The Logic of Baggage Fees

Felix Salmon today excerpts an interesting little piece on checked baggage fees from last year:

Baggage fees are the kind of shortsighted things that are killing us," the top U.S. executive of a European airline told me recently. "The accountants we have are great at tracking the 'ancillary' revenue we generate whenever we invent something like a baggage charge. But they have absolutely no way to match that against our potential overall revenue exposure if travelers book away from us. And no one holds them accountable for their one-way accounting. It's a scandal."

"Scandal" may be a little strong, but there's no arguing this airline executive's basic point. Ever since airlines began hiving off traditional services like in-flight meals, seat assignments, and checked baggage from the basic airfare, the carriers have carefully tracked the growth of this secondary revenue. But they never correlate it against their overall revenue picture. And U.S. legacy carriers have studiously ignored the fact that Southwest and JetBlue, which generally avoid what is now called as a la carte pricing, have gained market share, won the most customer kudos, and, not coincidentally, been the most consistently profitable.

Consider the odd, but entirely trackable, evolution of baggage fees. For decades, most carriers on domestic routes permitted customers to check at least two bags free. That changed during the first quarter of 2008, when United Airlines introduced a $25 fee for most coach passengers checking a second bag. The other legacy carriers--American, Continental, US Airways, and the now-merged Delta and Northwest--quickly matched. By 2008's second quarter, American Airlines announced a $15 fee for checking the first bag. That fee was quickly matched too, not only by the legacy lines, but also by smaller carriers such as Alaska Airlines and AirTran Airways. The only holdouts: Southwest Airlines, which has clung tenaciously to its two-free-bags policy, and JetBlue Airways, which still permits all passengers one gratis checked bag.

By the time the airlines had released their 2009 first-quarter results, a pattern was obvious: The carriers that had most quickly embraced checked-bag fees had suffered a massive decline in revenue, anywhere from 9 to 21 percent compared with the first quarter of 2008. As I reported contemporaneously on my own website, the airlines that didn't ding customers for bag fees had much more modest declines. The pattern was there for anyone to see.

But when the U.S. Bureau of Transportation Statistics (BTS) announced last week that airlines generated $669 million in bag fees during the second quarter, no one bothered to compare the statistics to the carriers' second-quarter revenue. All you heard about was the 275 percent year-over-year increase that the revenue represented. All you got was quotes about how carriers had finally found a reliable new revenue stream or wire-service dispatches claiming that passengers had "accepted" bag fees.

Now, I find it entirely unsurprising that businesses might have short-sightedly failed to account properly for the loss of customers due to checked baggage fees--I doubt they entirely failed to consider the possibility, but they could well have decided it wasn't too big a deal. But this article suffers from a similar failure to control for confounding factors.  Essentially his argument is that the airlines that made the most from bag fees suffered the biggest declines in revenue.  But of course, causation might go the other way:  the airlines losing the most revenue might be the ones that are most gung-ho about baggage fees.  Moreover, the two outliers that didn't charge the fees are discount airlines Southwest and JetBlue; it's not exactly surprising that they held up better than the majors during a downturn.

As I say, companies make short-sighted decisions all the time, and I have no trouble believing in this one--but I'd need better evidence.