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.)