Are checked bag fees for flights too high, too low, or just right?

by on January 1, 2016 at 3:28 am in Uncategorized | Permalink

Air Genius Gary Leff has a take on this, here is the concluding bit:

While checked bag fees are profitable, airlines want passengers to pay lower fares and higher checked bag fees, not price checked bag fees so high that people don’t pay them. That’s because moving revenue out of fares and into ancillary revenue excludes that revenue from the domestic 7.5% excise tax on tickets.

Checked bag fees are in large measure a tax arbitrage play. Eliminate the tax disparity and — since most aircraft don’t max out their carrying capacity — in ten years I’d bet that checked bags get rebundled back into the fare.

Higher checked bag fees may be disadvantageous since charging more for checked bags pushes more luggage to carry on, causing boarding to take longer, and resulting in aircraft not getting scheduled/utilized as effectively.

Do read the whole thing.  Don’t forget — Glazer’s Law!

1 Ashok January 1, 2016 at 4:58 am

These fees are also the staple benefit of most relevant credit cards, a large reason why annual fee credits on other such cards are worth close to parity, and one of the few – and maybe only consistently worthwhile – benefits of lower tiers of frequent flier status. Boarding time seems unlikely to be much lower – even Southwest isn’t that much better and it supposedly has a superior system to begin with – since plenty of people would rather avoid baggage claim. Encouraging people to bring smaller bags on the margin is also probably worth something.

These are of course observations from an occasional flier. Air geniuses might know better – but it seems profitable enough to reward not so frequent fliers with tiny perks like free checked bags without any expensive benefits like upgrades.

2 Axa January 1, 2016 at 5:49 am

Carry-on luggage doesn’t delay boarding, passengers do. My curious experience in a NY SFO flight involves laptop computer bags and winter coats.

In this flight, most people carried 3 objects: the wheeled carry-on on luggage, computer bag and a bulky winter coat. First passengers to board filled all the overhead space with winter coats. As the last passengers boarded, the crew said “overheard space is for luggage, no coats”. The amount of zero passengers sit up to get their coats and free space. As I looked for a space for my stuff in the aisle a distressed member of the crew just said “sir, take a coat, put it on the floor and place your luggage. I can’t do it because it’s disrespectful to passengers. But you can do it and if anyone complains I have the authority to shut them up”. I happily obliged.

This is just an US problem. I have traveled with Easter, Condor and other lie cost airlines that even weigh your carry-on luggage before boarding and no problem at all. Boarding is quick and uneventful.

3 prior_test January 1, 2016 at 7:43 am

‘This is just an US problem.’

Well, for all its pretensions, this web site is parochial, seemingly without any awareness of that fact. Much like most of its readers.

4 Bruce Cleaver January 1, 2016 at 9:17 am

Kitman’s Law

5 Art Deco January 1, 2016 at 3:32 pm

Including and especially the fellow who’s been nursing a grudge for 30 years about his termination by the moderators’ research center.

6 Dmitri Helios January 1, 2016 at 10:11 pm

Haha, this explains a lot.

7 Matt2 January 1, 2016 at 8:10 am

I check almost everything because I’m carrying work stuff that can’t go carryon, plus that has led me to appreciate how much easier it is to manage layovers and transfers without dragging bags around. When all I have in the overhead is a jacket I get very annoyed when someone want’s it moved so they can try to jam in a full sized suitcase that wouldn’t fit down the aisle and gave two people concussions when it hit them in the head on the way to my seat.

8 CRL January 1, 2016 at 12:19 pm

We have all these contested fairness claims because the overhead space isn’t anyone’s specifically. If airlines were to just sell it before hand boarding would go a lot more smoothly.

9 Dan Weber January 1, 2016 at 12:48 pm

I’m amazed at what assholes people will be about occupying as much overhead space as possible, or using it a way that gets them a very very minor benefit but a massive cost to someone else. (Saw someone drop their bag at the front of the plane before taking their seat at the back of the plane. This just causes people at the front of the plane to need to work backwards to get their bag.)

10 Phil January 1, 2016 at 2:22 pm

Why are you amazed? This is an econ blog and that behavior is a classic example of the tragedy of the commons and the effectiveness of incentives.

11 Axa January 1, 2016 at 2:35 pm

I don’t think it’s about incentives. It’s just to apply the rule of 1 piece of luggage means 1 piece of luggage. If you carry a laptop computer you must put it in that piece of luggage.

The experience with European low cost carriers is that 1 or 2 people of land crew team walk around the boarding room. If a luggage looks too heavy or someone is carrying two pieces, they are stopped well before they board the plane. The problem is solved before boarding, not while boarding. The incentive here is “you can’t board with 2 pieces of luggage if you didn’t pay for it, period”.

12 CRL January 1, 2016 at 11:22 pm

There isn’t room in the overhead for one piece of luggage for each passenger, at least if that luggage is bigger than a purse. So it doesn’t how tightly the one piece of luggage rule is enforced, you still have an allocation problem. The airlines for some reason don’t want to formally assign the space so instead you get this nonsense dance with who is allowed to board first — where in a sane universe it would be a perk to board last.

It they just cut up the bins into rigid boxes and sell them (or give them away) it’d solve the entire problem. There’d be no question about whether or not it was fair to put in a coat, it’d be your overhead to do with what you will.

13 jb January 4, 2016 at 11:20 am

“Lie cost” airlines. A freudian typo if there ever was one. Brilliant.

14 T January 1, 2016 at 7:06 am

I don’t buy the claim that baggage fees are largely about domestic excise tax – baggage charges are common in short haul air markets all over the world, from Western Europe to Trans-Tasman- presumably there aren’t similar taxes in all of these other countries?

15 Anon. January 1, 2016 at 8:07 am

You underestimate convergent evolution among tax regimes.

16 jk January 1, 2016 at 7:35 am

I always theorized that part of the success of the low cost carriers of Europe stem from the baggage fees which incentivize passengers to pack more efficiently via carry on. There is also the burden of waiting for the luggage on the other end when you can quickly jump into a taxi or train to your final destination asap.

Less bags to pack means lower weight of the airplane, which lowers fuel costs and idle time for the crew and airplane for the airliner and airport.

17 prior_test January 1, 2016 at 7:47 am

Pretty much describes Ryanair, apart from how successfully it use subventions to generate profit.

18 Millian January 1, 2016 at 9:34 am

Europe is a separating equilibrium in which higher-income / older tourists who want long trips, large bags, and easy connections converge to the non-lowcost airlines that charge more. Lower-income / younger tourists on shorter trips with low time costs take the cheap plane and often fly to the less-convenient airport.

19 prior_test January 1, 2016 at 11:01 am

Sure, but Ryanair has moved back and forth when it comes to free checked baggage, having backed off from its former quite radical insistence on charging for baggage, including that which it did not consider to fit its criteria. This in the absence of the reasons presented in the link, by the way.

However, much like Aldi, Ryanair is completely committed to cutting costs as far as possible, which is essentially the fundamental reason for its extreme practices. But unlike in the U.S., which seems to have little real competition, Ryanair faced a number of competitors that did not follow its lead, and apparently, Ryanair noticed that it was losing passenger volume to airlines that were not requiring passengers to pay for a piece of checked baggage.

20 jk January 1, 2016 at 11:56 am

Have you been on a European low cost carrier lately?

Ryanair and its stereotype backwoods airports is not the only thing flying. Ryanair likes to paint themselves as some sort of tacky Walmart of the skies but even compared to mainstream US carriers on a mid-range US domestic flight, the condition of the plane is not run down, the flight are pleasant, the crew is not rude or intrusive, and the passengers are not some lower class chav stock that everyone likes to believe.

Plus, the hubs from the secondary airports are actually more pleasant to park at and board. They are not so off the beaten track and realize they are competing with the mainstream airports which have a plethora of options for transportation to the main tourist destinations. Most of Europe is accessible within a 2-3 hour radius via plane so the flights are not painful.

They can actually be more convenient and cost effective.

Whizzair fles to many proper capitals such as Budapest.

Vueling flies to Barcelona proper.

21 Jan January 1, 2016 at 8:22 am

How about carry-on fees? Do it by number of carry-ons (>1) and for anything larger than personal item size. Or, the budget carriers could structure it as a rebate. Only one small carry-on? You get one free beverage.

22 Careless January 2, 2016 at 5:05 pm

Pretty sure Spirit Air charges for larger carryons

23 Ian January 1, 2016 at 8:52 am

Isn’t it true that flight ticket search sites like kayak.com do not include checked bag fees when they sort by price? Extra fees may be a “SEO optimization” in this context.

I always thought that this was a reason why restaurants serve relatively expensive drinks: they subsides entree prices creating an illusion of relatively inexpensive meal.

Of course, I may be wrong on both accounts.

24 Ian January 1, 2016 at 9:14 am

Also, when I compare the scenarios (assuming $25 domestic baggage fee):

a) Current regime: Ticket price + $25 fee

b) Tax on baggage fees: Ticket price + $25 fee + $1.88 tax

c) First luggage free regime: Higher ticket price (increase less than $26.88)

aren’t the options a) and b) much more similar to each other than a) and c) ?

I doubt that the extra $1.88 tax will affect the customer decisions more than the difference in pricing between a) and c). I think there must be some other reason why airlines choose to charge baggage separately.

25 Bill January 1, 2016 at 9:08 am

Come on, didn’t you ever take a graduate econ or business school class and study this as a case study?.

It;s not about the taxes,

it;s about price discrimination (family vacationers not seeing the true costs), oligopolistic coordination on baggage fees (easier to signal and coordinate on baggage fees than on routes) , information search costs (you see and search on the rate but dont see the all in costs to do a comparison), and credit card, loyalty program etc. features which “waive” fees for loyal and more frequent travelers.

26 Bill January 1, 2016 at 6:01 pm

Here is one of the econ papers on subject of unbundling baggage fees and the reasons for the fees based on my comments above:
http://www.socsci.uci.edu/~jkbrueck/course%20readings/bag_fee.pdf

27 Careless January 2, 2016 at 5:06 pm

You mean when he was in school, decades before these were policy? No, I’m guessing he didn’t have a time traveler’s curriculum.

28 Bill January 3, 2016 at 4:46 pm

Careless, Explain what you mean. If you followed the link, you would see this is current material.

29 MAH January 1, 2016 at 9:35 am

I always figured the airlines’ goal was to incentivize efficient packing to decrease carried weight per passenger and therefore decrease marginal fuel costs.

30 Dan Weber January 1, 2016 at 12:47 pm

But once the overhead gets full, the plane will check your bags for free.

This collapses very quickly to no one checking ahead of time, instead checking at the gate for free, because enough other people are doing the same thing.

31 yZrs January 1, 2016 at 10:01 am

In my experience, since stowed baggage fees have been implemented for (domestic Canadian) flights, it takes at least an additional 10-15 minutes to deal with the last 20% of passengers tying (and failing) to find space for their stuff and eventually gate checking it. Exit times also increase for all passengers as many have to go elsewhere in the cabin to find their bags. The newest planes do seem to be designed for more cabin storage.

The real question is why the airlines have not offered a choice of checking a carry-on sized item on check-in. Travelling as 2 adults and 4 kids I would much rather check my 6 barely-legal carry-ons which take up 10+ passengers’ worth of overhead for 5 paying seats. There’s no advantage to doing it at the gate since at that point I’ve done all the shlepping (and will still need to do it for any connections) and it’ll just delay me once I land. Since I have young kids I get to board first and watch the comedy unfold around me. I would love to leave those bags with the airline when I check in. Even better would be to get to trade in 2 overhead bags for 1 checked full-sized suitcase.

32 Joshua Gans January 1, 2016 at 10:04 am

This doesn’t quite add up. Checked bag fees cause a distortion in that they increased unchecked bags and we know that has a ton of costs. So if it is tax avoidance then why not just a bag fee regardless of how you take it? That will move revenue away from tickets but can also handle any distortions.

33 Brian Timoney January 1, 2016 at 10:46 am

Southwest monetizes it’s unique boarding system by selling “priority boarding” for $15. One experience with a gate-checked bag and a middle seat and that becomes a very good deal.

BT

34 Moo cow January 1, 2016 at 11:29 am

Now I’ve noticed ppl feigning disabilities so they can ride through TSA in the wheelchair and board early to take advantage of open overheads.

35 Vlad January 1, 2016 at 11:32 am

The author’s argument strikes me as being true in the short run, but false in the long run, much like arguments that the reason it is optimal to subsidize public transportation is that the fixed costs are high but marginal costs are so low that an efficient price cannot recoup the fixed costs [there are other reasons to subsidize it though, namely as a second-best to road tolls]. In the short run, most capacity is unused. In the long run, airlines have to have capacity to cover 99.x% of cases, and so if people on average put in 2x less checked luggage, they can build airplaces with 2x less luggage space and put more passengers there instead.

36 Ed January 1, 2016 at 11:36 am

Some people remember a time when airlines didn’t charge for checked in bags, which I think distorts how people think about this.

Airplanes carry people and things. There is no real logic behind charging to haul people around, and also charge to haul their things around. If you ship something by post, you are charged to have your stuff put on the plane and flown.

So yes, they should charge for bags, the charge should be levied on a per pound basis (weigh them at the check-in counter, and passengers can go online earlier and get an estimate of what they will likely pay, plus the per-pound charge), and the charge should be the same no matter where in the airplane the bag winds up going, in the hold or in the storage bin above the seat.

Because they are now charging for all bags, the fee-per-bag should be lower (though they will probably get greedy here), and you eliminate much of the boarding delay, though I agree with Axa that in the US much of that is just due to the trend of Americans forgetting how they are supposed to behave in public places.

37 jk January 1, 2016 at 12:20 pm

There is indeed a cultural perspective in business practices and why some forms of business can thrive and fail in other countries.

The US consumer thinks they are the baseline or the lowest common denominator depending on your perspective.

They are still relatively rich to some extent and may take this as some sort of superiority complex. Hence the need to yell English commands to dumb foreigners so they can understand better, continuation of obsolete imperial measurement listed on flight data since the metric system is so complicated and the imperial system makes sense. Or the whole argument of the superior 220v vs. 120v.

At least there are ugly Chinese and ugly Russians competing with the Americans in some places. Middle Easterners and rich guys from the Balkans driving tinted up Range Rovers compete with American levels of tackiness also. I was on flight from Albania to Germany once and an Albanian 20 something was drunk and opened the cockpit door during flight – this flight was at 0800 CET.

38 Alvin January 1, 2016 at 1:40 pm

“trend of Americans forgetting how they are supposed to behave in public places”
+1

39 megamike January 1, 2016 at 1:22 pm
40 DWAnderson January 1, 2016 at 1:30 pm

A few facts from someone whose spouse works in management at a major US carrier and has seen how these decisions are made first hand:

1. The main reason airlines hate checked bags is because they are expensive to handle. The need to transfer checked bags also adds significantly to the times between connecting flights. If there were no checked bags there could be massive increases in efficiency solely as a result of closer connections.

2. Several years ago the secretary of transportation was so incensed at the possibility of fees for carryon bags that he called the CEOs of US airlines and extracted a promise not to charge fees for carryons. All of the major carriers gave such a promise (presumably faced with the implicit threat of having their lives made difficult by DOT). A number– like Frontier and Spirit– did not. This obviously creates a bias toward checked bag fees vs carryon fees! Glazer’s law should be expanded to cover situations like this one.

3. Tax arbitrage is part of the reason for checked bag fees, but not a major one. An aside: these taxes fund FAA which is already receiving a windfall because load factors are so much higher on flights now, i.e. each flight nets FAA more tax revenue.

41 Static January 1, 2016 at 8:46 pm

OK…let’s see a checked bag fee AND a carry on bag fee.

42 John January 1, 2016 at 10:17 pm

So charging a check fee of, say, 4% less than the ticket and then giving the ticket away is a win-win for everyone but government taxation.

43 Nathan W January 2, 2016 at 3:05 am

I never have more than one checked bag, and I don’t see why my fare should subsidize those who travel with monstrous amounts of baggage.

But I definitely agree that pushing more baggage to carry on is a problem. I often travel with a half-sized guitar, which is very light and easily fits in overhead storage. I never used to have a problem finding space for it, but in recent years I almost always have troubles finding a place to put it, and there is often additional delay while airline staff try to find somewhere to put it.

44 mkt42 January 2, 2016 at 11:52 pm

I must confess to being ignorant of Glazer’s Law, and Tyler doesn’t help due to his inconsistent definitions:

“It’s either taxes or price discrimination.”
http://marginalrevolution.com/marginalrevolution/2013/06/the-case-against-small-plates-on-restaurant-menus.html

“It’s either taxes or fraud”
http://marginalrevolution.com/marginalrevolution/2015/09/just-how-guilty-is-volkswagen.html

Even though he is linking to the second version, I think the first version is more generally useful when thinking about microeconomic phenomena. Fraud happens, but one has to invoke asymmetric information, lack of fraud prevention by the authorities, and an inability of markets to mitigate those problems. Which certainly does happen in real life, with VW being one of the biggest recent examples, but even more common (in market-oriented economies) is good old-fashioned price discrimination (which requires its own set of assumptions, but they’re more commonly satisfied in general).

So an offshoot of Glazer’s Law is Tyler’s (di)Lemma: “If it ain’t taxes, is it price discrimination or is it fraud?” I think the correct answer is think about price discrimination first, and fraud second.

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