Why airlines charge extra to check bags

A number of Greater Greater Washington contributors have been fans of economic urbanist blogger Rob Pitingolo. When we heard he was moving to Arlington, we jumped at the chance to have him start contributing to Greater Greater Washington. Welcome, Rob!

Earlier this month the U.S. Department of Transportation announced its intent to beef up protections for airline customers. One of the ways it plans to accomplish this is by requiring airlines to disclose checked bag and other fees during the booking process.

USDOT certainly has good intentions, but it leaves an important question unanswered: Why do airlines charge extra money to check bags? Why don’t they just roll it into the cost of the fare?

From an economics perspective, the airline industry is quite interesting. Many of its customers are obsessed with getting the lowest prices on airfare, to the point where an entire secondary industry has arisen to allow people to nickel and dime and squeeze every penny out of their fare when they travel. Some people will book flights with highly inconvenient transfers to save a few bucks. Other people will drive to a nearby city for a less expensive flight.

Airlines know people behave like this. They know that flyers are logging onto “fare compare” websites, sorting the fares from least to most expensive, and then booking whichever comes out on top of the list. Being a transportation nerd, I often ask my friends which airline they took on a particular trip. Frequently, the answer is, “I don’t remember. Whichever airline was cheapest.”

Thus, airlines have no incentive to include services in the base fare, if it means not being able to display a lower fare on the web. And it’s a race-to-the-bottom, as airlines try to artificially undercut the competition by removing services that were once included in the fare.

In theory, there should be a lot more brand loyalty in the airline industry than there seems to be. Flying is a pretty intimate experience for many people. It can make or break a trip. It can make for a great weekend away or it can ruin a vacation. I’ve written before about the reason why many companies like airlines have poor customer service. It’s a rational response to the knowledge that enough customers will return for some other reason, like a good price. That’s not to say airlines haven’t tried to retain loyal customers. There are frequent flyer programs, there are branded credit cards, there are special perks for people who fly a lot. Some customers respond to these incentives. Many do not.

By requiring airlines to disclose all of their fees up-front, USDOT is essentially doing what airline customers were unable to do on their own: appropriately compare the cost of flying when all costs have been figured in. At the end of the day though, this is a good thing for travelers.