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.
[…] from the Wing has a great piece about why airlines charge fees for checked bags. One part that I found interesting that I hadn’t thought about was when airlines charge for […]