Etihad’s new baggage policy a simple cash grab: how does it stack up to competitors?

1 February, 2018

Whenever an airline changes its baggage rules, it’s down to one of two things: either new government regulations have been introduced, or it is to stimulate revenue. Often the former is kind to travellers; but the second means someone, if not everyone, will pay more.

Etihad Airways’ new baggage policy says it will be simpler for the traveller, a phrase that most frequent flyers come to fear, as it usually means the airline is looking for ways of improving its ancillary revenues. The new rates take effect from today, 1-Feb-2018.

Etihad Airways Executive Vice President Commercial, Mohammad Al Bulooki, said: “In line with global best practice and market trends, Etihad Airways has developed a baggage policy that best caters to the differing needs of our guests around the world. The switch to a policy based on weight rather than the number of bags simplifies our allowance system and provides greater convenience and customer benefit while enhancing the travel experience.”

The simplest method, the “piece system” is in fact the one applied in North America – and that is legislated. Every airline flying internationally in those markets must apply it, hence Etihad is retaining it there.

In future, on Etihad, the majority of markets will be entitled to 23kg of checked baggage on Economy Deal fares, 30kg on Economy Saver and Classic fares, and 35kg on Economy Flex fares. Customers in all Business Class fare categories are entitled to 40kg, and First Class customers enjoy a 50kg allowance. Those lucky enough to travel in the Residence are unaffected as they are still permitted to carry four 32kg bags.

This change is expected to provide a twofold opportunity for Etihad: to cash in on new revenue opportunities with additional baggage charges, while reducing fuel costs associated with lighter aircraft. Etihad does not currently report ancillary costs separately, however according to CarTrawler’s 2017 Ancillary Revenues report, baggage can make up to anywhere between 10-90% of an airline’s revenue.

The revenue/cost turnaround of this “simplifying” change is potentially quite mind blowing:

To take the extremes.

First, assume that no-one now exceeds the weight limits. From a fuel cost perspective, Etihad should save a considerable amount of money in having lighter aircraft. Our analysts did some quick calculations and found that one way out of Australia alone, in a year Etihad flights could be almost 10 million kgs lighter (based on Etihad’s average load factor of close to 80%). Oil prices currently sit at around USD70 a barrel and the consensus is this is expected to continue to increase in 2018, having a massive impact on the airline’s bottom line. On a 14-15 hour flight, this reduces consumption – and costs and emissions – very significantly.

Then, on the other hand, let’s assume that everyone took the same amount of baggage as they did previously (which they won’t because it costs an arm and a leg, as anyone who ever has to pay for excess baggage at the airport has discovered – the UK’s easyJet last month refused to uplift a passenger because he had several layers of clothes on and was barely able to walk, in an attempt to avoid excess baggage charges).

The revenue generated in this maximum case would exceed the fare paid by the passenger. For example, the cheapest one way fare between Sydney and Abu Dhabi this month would be about AUD800. To add 16kg of excess baggage (i.e. the difference between 2x23kg and 30kg) would cost almost as much again!

If every passenger carried the previous maximum under the new rules (and pays at the airport – online is a bit cheaper), Etihad would generate an additional AUD400 million – just on the Sydney-Abu Dhabi leg. And, life being what it is, “it’s the poor what gets the blame”. AUD 325 million of that would be paid by economy passengers.

The new allowances compared

Source: Etihad

There are exceptions to the new Etihad policy, which has been “tailored to market requirements”.

All flights from Africa have an allowance of 40kg as standard on both Economy and Business Class fares. Customers travelling between Australia and Lebanon are entitled to 40kg in both Economy Class and Business Class, and the allowance on flights from the GCC to the Indian Subcontinent starts at 30kg in Economy Class.

There’s obviously some market intelligence that has led to these decisions, and the fact that Lebanon has been singled out as a destination which requires additional baggage, suggests this is both a heavy baggage travelling market – as well as being highly price sensitive.

So, which airline should the heavy baggage traveller use?

Below is a snap shot of comparable airlines for bookings from Australia through to Europe at today’s conditions.

Interestingly for industry watchers, Etihad’s new allowances are very similar to Emirates’ standing rates. Meanwhile, Qantas, Qatar, Cathay and SIA are each similar – and quite a lot more generous.

Etihad has also perhaps worked out that there is an opportunity here to profit because its main competitor is Emirates, whereas the others see things a little differently.

Selected airline baggage allowances

Source: Airline websites

Let’s just hope this infection doesn’t spread too quickly, but these things do have a habit of going that way. Watch this space for other changes.