Are Checked Bag Fees Actually Too Low?

Priceonomics says that hated checked bag fees are actually too low.

  • “Space in the cargo hold is valuable to airlines, and passenger bags, which receive priority over other packages, can bump cargo from a flight and cost airlines money.”

  • The market price to ship stuff is higher than checked bag fees: “baggage fees are low compared to cargo prices.”

I’m not sure whether checked bag fees are ‘a good deal’ or not, but I don’t think airlines are underpricing and leaving money on the table. Businesses may be more willing to pay higher prices to deliver high priority goods in time, but the median leisure traveler may not be. The business of shipping personal belongings is likely very different than shipping commercial products.

But the argument that passenger bags are trading off with lucrative cargo, and thus passengers should be encouraged through higher checked bag fees to check less is likely flat wrong.

  • Domestic flights don’t carry a ton of cargo. Since air cargo deregulation in 1977 (a year before commercial airline deregulation), the market has shifted largely to operators like Fedex and UPS. Soon we may even see Amazon competing in this space.

  • Airlines actually do carry quite a bit of cargo on certain international flights, while they carry very little cargo on domestic routes. Priceonomics acknowledges that airlines use only 37% of their domestic cargo capacity. This suggests that there isn’t a tradeoff between checked bags and cargo and thus airlines should charge more for checked bags in order to get people to check less and preserve space for cargo.

This leads to a puzzle. Priceonomics asks why checked bag fees aren’t as common on international flights as domestic ones. They conclude, “The logic and incentives of checked bag fees are all wrong.”

In fact, the answer is actually a simple one.

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.

(HT: Allie T.)

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, 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. It’s why I’ve long thought that the airlines are doing it the wrong way – give everyone one free checked bag and charge for any carry-on larger than a small laptop bag or briefcase. Boarding is much faster (especially full flights), fewer full overheads, and people are paying for the convenience of not having to wait at baggage claim.

    Spirit comes closest to this by charging more for a carryon than a checked bag.

  2. A friend of mine who is a gate agent for DL has always said that they should allow the checked bags to go free and charge for the carry-on luggage. He is always irritated how much longer it takes to board because of people bringing on their luggage.

  3. @Ben, I’ve never flown Spirit, but I imagine that charging for carry on bags (particularly of different sizes) probably takes up more time than it saves. At what point do you pay?

    If it’s at check-in, you can just have somebody stand elsewhere with your bag (unless you’re given a separate baggage ticket which you use to bring your bang on board … but what if people lose the ticket, they’re not going to want to pay twice and that takes up a lot of GA time to verify everything). Also does that mean taking up check in desk space with carry-on sizers? You’re also inevitably going to slow down the check in line which people can’t stand…

    If it’s at the gate, that sounds like a recipe for the slowest boarding process in the industry. First the GA has to eyeball it to see if it’s potentially chargeable size-wise, then you have to put it in the sizer, argue about the wheels, handle, strap, etc, then charge the person? No thanks…

  4. The study seems to ignore the fact that the airlines are also carrying passengers, and there is a profit associated with them as well. If the airlines price the bags higher, the total travel price is higher which means they’ll carry less passengers. It’s not nearly as simple as carry less bags and more cargo, and everything else is constant. It seems airlines have found a way to charge for bags, which changes consumer behavior to consolidate their bags, which frees up space for the airlines to carry more cargo, all while still filling their planes with passengers. I bet they’ve done much more sophisticated analysis incorporating the elasticity of passengers than just comparing shipping charges to bag fees.

  5. Not only that, I believe the bulk of domestic cargo the airlines carry are USPS mail. I’ll bet the USPS doesn’t even remotely pay close to the standard cargo rate.

  6. Frequent flyers can do either option (carry on vs. check) and consistently opt to carry-on. Also, the fact that overhead space consistently runs-out suggests that there is too much demand for carry-ons.

    Perhaps the solution is compulsory overhead storage assignments (at a fee). Boarding would be more orderly, there wouldn’t be a competition for overhead space, and the airlines get their money.

  7. @Justin:

    1) Fewer people will carry on if they know they can check it for free vs a cost to carry on.

    2) Tie it to the boarding pass. Have a different ‘ding’ when it is scanned. For a backup, have CARRY-ON printed on the boarding pass if purchased beforehand, or print out the reciept if at the airport.

    3) Practically every check in desk already has carry-on sizers, they just have to add the personal item sizer to it. Here’s Spirit’s:

    4) Many airlines already have oversized carry-ons checked at the gate (and collecting the fee). Here’s a story about United starting it last year:

  8. I really wish they would charge for carry-ons. There’s always so much drama upon boarding. And it places a load on FAs who are asked to play Tetris.

  9. Cargo can be more profitable than passengers plus bags. I was told, by a United employee, that United dropped the SEA-ANC service (which was operated by a DC-10) because there were too many passengers and therefore they were not able to carry all the cargo they could have booked (that this was an “international” route was probably also a factor). United then ran the Worldwide Cargo DC-10s until that operation was disbanded.

  10. @Justin,

    I just flew Spirit, they charge for the carry-on back at check in. Sure, you could hide your bag at check in, but if you don’t have a carry-on bag on your boarding pass, they’ll charge you at the gate. If you lose your boarding pass, you’re going to need to get a new one before they will let you board the airplane, regardless of the airlines.

    The boarding went very smoothly, as people are trained/briefed in advance, and there were very few carry-on bags, as checked bags are cheaper. Yes, they have a separate “personal bag” sizer, but I didn’t see them enforcing it tightly- just if you had a roller bag with wheels, you’d better have paid the fee…

  11. Agree with the others regarding carry on bags, it’s a pain in the ass watching the boarding process due to too many people bringing oversize carry on bags aboard. I wish the airlines would enforce the carry on size limits more. Charging for carry ons would help create more space and probably get flights loaded/offloaded a lot faster.

  12. Absolutely agree that carry-on bags are the worst part. PITA boarding with everyone trying to get big carry-ons on . One checked bag should be free and the carry-on should be charged.

    However, it’s what Americans want. They hate going to baggage claim. Alaska is pandering to this by retrofitting their planes with much bigger overhead carry-on bins.

  13. There’s also the related revenue stream of people paying for priority boarding. This wouldn’t exist outside the context of everyone wanting to carry on a large roller bag. What other reason is there to pay for this other than making sure you get your bag in the overhead bin?

  14. @James Ultra low cost carriers are a different beast, they grew in Europe first and spread to the US a la Spirit and Frontier. Their goal is to drive down base price and where carry on bags are also charged if they’re too big to fit under seat. Major carriers then followed suit, but not to the degree that US airlines have, in order to offer prices competitive with those ultra low cost carriers (eg BA sells ‘hand baggage only fares’).

    The tax issue doesn’t fully explain the existence of checked bag fees, but why it makes sense they are predominantly on domestic rather than international travel. And why they persist in the US as an equilibrium across the board even for ‘full service’ airlines.

  15. Oh good grief.

    If the airlines’ standard setup for “free” checked baggage included a zillion-dollar payout for lost baggage, and half-a-zillion for misdirected baggage that didn’t make it to your destination with you, then sure.

    Otherwise–and everyone who’s ever had lost baggage will understand–there’s a huge, though hard to calculate, value premium on knowing that if you get to your destination alive the stuff you wanted to have there is guaranteed to be with you.

  16. Alaska is pandering to this by retrofitting their planes with much bigger overhead carry-on bins.

    One man’s “pandering” is everyone else’s “paying attention to the market”.

    Kudos to Alaska!

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