Are Checked Bag Fees Good for Consumers?

Gabriel Okolski makes the unpopular case that checked bag fees are good for consumers in the long-run. His suggestion is that as a result of paying for checked bags, customers will demand better baggage handling.

Now, one possible contrary data point is that Delta is the airline with both the highest revenue per passenger from checked bags and also the most baggage problems per passenger.

If Okolski was correct I would expect to see airlines reaping more revenue from checked bag fees performing better in baggage delivery.

But fair enough, perhaps this is a process where performance will improve over time and Okolski references innovations that are just now being made to make his case. So we’ll have to wait and see empirically.

Although in the current environment, with how tickets and services are priced, I would have expected that unbundling passenger travel from checked baggage would fail to raise net revenue for an airline. In fact, I would have expected bundling to be a profit-maximizing strategy the way it is for software or cable television channels.

Moving checked bags is mostly fixed costs. Once the baggage carousel is built, the trucks are purchased, you’ve hired baggage handlers, and you’ve outfitted your planes to handle checked bags, you might as well get more passengers to check bags rather than fewer either at a price which is continually falling or bundled into the overall price of the ticket. (This seems true at least as long as the price of checking the bag or the increased price of the ticket resulting from bundling exceeds the fuel cost from the incremental weight of the checked bag.)

Currently, though, there’s very little consumer information about the price of checked baggage as differentiated from the price of the ticket itself. Most websites price itineraries with the upfront ticket cost only, which is all you’re usually buying at that time, but don’t offer price comparisons of total trip cost based on the particular buyer’s likely travel experience: how many checked bags, are they an elite entitled to the bag for free, do they want to pay more for a seat or a better seat or to jump the queue? Perhaps one airline like Continental offers a free meal on the flight, while another will offer to sell you sandwich.

But there are some online pricing engines that now offer this information in order to help you compare total trip costs. Southwest is advertising that they don’t charge for checked bags, Continental is advertising that they give you a meal. So the travel providers are trying to distinguish their products, and the travel sales engines are just now slowly getting better at organizing the information that’s helpful to consumers. Providing a more useful consumer product should help differentiate airfare aggregator search sites, at least in the short run until they all catch up with the offering. But at that point there will be a much greater degree of transparency.

And we’ll be able to see whether people make their decisions based on total trip cost, whether airlines are able to differentiate themselves on the services they bundle into base price, and whether quality improves while price declines over time. How this all shakes out is an open question to say the least.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. This policy has saved me lots of money as I no longer shop while traveling. Thanks airlines for helping the economy!

  2. @Don – Just tell the merchant you need him to reduce his price so that you can pay to check the stuff you are buying. Or tell them to ship to you for free.

  3. I agree – evidence of horrendous bag service doesn’t bode well for my theory. That being said, while the scatterplot on the Economist article doesn’t appear to show any meaningful correlation, removing Delta as an outlier for argument’s sake appears to show a weak negative correlation between baggage revenue and baggage complaints.

    I’m not sure if I agree that bag processing is driven by fixed costs. One important factor is opportunity cost – carrying cargo is extremely profitable for commercial airlines, so having a passenger bag can displace any potential cargo revenue. Furthermore, at hub airports, lots of baggage flow at peak times can result in significant delay costs, which have a system-wide ripple effect. Bundling tends to occur in industries with very low marginal costs (think cable companies) – perhaps changes in cargo revenue and delays have risen marginal costs to a point that made unbundling profitable?

    I do agree that there is a lot that needs to be figured out by the airlines in this regard. This is still a relatively new revenue source for them, and it will be interesting to see how things play out.

  4. Also, if you have a branded Continental credit card, your first bag fee is waived, even if you didn’t use the card to buy the ticket. Why they don’t advertise this more heavily is beyond me. It’s like free money.

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