US airlines reported $4.9 billion in checked bag fees in 2018, up from $4.6 billion in 2017 according to data released by the Bureau of Transportation Statistics. That’s often taken to mean money they’re making on checked bags but it’s highly misleading.
Delta and United traded places on this list and so did Alaska (including Virgin America) and Allegiant.
American’s leadership here isn’t surprising. They’re the largest US airline and their business is disproportionately domestic (where first bag fees are most common), and their international network is Latin-heavy carrying significant checked baggage. United’s business is disproportionately international.
It is interesting though to see the drop in bag fees at Delta, generally thought to be the best-performing US airline. They also derive the greatest portion of their revenue from fare upsells, which bundle checked bags. The most successful US airline appears to be moving away from baggage fees and unbundling, they’re also the carrier (after JetBlue) testing free inflight wifi.
Meanwhile United may be driving higher checked bag fees from passengers on basic economy fares who are not allowed to bring a carry on bag onto the aircraft. Notably it may be the lowest airfares, then, driving higher bag fees.
Here’s why ‘checked bag revenue’ is not ‘how much money they made on checked bags.’
- Ticket prices used to include bags, now they don’t and ticket prices have fallen. Airlines are earning less than they would have on airfare. Clearly some people pay more, but not everyone, there’s a lot of ‘moving money around’ going on here.
- Checked bag fees also cost airlines money delaying flights and leading to less efficient use of aircraft, since passengers try to bring all of their worldly possessions onto the aircraft.
- One of the big drivers of profit here is hidden and explains a lot — tax arbitrage. Airlines are saving the 7.5% excise tax on domestic airfare when they move money out of the fare and into fees.
Hate checked bag fees? It’s the tax code’s fault. And any politician who rails against these fees without mentioning the politician’s own role in the tax code isn’t being honest.
Last year a man checked a can of beer as luggage on a Qantas flight.
Are Airlines Really Taking in More Money When They Charge Checked Bag Fees?
Tickets used to come with checked bags. Now most domestic tickets include transportation with checked bags sold separately. Passengers checking bags aren’t suddenly willing to spend more for air travel than they were before.
Some passengers were willing to spend more than they were being charged of course, so targeting them with higher prices raises more revenue. However bag fees tend to fall heavily on the most price sensitive consumers (non-elite leisure travelers).
For many customers, willing to spend as much as before, fares just fall and the total trip cost remains the same. Indeed, airfares have been falling since checked bag fees were introduced over a decade ago.
Some of the checked bag fees represent revenue at the margin the airline wouldn’t have earned if they were still bundling bag fees in with fares, but certainly not most. The point is this isn’t all new revenue to the airlines. Indeed Southwest Airlines even thinks they make more money not charging checked baggage fees. (Their first two checked bags are free, but they still earned $50 million in additional bags and heavy bags.)
Checked Bag Fees Impose a Cost on Airlines
Checked bag fees push more bags into the cabin. More carry on bags slow down the boarding process. And slower boarding means less efficient use of aircraft and more delays, which can cost airlines nearly as much as they’re taking in in bag fees.
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 — and 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 forward cabin 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.
A few minutes here and there is a big deal to an airline, Southwest’s CEO claimed “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’s because you don’t just push your schedule later into the night, you have to schedule flights when passengers want to fly and at times they’re most
Blog reader Hemal G checked deoderant onto an American Airlines Charlotte – Newark flight because he wanted to use his free checked baggage allowance.
Checked Bag Fees are Tax Arbitrage
There’s an excise tax of 7.5% on domestic airline tickets. That tax doesn’t apply to fees. So by moving bag fees out of the base fare airlines pocket a huge tax savings.
If $4.9 billion would have otherwise been part of airfares (it wouldn’t have been, and some of the checked bag fees are from international flying which doesn’t incur the excise tax) that would mean $368 million in tax savings for US airlines in a single year. It’s reasonable to think the tax savings is half that, however.
Ultimately checked bag fees themselves aren’t the big business that simply summing up the charges from an accounting standpoint would have you believe.