Why Airlines Should Start Charging For Carry-On Bags

Financial Goals

photo: cdsessums

Remember the fracas over carry-on baggage fees? Here’s a refresher.

Back in April, in the midst of an orgy of airline cutbacks, low-fee carrier Spirit Airlines announced that it wasn’t enough to charge customers for meals, headphones, and checked baggage; they were going to charge for carry-ons. The fee is $45 if you declare your carry-on bag at the gate, or $30 if you check in online. It applies only to bags that don’t fit under the seat, and you still get one “personal item” free. Is it just me, or does “personal item” sound more euphemistic every time you hear it?

Because luggage is a pressing national issue, the Senate immediately got involved. Sen. Charles Schumer (D-NY) announced that not only would he introduce legislation (the “Block Airline’s Gratuitous Fees Act,” or BAG Fees Act) to ban carry-on fees, but he had gathered pledges from five major airlines not to charge for rolling suitcases. “I am pleased some of the major carriers have responded to our efforts and have agreed not to charge for something that has always been free,” said Schumer in a press release.

Surely, Delta Airlines (DAL) executives signed on to the pledge because they love their customers, and not because it was an easy PR opportunity.

The world held its breath. Then exhaled. Then held its breath again. It is now turning blue. The Senate has done nothing (surprise!). Spirit Airlines implemented its bag fee beginning August 1, as promised. No other carriers have followed suit.

But they should.

At the risk of being censured by the U.S. Senate, I’m going to speak out in favor of bag fees, and I’m going to do so in the language of economics, which is another great way to make friends.

Here’s the basic argument. Baggage space, whether in the cargo hold or the overhead bins, is a scarce resource. When we artificially lower the price of a scarce resource, people overuse it—even when you try to put controls on its use. How many shrimp do you take when you see “Free sample—one per person”?

Behavioral economist Jodi Beggs thinks this principle doesn’t apply to overhead bin space. “[T]he vast majority of people take luggage on airplanes, and I doubt that people vastly overpack when they don’t have to pay extra to take a bag with them,” she wrote on her blog, Economists Do It With Models.

Oh really? When I wheel my suitcase onto a plane, I’ve learned to take the first overhead spot I see that is anywhere near my seat. The last thing I want is to be holding the bag when the announcement goes out that the overhead bins are full and we’re going to have to check any remaining bags if you want this flight to leave today. In other words, price controls — for example, offering discounted or free items or services — cause shortages.

Sure, I could opt out of this rat race by packing even lighter, but what’s the incentive? I have just as much right to fight for overhead space as anyone else.

This is the kind of dumb trade-off people have to make whenever things are underpriced. Do I want one kind of inconvenience (packing extra-light) or another kind of inconvenience (hoisting my bag into the bin before that surprisingly agile old lady can nab my spot)?

Economically speaking, this is nuts. The right way to allocate overhead bin space is the same way we allocate most things: put a price on it.

That was my armchair logic. But I wanted to test it out on a real economist, so I called Robert Frank, professor at Cornell University and author of The Economic Naturalist.

“The mere fact that customers don’t like it isn’t proof that it’s a bad thing,” said Frank. “People never like extra fees for anything.”

But there’s always a catch. “There’s a cost in splitting out every little thing,” Frank added. “At some point the cost of administering a purely unbundled fee structure gets to be higher than any possible efficient gains you get from giving people the right incentives to conserve scarce resources.”

In other words, if the fee results in long lines to pay for your carry-on, that’s even less efficient than the old system.

So how is Spirit’s implementation going? The airline is conveniently preparing for its IPO and can’t talk to the press. But Susan Stellin gave the policy a test run in the New York times:

“[J]ust as I approached the plane an agent started gate-checking big carry-ons (including mine), claiming the overhead bins were full. But they weren’t: two bins near my seat were entirely empty, as were others throughout the plane.”

That’s the kind of performance that won’t make anyone happy. Not even an economist. As Stellin put it, Spirit’s “bare-bones business model extends to its customer service—Spirit has a reputation for being particularly callous.”

Too bad, because carry-on bag fees are a good idea, and if they’re DOA thanks to bad PR and bad implementation, travelers lose.

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