It looks like my intuition is turning out to to be right, in that Steven Udvar-Hazy is apparently leading an effort to buy ILFC back from AIG. I have very high confidence that Mr. Udvar-Hazy will make the deal happen.

United Airlines just announced that they are increasing their fee on the second checked bag from $25 to $50 for, essentially, economy seats on North American domestic flights. Their 1st check bag fee remains $15. This is great timing for me, personally, because the subject of my business law class this morning was tort law. The connection being that damages available under tort law include compensatory, nominal, and punitive. Airline fees seem to be falling into the same categories lately, with some airlines adopting what can only be considered punitive fees. $50 for a second checked bag being a prime example.

Continental Airlines reported last week that it expects to generate up “in excess of $100 million dollars in net benefits” from their baggage fees over the next year. Following the trend of many U.S. airlines, CAL has put in place a $15 fee for the first checked bag for its domestic economy passengers. You have to wonder if their definition of “net benefits” would show that a customer lost to the competition is a “net benefit” since you won’t incur the cost of servicing that customer. Frontier Airlines demonstrated this week that it really isn’t a whole different animal by following the industry trend and introducing its own checked baggage fee schedule that starts with $15 for the first checked bag, $25 for the 2nd and 3rd checked bags, and $50 for the 4th and higher check bags.

Now, getting back to tort law, Frontier’s checked baggage fees make good fodder for my “damages” example. I.e., a $15 fee could be considered “nominal” meaning that it isn’t that big of a deal and gets the point across that, yes, checking in a bag for a flight is in fact a service that one could reasonably be expected to pay for. The $25 fee being more “compensatory” in nature, meaning that it is really just there to cover the costs of handling the extra baggage. Then, lastly, my favorite. The punitive fee of $50 for the 4th and all subsequent bags. Punitive meaning that it is really more like a fine than a fee. Clearly, such behavior is harmful to society and you need to be made an example of, lest others commit similar atrocities.

As fun as that all is, baggage fees really are, by and large, simply revenue grabs. An appropriate nominal fee would be $1, and a justifiable compensatory fee would be in the $5 - $10 range. I do hold, however, that $50 for any checked bag is really a punitive fee. It makes sense that handling and transporting baggage is a service, and providing that service costs the airline money that it should be able to recoup and, dare I say, profit from. However, what do you think it actually costs an airline to carry a 50lb bag on a flight? Well, if you are a 737-800 flying 1,200 nautical miles, throwing one more 50 lb bag onto an already loaded aircraft would mean that would burn about 1 extra gallon of fuel on the flight. In economic terms, the marginal fuel burn for 50lbs is about 1 gallon. An A321 flying coast-to-coast would need about 2 extra gallons of fuel to take on that extra 50lb bag. Keep in mind, though, that most short haul flying is less than 500 nautical miles. Granted, there is also a ground handling cost involved which I don’t have a good estimate for, but I would guess to be around $1 per bag at the margin.

Now, no one will blame a money losing airline for trying to increase revenues, but in a highly competitive market you have to be suspect of prices that grossly exceed the marginal cost of providing the product/service. They are just not sustainable. In other words, if there is that much margin built in to baggage fees, then you have to expect that they’ll eventually be competed away. Indeed, Southwest is making quite a big deal of the fact that it does not charge such fees. Now, that isn’t to say that baggage fees, in some form, won’t hold. I think “nominal” and “compensatory” level fees, to stick with the analogy, can stand up to competitive pressure, but $50 for a second bag will likely cost United more money in lost customers than it will generate in revenues.

Breaking news is that AIG may be looking to sell ILFC to raise capital and restore investor confidence. With a fleet of around 1,000 aircraft, ILFC the world’s second largest aircraft lessor, trailing only GECAS. What I’m wondering is who will come up with $14 Billion? If time was not important, I would think a spin-off and IPO would probably be the best course of action for both ILFC and AIG. Given the circumstances, though, I can’t see that happening. Off the top of my head, I can’t think of any likely single buyer from the United States. I could imagine a deal structure where Steven Udvar-Hazy helps take the company private along with the help of private equity. I can also imagine there being some interest from investors in the Middle East.

People who have been in the leasing business for a long time are probably enjoying the irony that it is the lessor who is being dragged down by the parent company this time around.

As our banking and capital markets system encounters its next milestone, namely the apparent imminent collapse of Lehman Brothers, I found the quote below (from this article) to be particularly choice:

Good thing that investment banks don’t have to merge seniority lists…

It’s nice to know that the TSA is focusing its efforts on the important aspects of its job. Somehow, I don’t see a change in uniform getting them any more respect. I guess we should just be happy that Jack Boots aren’t part of the new uniform. I’m also wondering how many dollars came out of TSA’s budget for this gem of a webpage. I’m pretty sure that web developers cost more than a TSO (not sure about a TSI). I guess if you can’t sell the steak, you have to sell the sizzle.