Baggage fees present a very strange alchemy for airlines. Higher baggage charges deliver more revenue - even when fewer passengers check bags as a result of the fee hikes.

No doubt recognizing this, the group of big-5 airlines (American, Continental, Delta, United, and US Airways) all boosted baggage fees during January 2010. IdeaWorks estimates these carriers will realize annual baggage fee revenue of $1.76 billion. The “new money” portion of this amount for the group of big-5 carriers exceeds $117 million.

Southwest Airlines, which has positioned itself above the fray by promising “bags fly free,” is a large and vocal holdout. The carrier’s current advertising campaign virtually assures it will remain on the sidelines for some time. But if Southwest achieved Delta’s per passenger result of $7.32 from baggage fees, its 100 million annual passengers would contribute $732 million to the bottom line.

The US airline industry is unlikely to stop this trend and more tweaking of the fee structure can be expected during 2010 and beyond.