BUSINESS

WestJet Adds $25 Checked Baggage Fee For First Bag

09/15/2014 09:18 EDT | Updated 11/15/2014 05:59 EST
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CANADA - JUNE 08: A WestJet plane taxi's on the runway of Pearson International Airport in Toronto, Ontario, Canada, Wednesday, June 8, 2005. (Photo by Norm Betts/Bloomberg via Getty Images)
MONTREAL - The cost of flying will soon increase for millions of Canadian passengers each year with the announcement by WestJet Airlines that it will start charging some economy fare customers a fee to check their first bag on flights within Canada and to the United States.

The new fee, ranging between $25 and $29.50 depending on provincial taxes, will apply to all new bookings starting Monday for travel on WestJet and its regional airline Encore as of Oct. 29.

WestJet (TSX:WJA) said the new charge — to be paid at check-in or online up to 24 hours before travel — is expected to affect 20 per cent of its travellers, or some 4.4 million passengers a year.

Different baggage allowances will apply to those in other fare classes or those using its revamped loyalty program, also unveiled Monday.

WestJet's Flex fares avoid the first baggage charge, while Plus fares provide more leg room, advance boarding and two free checked bags. WestJet RBC World Elite MasterCard holders and up to eight guests travelling on the same reservation won't pay the first checked bag fee.

Passengers flying to international destinations, including Mexico, the Caribbean, Central America and Europe will continue to be able to check a first bag at no charge.

Analyst Chris Murray of AltaCorp Capital said the new baggage charge comes earlier than anticipated but follows Porter Airlines and most U.S. carriers aside from Southwest Airlines and Jet Blue.

"I don't think anybody can be really surprised that it's come to Canada. It's sort of a standard in most markets around the world," he said in an interview.

Murray expects the new fees should generate $11.9 million in revenue this year and $87.5 million in 2015. He raised his 12-month target price for WestJet's shares to $38 from $34 due to his expectation that full-year earnings will increase 34 cents to $3.26 per share.

Baggage allowances for military personnel, infant and child equipment, mobility devices and those travelling in connection with other airlines are not affected.

Despite the new baggage fee, the Calgary-based airline said its fares allow customers to purchase the services they want.

"This user-pay type of system allows us to keep fares as low as possible, introduce lower sale fares and avoid fare increases, which benefits you and liberates even more Canadians from the high cost of air travel," said Bob Cummings, vice-president of sales, marketing and guest experiences.

WestJet has said it put off a decision on charging for first checked bag until technological challenges were ironed out to exempt frequent flyer and loyalty credit card customers. It currently charges all customers for a second checked bag, which will increase from the prior level of between $20 and $23.60 with taxes to the same levels as the first bag. Fees for third, fourth, overweight and oversized bags will increase to between $75 and $88.50, up from $50 to $59.

Fees for pets travelling within the cabin are unchanged at $50-59, but will increase to $75 to $88.50 when checked as baggage.

Air Canada (TSX:AC.B) is expected to follow suit and charge for first checked bags on flights within Canada, as it does for service to the United States.

"We are always monitoring industry developments such as this with great interest. We will evaluate it going forward," Isabelle Arthur, a spokeswoman for the Montreal-based carrier, wrote in an email.

Porter Airlines began charging $25 for the first bag and $35 for a second bag checked on domestic travel as of May.

Walter Spracklin of RBC Capital Markets estimates the new baggage fee will generate about $109 million in annual pre-tax operating profits (EBITDAR) for WestJet, representing $4.81 per share.

With the new charge, WestJet is catching up to other North American carriers which, on average, generate at least $20 per passenger in ancillary fees. The fee is expected to add $6 to the $10 per passenger WestJet currently receives.

"The key is that WestJet continues to have opportunities to close this gap including on-flight media fees and other ancillary revenue opportunities," he wrote in a report.

Spracklin said such a charge would also add about $100 million in EBITDAR for Air Canada, equal to $1.84 per share.

WestJet's baggage announcement boosted the share prices of the country's two largest airlines. On the Toronto Stock Exchange, WestJet's shares hit an all-time high of $32.88, and were up $1.72 or 5.59 per cent at $32.51 in Monday afternoon trading. Air Canada's shares were up 59 cents, or 6.96 per cent, at $9.57.

WestJet also launched Monday a new three-tier rewards program that will give customers as of Oct. 29 a variety of benefits depending on how much they spend on WestJet flights in a year.

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