Do Airline Bag Fees Really Increase Profits?

In 2008, American Airlines CEO Gerard Arpey decided his airline was going to become the first to charge a first-bag-checked fee to its customers. Thus began a dubious trend in the airline industry towards charging significant fees on top of the price for tickets. Up that point most fees were nuisance fees intended to discourage certain types of services or to offset the cost of those services. But American felt it had no choice in the face of being squeezed at the top end by Internet-driven ticket price competition and at the bottom end by $150 oil. The move elicited gasps from market watchers and sighs of resignation by airline customers.

“I’m constantly surprised at the creativity in the wrong direction of airline management,” said Claes Fornell, a professor of business administration at the University of Michigan, as quoted to the New York Times.

United Airlines, never one to leave the competition in front in terms of annoying its customers, quickly adopted the bag fee. When both airlines reported their results to Wall Street, they broke out their bag fees as an income stream and crowed at their collective genius in raising revenue without raising ticket prices. Analysts quickly piled onto airlines that had not yet adopted the bag fee, writing diatribes how each were foregoing earnings per share in the name of misguided altruistic behavior toward their customers. By 2009 most legacy carriers wilted under the pressure and started charging a bag fee. And in the years since most airlines have significantly raised their bag fees.

As an interesting aside, American Airlines went into bankruptcy in 2011 and Arpey was pushed out.

The question is: do bag fees really increase profits for airlines?

There are few good reasons to charge a checked-bag fee for all bags. 1) Less bags mean less fuel on a flight, and therefore less cost; 2) Less bags checked mean less labor needed to move those bags and less of a chance of bags being lost or damaged; 3) Service should improve with less bags to worry about when loading an airplane and shorter check-in lines that have less bags to be tagged.

But the question is not whether discouraging baggage use incrementally benefits the airline. Rather, the question is whether bag fees really raise revenue and increase profits. In one word—no.

For the average airline customer, there is really only one price to fly an airline—the total price incurred to do so after all bag fees, food fees, ticket prices, service fees, and all other nuisance fees. Splitting the price to fly into components (e.g., a ticket face price, airport taxes, fees, and other price boosters) has no economic impact to the airline or the customer. Conceivably the first time a novice flyer enters the process it might be possible to bait-and-switch them into a higher price than they would have received from a competitor. But over the course of time this effect is negligible to the airline’s bottom line.

Airlines are not the only organizations to adopt the practice of charging fees in addition to a price for base service. Colleges and universities now tack on large fees to tuition and board. Governments bolster their coffers with fees without raising taxes. Banks charge overdraft and late fees to offset dwindling interest income. Auto dealerships charge steep “processing” fees after settling on the price of a car. Auto mechanics charge a 10% waste and supplies fee on top of their hourly labor rate. And the list of perpetrators goes on and on.

So what is the message here? Is the U.S. consumer gullible? Or are companies and organizations myopic and stupid? It is probably a bit of both.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s