The Spirit of baggage fees

Spirit Airlines has  made some news this week by announcing some tweaks to their fee structure. Most notably they are increasing the fee for carrying on a bag (they are the only US airline that charges for carry ons unless you consider charging for earlier boarding a form of charging for a carry on). If you carry on a bag and don’t pay for that until you hit the gate, it will set you back a C-note (see, for example, Spirit Airlines to charge $100 for late carry-on bags, Marketplace, May 4). I wasn’t feeling compelled to comment on this until I read Saturday’s Heard on the Street column (One-Hundred-Buck Bag Shows the True Spirit of Air Travel, Wall Street Journal, May 5). It noted the following about Spirit’s $100 fee.

Rather than being a big money-spinner, though, the increased fee is more likely a form of deterrence. It will be an incentive for passengers to pay their fees ahead of time, says aviation consultant Bob Mann of R.W. Mann & Co. This reduces costly delays caused by bottlenecks at the gate.

This is basically the argument that Gady and I make (along with our colleague Achal) in our paper about baggage fees (although we focus on checked bag fees): If providing an ancillary service like checking a bag or providing space in an overhead bin imposes a cost, it is best to charge for it. The goal in charging for the ancillary service explicitly (over bundling it with the main service) is to reduce use of that service (relative to bundling). For more, see here and here.

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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?

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American Airlines will pay you to check a bag

OK, so my headline is a little misleading. By “pay” I mean give you 500 bonus frequent flier miles and by “you” I mean elite members of their AAdvantage frequent flier program who happens to be traveling from Boston. Here is how they explain the offer:

Through November 22, 2011, American Airlines will offer AAdvantage® elite status members the opportunity to earn a minimum of 500 AAdvantage bonus miles for checking bags on flights departing Boston Logan International Airport (BOS).

Earning the bonus miles is easy – simply visit a BOS Self-Service Check-In machine on the day of your departure and follow the normal steps to check-in with bags. Check at least one bag under your own name to earn the bonus miles, which will automatically post to your AAdvantage account five business days after you have completed the travel associated with your itinerary. As a reminder, all AAdvantage elite status members are entitled to check two bags free of charge (within current size and weight limits) in addition to earning the bonus miles with this special offer.

There are, of course, a number of caveats (such as the bonus is only for your first bag) but they are, in effect, paying a select group of passengers an incentive to check bags. This strikes me as rather crazy; I can’t quite figure out what they hope to accomplish with this.

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Are baggage fees good for society?

A different sort of post today. This one is about a research paper that Gady and I recently finished with our colleague Achal Bassamboo. The paper is called “Would the Social Planner Let Bags Fly Free?” It deals with ancillary services — things like checking bags or printing boarding passes that service firms provide in conjunction with their main service (i.e., flying a person in the case of an airline). What is notable about this paper is that it is the first paper to follow directly from this blog. In essence, the paper compare the relative merits of two quotes that have appeared here in The Operations Room.

The first quote is from Michael O’Leary, the CEO of Ryanair and it appeared in something Gady wrote. (It should be clear from this why we refer to this paper as Fee to Pee.)

Like, paying for checked-in bags: It wasn’t about getting revenue. It was about persuading people to change their travel behavior—to travel with carry-on luggage only. But that’s enabled us to move to 100% Web check-in. So we now don’t need check-in desks. We don’t need check-in staff. Passengers love it because they’ll never again get stuck in a Ryanair check-in queue. That helps us significantly lower airport and handling costs.

Now we’re looking at charging for toilets on board—not because we want revenue from toilet fees. We’d happily give the money away to some incontinent charity. What it means is, if by charging for toilets on board, more people would use the toilets in the terminals before or after flights, I could take out maybe two of the three toilets on board, add six extra seats and reduce fares across the aircraft by another three or four percent.

The second quote appeared in a post I wrote about Spirit Airlines starting to charge for printing boarding passes at the airport (which Ryanair was already doing). It is from Ben Baldanza, Spirit’s CEO.

“We believe it is important to let customers decide what is of value to them,” said Ben Baldanza, Spirit’s chief executive. “Imagine if you went to a restaurant and all the meals came with dessert. That’s great if you like dessert but, if you don’t, you would prefer the option to pay less for the meal and not take the dessert.”

Note that these are fundamentally different rationales. Ryanair’s O’Leary is saying fees are shaping behavior to lower costs and those saving can be shared with customers. Spirit’s Baldanza is basically talking about segmentation. He’s creating a pricing menu that may give some customers a break but is mostly going to extract extra cash from customers who value or need ancillary services.

So do either of these explanations hold water?

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Beating baggage fees

As long-time readers of this blog know, baggage fees are one of my favorite topics. Now from England we have an innovative way of beating the system.

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Paying for a boarding pass

Airlines fees remain an endless source of fascination. The word now is that Spirit Airlines will be charging five bucks if they have to print a boarding pass for you. This is offset by an across the board $5.00 reduction in fares. That is, if you win if you can remember to print your boarding pass before you head to the airport. (The astute reader will note that most passengers travel round trip and hence are out five bucks if the have to print two boarding passes.)

Here is the NBC News report on the move.

The related Wall Street Journal story (Spirit Air’s New First: Levying Fee for Passes, Jun 22) has the following chestnut.

“We believe it is important to let customers decide what is of value to them,” said Ben Baldanza, Spirit’s chief executive. “Imagine if you went to a restaurant and all the meals came with dessert. That’s great if you like dessert but, if you don’t, you would prefer the option to pay less for the meal and not take the dessert.”

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Airlines are doing better with bags

Here are some interesting numbers from the Wall Street Journal (Better Odds of Getting Your Bags, Dec 2).

So airlines are doing a much better job of getting checked bags where they are suppose to go. Of course, there a certain he’s-fast-for-a-catcher ring to that.

The problem of lost luggage, of course, is far from solved. Even with the improvement, more than 1.5 million bags didn’t show up on carousels as scheduled on domestic flights through September this year, according to the Department of Transportation.

A million and a half bags sounds like a lot but it is fully 900,000 less than were lost in the same period in 2008. The question then is what is behind this improvement.

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Baggage fee eye candy

Given how much we have posted on baggage fees, it is impossible to pass up this bit of Wall Street Journal eye candy (With Low Fares, Furor Over Carry-On Fees Wanes, Oct 14). Click to enlarge.

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Airlines and lines

So I have been traveling this week (as has Gad) which has limited time for writing. It has, however, allowed for a fair amount of time to think — and experience — airports and lines. Coincidently, the Wall Street Journal’s Middle Seat column discusses how airlines are charging for the privilege of not waiting (A New Low in Airline Fees: $10 to Cut in Line, Jun 24). Most notable here is American’s recent announcement of a new fee that lets customers board in Group 1 — which puts passengers after those with high frequent flyer status but before the rest of those in coach. Why are they doing it? Because people are willing to pay up for priority.

“You avoid congestion. People like that. People don’t like standing in line,” said Daniel Garton, executive vice president for marketing at AMR Corp.’s American Airlines.

It should be noted that American is relatively late to the party on this one. Gady posted on Southwest’s early boarding program last fall and the WSJ article has a nice side bar on the various sorts of programs different firms are offering. What surprises me is how cheap American’s fee is — $10 lets you get on early even if you don’t sit at the back of the plane. I suspect that they will raise this before to long. I say that because people will soon come to see this as a fee for carry-on luggage. Spirit caught all sorts of grief when they announced that they were going to impose such a fee — senators held news conference and threatened legislation and so on. But American is doing effectively the same thing without the blowback. I would venture that most travelers would part with $10 for at least one person in their party if it meant getting an overhead bin for sure. If enough passengers are getting on early and hogging bin space, then the only options are $10 to join the fray or $25 to check a bag. I can see only one logical choice.

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