American Slashes Capacity and Adds Fee for Checking First Bag

(MoneyWatch)  By now, you've undoubtedly heard about American's bold decision yesterday to slash 11 percent to 12 percent of domestic capacity and to add a $15 charge for the first bag you check. You'll find comments from travelers all over bemoaning the fee, and saying that it's clearly a bad idea because the airline's stock dropped nearly 25 percent after the news broke. I take a different view.

First of all, this news is downright scary for the industry. If an airline feels that it's necessary to cut that much of its schedule, the numbers that management is seeing must be absolutely dreadful. And it wouldn't surprise me to see further cuts as we go along. Additionally, to have to tack on a fee for checking the first bag makes it sound even more dire. There's no question about it -- this industry is in a crisis greater than we've seen in my adult life, and yes, that includes September 11. While September 11 was followed immediately by roughly a 20 percent cut in capacity by American, that was the bottom and it rebounded slowly. In this case, it's an issue with the fundamentals. High fuel prices and a weak economy are not a good combination, and those don't look to be changing anytime soon. I'm guessing it's this realization of how bad things are that tanked the stock yesterday, and not the actual moves that were made to counter it.

At this point, airlines are going to do whatever it takes to keep their heads above water. If that means quick and dirty fees like the $15 for the first bag, then that's what it'll take. Are there better ways to raise money? No question. But none of them could have as quick an impact on the bottom line as this move. And right now, speed is of the essence.

Unfortunately, a change like this is going to carry plenty of operational baggage. Will people be charged if they have to gate check their bags? How many more people will try to sneak liquids in their carry on to avoid paying the fee? How quickly will overhead bins fill up now? It's going to cause a lot of problems.

Ultimately, the collective addition of fees throughout the travel experience is mind boggling. Are these not the same airlines that consider themselves to be "full service"? Now it's the low cost carriers that offer a far superior experience for the price. But in a time of crisis, apparently airlines don't have the luxury of thinking about those things. They enter survival mode and do whatever they can. This may end up backfiring on them in the long run when better carriers come into being during the (hopefully) better times ahead. And when that happens, the current legacy carriers, battered and bruised from this experience, will not be able to compete.

Of course, this fully depends upon the economics of this business changing for the better. While the economy will eventually improve, I'm not nearly as confident in the price of oil going down. So for now, the airlines have to continue doing anything they can to increase revenues. Cutting capacity is an important step in doing that. Adding the bag fee? Well, it may make sense right now, but I'm not so sure how it will play out in the long run. It may just create opportunities for new entrants to provide a better product.