The Real Reason Airlines Charge Checked Bag Fees.. And It’s Not What You Think.

Vox thinks airlines should charge for baggage by weight rather than by the piece because of fuel costs. Much of the world actually does set baggage limits and charges by weight. So if weight makes more sense to economize on cost and attach revenue to cost drivers, why doesn’t the US follow suit?

Megan McArdle finds some problems with this approach.

I think it would be helpful here to really understand why airlines are charging bag fees. Sure, there’s unbundling. But it’s not just about unbundling and charging customers more. A key driver in domestic checked baggage fees is tax arbitrage. Airlines want to get a portion of the transportation cost out from under the base airfare so that it is not subject to the government’s 7.5% excise tax on tickets.

At some level it doesn’t matter what pricing mechanism is used, as long as there is one.

That’s because the 7.5% federal excise tax on domestic tickets applies to airfare and not to ancillary services. So as long as airlines are able to unbundle, they get a portion of the transportation cost out from under that tax.

There’s an argument to be made that – contrary to conventional wisdom – charging bag fees is actually a wash for airlines except for this tax savings. I am not persuaded that it’s quite a wash, but the net revenue from bag fees is certainly not what airlines say that it is.

Let’s take an example of United which reports generating about $700 million a year in checked baggage fees.

  • That pushes more bags to the gate. Gate checked bags add a few minutes to the boarding process (passengers try to find overhead space, then wind up going back to the front of the aircraft to gate check, plus 1-2 minutes to move gate-checked bags to the belly of the plane).

  • Extra bags in overhead bins add a minute or two to deplaning.

  • Elite frequent flyers (frequently with aisle seats) board first to ensure they get bin space. Boarding aisle seats first slows down boarding — those passengers get up to let middle and window seat passengers into their row and then have to sit back down while the rest of passengers are held up getting to their rows.

Even if bag fees add just a few minutes to boarding each aircraft, that’s a huge loss to the airlines. From Southwest:

It would cost us approximately 8 to 10 airplanes of flying per day if we were to add just a couple of minutes of block time to each flight in our schedule.

Remember that airlines are trying to optimize schedules for connecting flights, they don’t just push each flight later in the day. Customers want certain times, their competitors fly certain times, there’s a scheduling inefficiency that derives from small delays. And United has twice as many planes as Southwest so the effect is even bigger.

With some very reasonable assumptions about average fare and load factor, 16 to 20 aircraft mean about $700 million worth of revenue per year, which happens to be what’s being brought in from bag fees.

It’s not really a wash, but there’s a real economic loss that trades off with charging checked bag fees.

It’s an admittedly stylized example, things aren’t actually this simple. But it’s certainly illustrative that the bulk of the value to the airline from bag fees come from savings on domestic ticket taxes… tax arbitrage not passengers.

Shifting $700 million out of ticket revenue and into ancillary revenue saves over $50 million in taxes.

Incidentally, international tickets – which do not have this 7.5% excise tax – for the most part still include a free checked bag.

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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  1. So the airlines charge checked bag fees for financial reasons?

    Yeah that is what I thought. That’s what EVERYONE thought. Another *eyeroll* worthy headline from you.

  2. Unknown to travelers perhaps, but not to those of us engaged in trying to reform the FAA and its funding. The perverse effect of this is that it discriminates against airlines who do not unbundle as much–Southwest and JetBlue–who pay more for aviation services because more of their revenue is taxed.

    In recent years, there have been many policy and budgetary fiascos that have caused reduced services to passengers and delayed investments in the capital accounts of the FAA–including airports and air traffic control. If baggage fees and ticket change fees had been taxed we would have had in the range of $500 million more to devote to FAA services.

    Given the increase in airline unbundling, this probably will only grow if either the loophole is not closed or we don’t reform the FAA and its programs.

    Steve Van Beek

  3. Ditto on the full RSS feed.

    “It would cost us approximately 8 to 10 airplanes of flying per day if we were to add just a couple of minutes of block time to each flight in our schedule.”

    That doesn’t make a lot of sense. Especially for an airline like Southwest, which is mostly domestic and mostly consists of planes making lots of short hops every every day—adding or subtracting a few minutes to each segment wouldn’t necessarily add or subtract one segment every day.

    While fleetwide, the number of flying minutes lost every to every segment may add up to the equivalent of 8-10 airplanes of flying time, they’re diversified across the entire fleet and can’t be coalesced into anything meaningful.

  4. Charles…I for one was educated by this post. If you hate so much, why do you visit this website?

  5. It’s hard to imagine the inefficiencies that must prevail in order to have $25/bag (and more for 2+ bags) become a break even proposition.

    They could pay baggage handlers $25/hr, and for the first 30 minutes, he could take my bag from my car and personally walk it to the plane and place it on board. Then somebody else on the other end, also in no more than 30 minutes, could personally retrieve my bag and escort it to me calling me on my cell phone to find out where I am so he can bring it right to me instead of waiting at a belt.

  6. If the airlines REALLY want to avoid the tax on fares just make every ticket $1 and charge a “boarding fee” of $600:)

  7. If the legacy airlines cared about turns they would not pad flight times nor implement earlier/longer boarding times.

    But they have done both. So no, they don’t care all that much about turns. Better to rake in the bag dough and let the passengers fight over overhead space for 45 minutes.

  8. the airlines don’t pay the excise tax out of their own pocket … it’s entirely passed onto the customers

    what I want is stricter controls of carry on baggage sizes. I’ve seen people bring backpacks sufficient for 2 months in southeast asia onboard, and yet the gate agents let them through, which end up slowing down the whole lane

  9. Your argument neglects the fact that the bag fees were never built into the ticket price to start with. It’s not like ‘poof, now we’re breaking them out as separate bag charges’ they were just added on TOP of the base ticket price to get, you guessed it, more money. The analysis is really quite simple – they realized they could charge more, and they did.

    Echoing the request for restoring the full RSS feed. Don’t be like the airlines and put profit (and clicks) before all else!

  10. I seriously doubt that the Airlines after being in business (not necessarily any current airline just commercial business in general) for approximately 100 years (reference St. Petersburg-Tampa Airboat Line) finally came up with an idea to move part of its fees to non-taxable buckets. It is far more likely that they had been doing some form of this as soon as the federal tax was enacted. This is finance 101.

    Further, I highly suspect that when the pricing for bags was introduced that there were pricing models created, trials run, etc. to see what the customer would accept. This does not directly correlate to the cost of providing the service.

    Now it may be true that legislation was introduced to allow more ancillary services to not be included in taxation or maybe just a loosening of what could be considered as such. Of course, the government could change their mind on this at any time.

    By the way, if this was all about tax avoidance and if this is really new, then the government would be leaking revenue and would look to counter balance that loss. I have not seen any such press on such activity.

  11. I know readers may not like this but back in 2007 when the liquid ban went into place and each person was required to check their bags in the US for approximately 10 days I flew twice and the entire process (security screening, boarding, deplaning) took such little time. I asked a flight attendant what her experience had been. “Our one-time schedule is flying through the roof” was her reply.

  12. I’m not in a position to quantify it, but I’m betting the fees for checked baggage cause lots of people to pack more efficiently and take less stuff along, resulting in lower weight, lower fuel costs.

  13. That’s not the complete picture. The other reason they started bag fees is because Americans have gotten fatter which has cost them $ millions in fuel due to the ever increasing weight. The airlines can’t charge you for your waistline so the other way to get the weight down is to charge baggage fees.

  14. “The Real Reason Airlines Charge Checked Bag Fees.. And It’s Not What You Think.”

    “This One Weird Thing Airlines Do To Your Ticket!”

    “A Woman Got Drunk On A Flight In Europe… You Won’t Believe What Happened Next”

    “I Hold My Readers In Contempt”

  15. It’s an interesting sentiment. I do think that there are a lot of negative externalities not captured by whatever MBAs conceived bag fees, as you point out, about the problems it leads to with folks trying to carry on more luggage. It doesn’t take a rocket scientist to see the effects — compare the boarding process on UA 737 compared to a WN 737 any day of the week. Earlier this month I was delayed on UA when they decided they had to gate check every group 5 person’s carry-on. Of course the printer was overwhelmed and the bag tagging fell behind, then the bag loading fell behind, then the paper work fell behind — oh, then, because they had boarded everyone before they could print their bag tags, they had to go find everyone on the plane to give them their bag stubs to make sure the final destinations were all right. Next thing you know we are 30 minutes late, and if you boarded in group one, you have been waiting on the plane for more than a hour. Flyer Friendly? Not much.

  16. I’m not so sure it’s the taxes — the airlines don’t seem to have a problem sending that bill straight to the pax. Likewise, I don’t recall seeing ticket prices drop due to the new bag fees. It’s a cash-grab pure and simple.

    Unfortunately, it’s more a trojan horse than cash cow, as you pointed out with the inefficiencies caused in boarding the aircraft, not to mention pissed off pax. It’s a large reason my company generally tries to put people on B6 first, legacy carriers if a B6 flight won’t work.

    I’ve not seen any price drops due to lower fuel costs lately either.

  17. Several facts are ignored by this “analysis”. First, most airlines’ elite flyers of one sort or another get at least one bag checked without a fee. (I’ve checked both United and Delta, as I’m silver on both, and they do. I don’t know about American.) So, that should not provide additional revenue. Second, if there were an excise tax on bag fees, it could and likely would be passed on directly to the consumer. So, the $25 bag fee would just become $26.88.

    The real reason the airlines levy a bag fee is because the general public will pay it. If the airlines’ best customers don’t pay it, (elites and branded credit card holders do not pay the fee (at least for the first bag), only the general public who occasionally travel will need to pay it. It probably accounts for about 10-12% of total revenue. According to Delta’s most recent Form 10-Q (April 15, 2015) filed with the SEC, Delta would have had positive net operating revenue without it.

    By the way, looking at the Delta 10-Q, I found even more interesting the fact that capacity (measured on an ASM – available seat miles – basis) on Delta increased by 7% on a quarter over quarter basis. I haven’t seen many open seats, at least on the routes I fly. Where is it going?

  18. The real bonus to the airline is with regard to baggage handlers. When
    You shlep your own bag you become the unpaid baggage handler. You’re also not receiving employee benefits, nor are you covered by workman’s comp when you injure your back/neck/shoulder. That’s huge.

    Also, less baggage in the hold allows for more commercial cargo.

  19. since airlines are greedy like banks is why my wife and I don’t fly but rarily when is necessary, it’s like being in a jungle, you don’t know what’s out there. it’s all $$$$$$$ for them called the jewish god! and since they’ve been charging for baggage it really sucks now. if your a business traveler it’s a tax write off but leisure travel you get burned.

    we need a new dot and faa

  20. I’m not sure if everyone remembers this but it was when gas prices increased to $4.00 plus a gallon that the airlines said that they had to institute a baggage fee to offset the increase in fuel cost. Now that the fuel cost has come down, they are holding onto the additional revenue. Try and ask an employee why the fees have not gone away. I guarantee you will get a different answer from everyone you ask.

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