Back in October I explained why I was surprised to see airlines increasing checked baggage fees, that in fact I would have expected higher ticket prices and free checked bags to be a profit maximizing equilibrium — an equilibrium that more or less existed, so the current shift towards unbundled pricing was quite surprising:
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.)
But it took this news to hit me over the head with a strong reason why airlines prefer separately charging for checked bags rather than including them in the ticket price (hat tip: Wandering Aramean). The IRS has ruled that checked bag fees are not subject to the 7.5% excise tax that is imposed on tickets.
Generally, items that are taxable are those paid as a condition to receiving air transportation, according to the ruling.
So the airlines pocket the full checked bag fees (of course, their profits — when airlines finally make any which aren’t offset by carryforward losses, are still taxable). Including the bag fees in ticket price subjects the same revenue to 7.5% tax.
The next time you’re forced to pay to check your bags at the counter, consider blaming the government. At least partially.
[…] incentives that are set by the IRS. As airlines expert Gary Leff points out, checked bag fees are apparently not subject to the 7.5 percent excise tax Washington has imposed on airfares. This gives all airlines an […]