Some Fliers Hate Baggage Fees, But They Work

SMITH BRAIN TRUST -- Customers have kvetched about airline baggage fees since American Airlines started charging people for even one checked bag in 2008, but the practice has swept the industry. Last month, JetBlue started charging passengers for luggage, leaving Southwest standing alone as the only company to let all passengers check a bag or two without an extra charge. Baggage fees now account for 2.4 percent of all airline revenue, up from .55 percent before 2008.

Complaints about nickel-and-diming aside, research from the Robert H. Smith School at the University of Maryland suggests that the fees have not only improved the bottom lines of airlines but have also helped them better their on-time records (most likely because there are fewer bags in the hold to move from plane to plane). What's more, baggage fees are associated with fewer customer complaints about lost bags, with no evidence that other kinds of complaints have risen.

Martin Dresner, chair of the Smith School’s department of logistics, business and public policy, explores the dynamics of baggage fees in two recent papers. One article finds that passengers are less sensitive to increases in baggage fees than to equivalent price increases in fares. Raising prices in any way causes some customers to leave — but fewer customers walk away when baggage fees go up. That "implies that carriers may be able to increase total revenues by substituting baggage fees for higher fares," write Dresner and his co-author, Davide Scotti, of the University of Bergamo.

Dresner and Scotti looked at roughly 1,000 U.S. airline routes — each leg of a round trip counted separately — from 2007 through 2010. In each case, at least one airline that charged baggage fees competed with Southwest, which does not. The average fare on these flights was just under $200. It turned out that a $1 increase in baggage feels led to a .01 percent decrease in the number of passengers on a flight. In contrast, a $1 increase in a base fare inspired a much larger, 3.3 percent, decrease in passenger volume. For the typical flight examined, that meant increasing baggage fees by $1 led to the loss of less than one passenger and increasing fares by $1 cost seven passengers. 

 Shouldn’t a one-dollar increase have the same effect, regardless of what it's called? There are a number of reasons why not. Customers may be more tolerant of fees that appear optional, even if they end up paying them. But less economically rational influences are at work, too: Travel sites often post only the base fare, introducing baggage only fees after a customers is well along in the process of booking a flight. “You’ve already made up your mind to fly a particular carrier," Dresner notes, "By the time the baggage fee notice appears it’s kind of after-the-fact."

Airlines also benefit from baggage fees because they are exempt from certain taxes that apply to fares.

In general, economists applaud so-called "cafeteria pricing" — where passengers pay for only the services they use, like baggage handling — because it aligns airlines costs with the prices charged. 

But what about the effect of baggage fees on airline performance and passenger satisfaction? On the one hand, fewer bags in the cargo hold should mean few lost luggage pieces and smoother flight connections. On the other, all those extra carry-on bags in cabin can lead to squabbling over space, delays when bags that are too big get rejected by flight attendants, and slower exits from planes.

In a second paper, Dresner, Scotti, and a third author, the University of Bergamo's Gianmaria Martini, examined those issues, looking at federal data about complaints about baggage, overall complaints and on-time performances by airlines from 2004 through 2012.  They found that airlines that introduced baggage fees saw fewer complaints about lost baggage (even after controlling for generally improved performance in the industry). And the number of delayed flights decreased by about 1.5 percent.

On-time performance improved when the fees were first introduced, and then improved again when many airlines raised fees in 2010. Overall, "The imposition of the baggage fees has contributed to improved operations and increased customer satisfaction for the airlines," the researchers write.

What about Southwest? It may not be acting optimally from purely economic perspective, Dresner says, but it can use its simpler pricing structure to build a distinctive brand — especially now that it stands alone on this issue.

"The Impact of Baggage Fees on Passenger Demand on U.S. Air Routes," by Davide Scotti and Martin Dresner, is forthcoming in Transport Policy.

"Baggage Fees, Operational Performance and Customer Satisfaction in the U.S. Air Transportation Industry," by Martin Dresner, Davide Scotti, and Gianmaria Martini, is a working paper.

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