Spring 2012 (Vol.51, No.1)

Baggage Fees and Airline Stock Performance: A Case of Initial Investor Misperception

Abstract

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.

by Gerhard J. Barone, Kevin C. Henrickson and Annie Voy

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