 2009 Alaska Air May 1, 2009 $15
Southwest Airlines and Jet Blue Airlines did not institute mandatory baggage fees.
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JTRF Volume 51 No. 1, Spring 2012
Table 2: Chronology of Subsequent Baggage Fee Increases, by Date of Announcement
Announcement
Date Airline Effective Date
New 1st Bag
Fee (online)
New 1st
Bag Fee
(airport)
April 23, 2009 US Airways April 23, 2009 $15 $20
May 13, 2009 United May 14, 2009 $15 $20
July 15, 2009 Delta July 16, 2009 $15 $20
July 21, 2009 Continental July 21, 2009 $15 $20
July 24, 2009 American August 15, 2009 $20 $20
August 26, 2009 US Airways August 27, 2009 $20 $25
October 2, 2009 Continental October 2, 2009 $18 $20
January 5, 2010 Delta January 5, 2010 $23 $25
January 8, 2010 Continental January 9, 2010 $23 $25
January 13, 2010 United January 14, 2010 $23 $25
January 15, 2010 US Airways January 18, 2010 $23 $25
January 19, 2010 American February 1, 2010 $25 $25
April 22, 2010 Alaska Air May 1, 2010 $20 $20
August 17, 2010 AirTran September 1, 2010 $20 $20
Southwest Airlines and Jet Blue Airlines did not institute mandatory baggage fees.
METHODOLOGY
The dates of the market’s reaction to baggage fee announcements are identied by rst searching
on the websites of the major U.S. airlines for information about the baggage fees that they are
currently charging, including the date these fees were put into effect.4 This information is used to
search backwards in time on Google News to identify the actual date and time of the press release
associated with either the introduction of a baggage fee or the increase to an existing baggage
fee. Finally, the press releases are used to choose the date on which to investigate the market’s
reaction to the announcement. In particular, if the press release indicated that a particular airline
made a baggage fee announcement “in the morning” on a particular date, the actual announcement
date was identied as the date on which to investigate the market’s reaction to the announcement.
Alternatively, if the press release indicated that a particular airline made a baggage fee announcement
“in the afternoon” or “in the evening” on a particular date, then the day following the announcement
date was used as the date on which to investigate the market’s reaction to the announcement.
This process of identifying announcement dates yielded nine announcements introducing the
initial implementation of baggage fees, and 14 announcements increasing existing baggage fees.5
The rst of these fees on checked bags was announced by American Airlines in May 2008, with
most of the other major airlines following suit later that same year.6 These fees were introduced
at the level of $15 for the rst checked bag, which was then followed up by baggage fee increases
beginning in mid-2009 and continuing through January 2010, when baggage fees were increased
to $20–$25 for the rst checked bag. While 23 baggage fee announcements over a three-year period
is a signicant amount of information dissemination, it is also noted that this results in a fairly
small sample size, especially when treating initial announcements and subsequent announcements
separately; however, this limitation is unavoidable given the small number of airlines and the short
amount of time since the initial introduction of these fees. In addition, three of these announcements
were excluded from the analysis. One of these, Frontier’s September 12, 2008, announcement was
excluded because the company’s stock was delisted. Two other announcements needed to be excluded
because the announcement was made at the same time as the company’s quarterly report (U.S.
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Baggage Fees and Airline Stock Performance
10
Airway’s April 23, 2009, announcement and Continental Airline’s July 21, 2009, announcement).
Because of the simultaneous announcement of accounting information and the baggage fee increase,
it is not possible to determine what portion of the stock’s daily return is attributable to the baggage
fee announcement rather than the quarterly report.7
The Model
The market’s perception of the valuation effects of both types of baggage fee announcements, initial
and fee increase, are investigated by using traditional event study methodologies. Specically, a
modied market model is used to establish an estimate of what an airline’s stock return would have
been without considering the effects of the announcement related to baggage fees. In calculating this
estimate, the market model is modied by including the change in the daily spot-price of jet fuel as
an additional predictor, along with the return on the market portfolio, according to the Standard and
Poors 500. Note that the change in jet fuel prices is included in the model because jet fuel is one of
the largest costs for airlines, and therefore is highly correlated with rm value and the daily returns
to airlines’ stocks. The market model is estimated via ordinary least squares (OLS) as:
(1) Rit=αi+β1iRmt+β2iJetFuelt+εit
where Rit and Rmt are the period t returns for security i and the market portfolio, m, JetFuelt is the
period t percentage change in jet fuel costs, and εit is the zero-mean error term.
In order to estimate equation (1) above, closing stock prices were collected from Yahoo!
Finance for each of the airlines announcing baggage fees from July 2007 through December 2010.
An airline’s stock return, Rit,is then calculated as the percentage change in the closing price of the
stock from one trading day to the next. As with the rm’s return, the market return, Rmt, is calculated
as the percentage change in the closing price of the Standard & Poor’s 500 from one trading day
to the next.8 To estimate the percentage change in the daily price of jet fuel, the Daily U.S. Gulf
Coast Kerosene-Type Jet Fuel Spot Price was collected as reported by the U.S. Energy Information
Administration (1990–2011), and then the percentage change in these prices was calculated from
one day to the next.
Event study methodology requires specifying the length of an event window. To determine the
length of the event window, airline stock returns were examined on the seven trading days before
and after a baggage fee announcement. Figure 2 shows the average daily returns surrounding the
announcement for rms introducting a baggage fee on the rst checked bag. This gure illustrates a
large negative average return on the announcement day, day 0, with relatively smaller average returns
on the seven days before and after the announcement. This indicates that, on average, these airlines
saw dramatic changes in their valuations on the exact day that they made their initial baggage fee
announcements (without, however, taking into account the overall return on the market or the change
in the daily spot price of jet fuel on those days.) Similarly, Figure 3 shows the average daily returns
for the seven days before and after announced increases to baggage fees. As was shown in Figure
2, Figure 3 indicates that when announcing increases to baggage fees, the announcing airline saw
dramatic changes in their valuations on the exact day that they made their announcement. Based on
these two gures, an event window of one day is specied, in particular, the exact day on which the
baggage fee announcements were made. Additionally, Figures 2 and 3 highlight the aforementioned
difference in the market’s reaction to the different types of baggage fee announcements. As such,
these announcements were treated as two separate events, rst examining the impact of the initial
announcements, and then later examining the impact of announced increases in baggage fees.
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JTRF Volume 51 No. 1, Spring 2012
Figure 2: Average Stock Returns of Announcing Companies One Week Before
and One Week After Announcement of Initial Baggage Fees
Figure 3: Average Stock Returns of Announcing Companies One Week Before
and One Week After Announcement of Baggage Fee Increases
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Baggage Fees and Airline Stock Performance
12
To quantify the impact of each baggage fee announcement, equation (1) is estimated for each
announcing airline over the 120 trading days prior to the announcement date.9 The rm’s expected
return on the date of the announcement was then calculated based on the estimated coefcients from
equation (1), and the actual values of the market return, Rmt, and jet fuel, JetFuelt, variables on the
announcement date. Any difference between the airline’s expected return and actual return on the
announcement date is attributed to the information content delivered to the market in the baggage
fee announcement, and is referred to as the airline’s abnormal return:
(2) AbnormalReturnit=Rit (αi+β1iRmt+β2iJetFuelt)
This process is done separately for each type of baggage fee announcement (initial fee
introduction and subsequent fee increase), and the abnormal returns are then tested for statistical
signicance to determine the impact of the type of announcement on the market price of the
announcing airline’s stock.
RESULTS
The results are presented in three sections. The rst section examines the impact of the announcements
of initial baggage fees, which were shown in Figure 2, to cause a large negative return to the
announcing rm. The impact of an announced increase in baggage fees is then analyzed as the
market had time to absorb several quarters’ worth of nancial reports prior to these announcements,
which gave investors more information regarding how to interpret baggage fees. Finally, it should
be noted that these announcements may impact competing airlines, so in the third section the impact
of announcements on the returns of non-announcing airlines is examined.
Initial Announcements of Baggage Fees
Table 3 presents the results of estimating equation (1) via OLS for each of the announcing airlines.
These results, while not the focus of this paper, show that the rms’ stock returns are positively
correlated with the market return, and negatively correlated with increases in jet fuel prices.
Using the estimates presented in Table 3 to calculate the expected return on the announcement
date, along with the actual market return and the percentage change in jet fuel spot prices on the
announcement dates for each airline, the abnormal return associated with each announcement of an
initial baggage fee is calculated. The results, presented in Table 4, indicate that there is a -10.1%
mean abnormal return associated with these announcements, which is statistically signicant at
1%. Thus, in 2008, with oil prices at record highs, the announcements by these airlines of charges
associated with a rst checked bag were interpreted by the market as a signal of weakness, as
these rms were searching for any additional source of revenue to survive, causing a -10.1% mean
abnormal return to the announcing rms’ stock prices.
Subsequent Increases in Baggage Fees
Table 5 presents the OLS estimates of equation (1) for each airline’s announcement of baggage fee
increases. Comparing the results in Table 5 with those in Table 3, it is worth noting that the impact
of jet fuel prices is much smaller and in many cases statistically insignicant in the second set of
regressions. This is largely due to the decrease in jet fuel prices between 2008, when the baggage
fees were introduced, and 2009, when most of these fees were increased, as shown in Figure 1. Table
6 shows that subsequent announcements of increases in an airline’s baggage fee are associated with a
statistically signicant 2.5% mean abnormal return. This result shows that while the market initially
interpreted these baggage fees as a signal of weakness on the part of the rm or industry, once it was
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JTRF Volume 51 No. 1, Spring 2012
AirTran
Airways
Alaska
Airlines
American
Airlines
Continental
Airlines
Delta
Airlines
Northwest
Airlines
United
Airlines
U.S.
Airways
S & P 500 Daily
Return
1.369***
(0.248)
1.068***
(0.172)
1.999***
(0.282)
2.882***
(0.474)
1.577***
(0.254)
1.608***
(0.446)
2.231***
(0.418)
1.918***
(0.364)
Daily Change in
Jet Fuel Prices
-0.366***
(0.133)
-0.126
(0.122)
-0.945***
(0.197)
-1.438***
(0.266)
-0.397***
(0.133)
-1.163***
(0.268)
-0.907***
(0.263)
-1.019***
(0.229)
Intercept 0.008
(0.007)
0.001
(0.005)
-0.003
(0.004)
0.003
(0.006)
0.009
(0.007)
0.008
(0.006)
-0.005
(0.006)
-0.005
(0.005)
R2 .21 .27 .40 .45 .25 .26 .28 .32
Observations 120 120 120 120 120 120 120 120
Standard errors in parentheses. *** signicant at 1%.
Table 3: OLS Estimates of the Daily Stock Return for Announcing Firms 120 Days Prior to Announcement
Table 4: Abnormal Performance of Airlines on Announcement of Initial Baggage Fees
Abnormal Return on Day
of Announcement
Two Tail t-Test of Abnormal
Return = 0 (p-value)
One Tail t-Test of Abnormal
Return < 0 (p-value)
-10.01% 0.009 0.004
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Baggage Fees and Airline Stock Performance
14
InitialIncreaseinBaggageFees
AirTran Alaska American Delta United
S & P 500
Daily Return
1.217***
(0.196)
1.571***
(0.263)
1.936***
(0.274)
1.975***
(0.260)
2.083***
(0.244)
Daily Change in
Jet Fuel Prices
-0.109
(0.143)
-0.059
(0.135)
-0.147
(0.181)
-0.038
(0.170)
-0.234
(0.165)
Intercept -0.0001
(0.002)
0.002
(0.002)
-0.004
(0.005)
-0.004
(0.005)
-0.004
(0.006)
R2 .34 .29 .36 .41 .40
Observations 120 120 120 120 120
SubsequentIncreasesinBaggageFees
American Continental
(2nd increase)
Continental
(3rd increase)
Delta
(2nd increase) United U.S. Airways
(2nd increase)
U.S. Airways
(3rd increase)
S & P 500
Daily Return
2.397***
(0.046)
2.192***
(0.360)
2.209***
(0.361)
1.875***
(0.304)
2.700***
(0.513)
2.947***
(0.348)
2.86***
(0.506)
Daily Change in
Jet Fuel Prices
-0.380**
(0.187)
-0.259
(0.199)
-0.494***
(0.168)
-0.310**
(0.133)
-0.429*
(0.239)
-0.513**
(0.222)
-0.387*
(0.231)
Intercept 0.003
(0.004)
-0.001
(0.004)
0.005
(0.003)
0.003
(0.003)
0.009
(0.005)
-0.001
(0.005)
0.005
(0.005)
R2 .23 .27 .24 .25 .19 .40 .15
Observations 120 120 120 120 120 120 120
Standard errors in parentheses. * signicant at 10%; ** signicant at 5%; *** signicant at 1%.
Table 5: Estimates of the Daily Stock Return for Announcing Firms 120 Days Prior to Announcement of Baggage Fee Increase
479359_Guts_kp2.indd 14 4/23/12 2:35 PM
15
JTRF Volume 51 No. 1, Spring 2012
learned that these fees produced large revenues for the rms, the increases were then interpreted as
positive events. This is not to say that the market’s initial reaction was wrong (particularly given
that the introduction of these fees was likely a sign of weakness), but rather that the market’s view
of these fees evolved as it learned, through company nancial statements, that these fees were
generating new revenues for the rms. Evidence of this learning can also be anecdotally seen in
looking at the size of the abnormal returns over time, where the rst several announcements of the
introduction of baggage fees were received with negative abnormal returns greater than 10%, while
rms announcing the introduction of baggage fees later tended to have smaller abnormal returns.
For example, American Airlines, the rst airline to announce baggage fees on the rst checked bag,
had an estimated -16.6% abnormal return, while Delta, one of the later legacy carriers to announce
baggage fees on the rst checked bag, had only a -0.4% abnormal return.
Table 6: Abnormal Performance of Airlines on Announcement of Baggage Fee Increases
Abnormal Return on
Day of Announcement
Two Tail t-Test of Abnormal
Return = 0 (p-value)
One Tail t-Test of Abnormal
Return > 0 (p-value)
2.5% 0.074 0.037
Impact of Announcements on Non-Announcing Firms
In addition to the impact on the announcing rm, it is possible that an announcement of an initial
baggage fee and/or increase in baggage fees could impact the return of competing airlines. Further,
the literature indicates that within the airline industry, low-cost carriers and large, legacy carriers are
often differentiated by the market (e.g., Carter and Simkins [2004] and Flouris and Walker [2005]).10
As such, the abnormal returns were calculated for all non-announcing airlines as shown in equation
(2) above, and then these abnormal returns were separated by carrier type: low-cost carrier or legacy
carrier.11 These returns are shown in Table 7 by type of airline and type of announcement (initial or
subsequent increase in baggage fees).
The results presented in Table 7 show that an announcement of changes in baggage fees, of
any type, caused a marginally signicant -1.1% mean abnormal return for legacy carriers, and had
no statistically signicant impact on the average return of low-cost carriers. However, it’s been
established that the market learned about the positive revenue impact of these baggage fees between
the initial announcements and the subsequent announcements of increases; therefore, there is no
reason to focus specically on the impact of an announcement without differentiating between the
type of announcement.
Indeed, if the market viewed the initial announcements as a signal of weakness, it is likely that
all similar stocks would be viewed by the market as weak. Thus, the second set of results in Table 7
presents the impact of the initial announcements of baggage fees on the stocks of competing legacy
carriers and low-cost carriers. The results indicate that competing legacy carriers had a -3.4% mean
abnormal return when baggage fees were announced by their competitors since they would also
be perceived to be vulnerable. However, the low-cost carriers experienced a marginally signicant
0.9% mean abnormal return as the market would have viewed these rms as being in stronger
positions than their legacy carrier competitors.
Finally, as noted in Table 7, subsequent announcements of baggage fee increases had no
statistically signicant impact on the stock prices of competing airlines. This result makes intuitive
sense since the market had learned that baggage fees actually serve as a new revenue stream for the
announcing rm, which will not impact the revenues of competitors, hence their stocks experienced
no impact from such an announcement.
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Baggage Fees and Airline Stock Performance
16
Table 7: Abnormal Performance of Competing Airlines
Abnormal
Return on Day of
Announcement
Two Tail t-Test of
Abnormal Return =
0 (p-value)
One Tail t-Test of
Abnormal Return
> or < 0 (p-value)
OnAnnouncementofBaggageFeeChanges(InitialorIncrease)
Legacy Carriers -1.1% 0.053 0.027
Low Cost Carriers -0.5% 0.242 0.121
OnAnnouncementofInitialBaggageFees
Legacy Carriers -3.4% 0.003 0.002
Low Cost Carriers 0.9% 0.172 0.086
OnAnnouncementofBaggageFeeIncreases
Legacy Carriers -0.2% 0.691 0.345
Low Cost Carriers -1.0% 0.232 0.116
CONCLUSION
Using traditional event study methodologies, this paper analyzes the impact of airlines’ baggage
fee announcements on rms’ stock market returns. There is evidence of large negative abnormal
returns on the date on which the airline announced an initial baggage fee on passengers’ rst
checked bag. It was also found that these announcements impacted competing airlines’ stock prices,
but that, as previous literature has shown, the market differentiated between large legacy, carriers
and low-cost carriers in its reaction. The results further show that investors learned of the revenue
generation caused by these baggage fees, and reacted differently to announced increases in baggage
fees. Specically, subsequent announcements of baggage fee increases are correlated with positive
abnormal returns on the announcing airline’s stock price, with no impact on competing airlines’
stock prices. As such, this research highlights both the effects that these types of announcements had
on airline’s stock prices, as well as the learning curve faced by market participants when presented
with these types of announcements.
Endnotes
1. In 2010, U.S. airlines collected roughly $5.7 billion in service fees charged to passengers for
checked baggage and reservation change fees (U.S. Department of Transportation 2011).
2. Prior to the implementation of these new fees, virtually all airlines charged fees for passengers
checking more than two bags. Thus baggage fees weren’t new, in and of themselves, but the
practice of charging customers for a rst checked bag was a new strategy.
3. Jet fuel costs and carrier protability were obtained from the U.S. Department of Transportation’s
Form 41 Financial Data (2008 – 2010).
4. Airlines included are: AirTran Airways, Alaska Airlines, American Airlines, Continental
Airlines, Delta Air Lines, JetBlue Airways, Northwest Airlines, Southwest Airlines, United
Airlines, and US Airways.
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17
JTRF Volume 51 No. 1, Spring 2012
5. The term ‘initial baggage fees’ refers to airlines implementing fees on each passenger’s rst
checked bag. Oftentimes these airlines had fees on second and subsequent checked bags prior
to the dates examined here, but the focus of this analysis is on the impact of implementing fees
on rst checked bags as this, potentially, has a greater impact on travelers.
6. All of the “legacy” carriers introduced baggage fees by spring 2009, but several “low cost
carriers” have differentiated themselves by not charging for baggage.
7. However, inclusion of these two observations does not qualitatively change our results.
8. Other measures of the market return were examined, and the estimates presented here are robust
to these different measures.
9. Note that various window sizes were examined, and the results presented here do not qualitatively
differ from those associated with these different window sizes.
10. Low-cost carriers included in this analysis include Southwest Airlines, JetBlue Airlines and
AirTran Airways.
11. Note that the most prominent low cost carrier, Southwest Airlines, focused their advertising
campaign on “Bags Fly Free” following the introduction of baggage fees by the legacy carriers.
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Gerhard J. Barone is an assistant professor of accounting at Gonzaga University. Previously
he taught accounting at the University of Wisconsin-Madison and at the University of Texas at
Austin. His research interests include market efficiency, earnings quality, and the pricing of
earnings components. He received his B.A. in economics fromHaverford College, his B.B.A. in
accountingfromtheUniversityofAlaska-Anchorage,andhisPh.D.inbusinessfromtheUniversity
ofWisconsin-Madison.
Kevin E. HenricksonisanassociateprofessorofeconomicsatGonzagaUniversity.Hisresearch
interestsincludespatialpricingandtransportation’sresponsestochangesincosts.Hereceivedhis
B.A.ineconomicsfromPacific LutheranUniversity,hisM.S.ineconomicsfromtheUniversityof
Oregon,andhisPh.D.ineconomicsfromtheUniversityofOregon.
Annie Voy is anassistant professor of economics atGonzaga University.Her researchinterests
includeinternationaleconomics,internationaltradeandeconomicdevelopment.Shereceivedher
B.S.ineconomicsandbusinessadministrationfromSaintMary’sCollegeofCalifornia,herM.A.in
economicsfromTuftsUniversityandherPh.D.ineconomicsfromtheUniversityofOregon.
479359_Guts_kp2.indd 18 4/23/12 2:35 PM
... At present Southwest is the only carrier that does not charge any fees for first and second checked-in baggage. 1 There is a dearth of literature on the effects of the imposition of BF by air carriers. A number of studies, however, have looked at the linkage between the imposition of fees and stock values (Barone et al., 2012), ticket prices (Henrickson and Scott, 2012;Brueckner et al., 2015), and air passenger demand (Scotti and Dresner, 2015). The literature, however, does not adequately address the linkage to operational service quality such as flight delays. ...
... However, researchers have investigated several aspects of imposing BF on checked-in bags by carriers. Barone et al. (2012) studied the reactions of the stock market to the announcement of the imposition of fees. The authors suggested that initial announcements of change in fees policy lead to negative abnormal returns for the announcing firms as well as their competitors. ...
... At present Southwest is the only carrier that does not charge any fees for first and second checked-in baggage. 1 There is a dearth of literature on the effects of the imposition of BF by air carriers. A number of studies, however, have looked at the linkage between the imposition of fees and stock values (Barone et al., 2012), ticket prices (Henrickson and Scott, 2012;Brueckner et al., 2015), and air passenger demand (Scotti and Dresner, 2015). The literature, however, does not adequately address the linkage to operational service quality such as flight delays. ...
... However, researchers have investigated several aspects of imposing BF on checked-in bags by carriers. Barone et al. (2012) studied the reactions of the stock market to the announcement of the imposition of fees. The authors suggested that initial announcements of change in fees policy lead to negative abnormal returns for the announcing firms as well as their competitors. ...
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We examine the linkages between the implementation of baggage fees and late flights in the airline industry. We find that baggage fees policies result in improvements in on-time performance as assessed through late flights, directly through improvements in airport-side sorting and loading efficiencies, and indirectly through lower air travel demand. We further find that these relationships are contingent upon the presence of a hub airport on a route. Our findings have important managerial and public policy implications as baggage fees have often been cited as a driver of security queue, aircraft alley, and overhead bin congestions, and ultimately delayed flights. Our results suggest that these suppositions could be misplaced.
... While the baggage fee policies are now generally agreed upon as a successful way of improving revenues for both the airlines that started charging for checked bags, as well as those that did not (see for example Barone et al. (2012) and Henrickson and Scott (2012) a marketing strategy decision such as charging or not charging fees for the second or first checked bag has had implications on an airline's operational performance. ...
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This paper investigates the effects of terror attacks of September 11 on a set of airline stocks listed at various international stock markets. Utilizing the Market Model as the relevant return generating mechanism, we document a structural break in systematic risk (beta) for airline stocks. Moreover, our empirical evidence shows that, apart from the systematic risk, idiosyncratic risk has also substantially increased. In quantitative terms, conditional systematic risk has on average more than doubled, while the percentage it represents over total risk has shown a considerable increase. These results have implications for portfolio diversification and the cost (and ability) of airlines in raising capital.