Should baggage fees be banned?

So the New York Times had an article on the lengths people will go to avoid baggage fees (Avoiding Baggage Fees, Feb 7). Tricks of the trade run from vacuum sealing bags to driving hours to get on a Southwest flight. Here’s what caught my eye, however:

In Congress, lawmakers in both houses have introduced legislation to force airlines to roll back some of the fees. Senator Mary Landrieu, Democrat of Louisiana, introduced a bill in November that detailed what services passengers were entitled to receive free, and mandated that airlines allow passengers to check the first bag without charge.

In December, Representative Larry Kissell, Democrat of North Carolina, followed suit by introducing a companion bill in the House. Both are confident they can get bipartisan support.

Senator Landrieu said she had no problem with airlines charging for nonessential services. “If you want to bring five bags or if you want beer or wine, you can pay extra,” she says. “The bill is not anti-airline, it’s really pro-consumer.”

So should fees for checking the first bag be eliminated?

If you’ve read this blog awhile, you should know that I have an opinion on this. It is pretty easy to write out a model in which imposing baggage fees is socially efficient. That is, imposing baggage fees leads to a better allocation of resources from the overall view of society. (Gady and I have in fact written out such a model with our colleague Achal Bassamboo.)

Of course,  social efficiency is not the same thing as being pro-consumer as Senator Landrieu purports to be. It is possible that whatever is gained from system-wide improvements is all captured by companies. There is some evidence that isn’t necessarily so with regard to baggage fees. Check out the post Flying is Cheap from Salon’s Ask the Pilot column (Aug 11, 2011). The author notes that “the average airline ticket, adjusted for inflation, fell 21 percent between 2001 and 2010, despite soaring jet fuel costs.” Now ticket prices don’t account for ancillary service charges (of which baggage fees are a big part). So it may be that the “true” cost of flying has increased as fees have been added. But …

Last year, U.S. carriers reportedly earned $5.5 billion in extra service fees. That sounds like a lot, but only a fraction of passengers actually purchased these extras. Even if we spread the total among every single person who flew, it works out to only around $6 per passenger. In other words, supplemental fees do not come remotely close to closing the gap on that 21 percent. (And contrary to what several posters and emailers have contended, the BTS data does include fuel surcharges and taxes.)

So baggage and other fees have not offset the decline in ticket prices and the total cost of flying is cheaper than it was 10 years ago. Of course, your mileage may vary. Fares almost certainly have gone up on routes where United and Continental once competed. That is, consumers may be paying more in some markets because of changes in the industry that go beyond baggage fees.

There are two other points to make here. First, while Senator Landrieu’s bill might muck up the market, it is worth noting that the Feds already mess up my social efficiency argument. Specifically, basic ticket fares are subject to an excise tax while ancillary fees are not. Hence, airlines have an incentive to favor booking revenue as coming from a checked bag fee over as coming from a ticket sale. So a pro-consumer move might be taxing baggage fees as if they were sold tickets. If one believes those excise taxes are necessary to support the FAA and the rest of the air system infrastructure, then there is a case for not letting airline duck those taxes.

Second, my socially efficiency story ignores the impact on entities outside of consumers and airlines. Let’s call those entities the Transportation Security Administration. Fewer checked bags means more carry ons and more work for the TSA. It may well be that baggage fees are too high if we worry about the extra work the TSA must now do. A solution to that isn’t necessarily giving a discount on checking a bag. Rather the TSA could play the airline’s game of charging for their service. All fliers currently pay the same security fee whether they have just a back pack or multiple carry ons. Charging for a second carry on could help balance the cost of TSA screening with the cost of airlines handling bags.