The Madness of Checked Bag Fees
Donald Marron hits upon one of my pet issues: fees for checking bags on airlines. A year ago, I concluded:
Airlines can charge all they want for a checked bag that is too big to carry on. They should not charge to check a bag that is small enough to carry on. This would avoid giving incentives to passengers to carry bags on, where the external costs in terms of delays and crowding are high.
I think that strikes the right balance. In other posts, I declared American Airlines a "Microeconomics-free zone" and linked to a pretty smart analysis that suggests that bag fees may not yield any additional revenue for the airlines.
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Logic Check
A year ago, American Airlines wanted to charge me $50 for my 2nd bag (the 1st was free). Rather than checking that 2nd back, I carried it on board, and made 20 folks behind me wait while I dumped it into an overhead bin. (The wait was not long, as I have a bit of experience traveling.)
On the way home during that same trip, I tried to get AA to check the 2nd bag without a fee: 1) They would be carrying it on their plane anyways; 2) Checked, THEY would determine load balance, not me; 3) Checked, it would take 3 seconds to load the bag, whereas I would take 3-10 times that amount of time.
No good - the person at the counter merely stated "I've heard them all - it is $50." So, I carried it with me. But what happens at the gate? It is a puddle-jumper, not a big plane, so they take all the carry-ons, give me a ticket, and store it in storage (right next to the checked bags). And to top it off, the person who took the bag from me? The same lady that was at the counter when I checked in.
Whenever possible, I fly Southwest, where they don't screw over the customer, don't charge for the 1st or 2nd bags, and somehow STILL manage to make money!
The airline micro problem is much worse
Yes, the Legacy Airlines are bad at basic economics (they’ve lost $40 billion in the last decade) but the problem is not what your post suggests.
The bag fees do two things: (a) exploit marginal consumer stupidity—many people do make purchase decisions based on the headline ‘sale” price, without factoring in extras, fees, service, etc and (b) support marginal price discrimination between casual/leisure customers (paying low fares but more fees) and high volume frequent flyers (who don’t pay the fees). The thinking behind these fees (as with complex fares subject to revenue management) is fairly sophisticated, although this is an area where (even after the fact) it is almost impossible to prove whether a given scheme has increased total revenue. My guess is that the net gains after pissed off passengers and costly administration are positive but very small.
The real issue is that these airlines don’t understand the concept of supply and demand. There’s been serious industry overcapacity since the dot-com era (added capacity that never had any hope of earning the cost of capital). Capacity cuts have come years after they were originally needed, and haven’t kept up with subsequent damage to demand due to higher prices and the lower value offered (yes, things like these insulting fees just made the larger problem worse). The collapse in classic “full fare” business demand is probably permanent, but a year into the Great Recession, carriers haven’t really reacted. Legacy Airlines kept trying to protect market share and clung to 1980’s network notions (we have to serve every market our frequent flyers would ever want to fly to), and then prayed that some other large carrier would go bust and solve their problem for them.
The baggage fees are an overly clever adjustment to the roof of a house that has long been sinking in quicksand.
Checked bag fees are the
Checked bag fees are the silliest fees you can imagine. By that rationale, overweight people (like myself) should be charged more for airline tickets since we cost more to shuttle about. What a joke.