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Jan 03

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Bagging airline bag fees won’t help passengers

No one who just paid $50 to check a bag when flying home from the holidays is likely to be convinced that bag fees are a good thing. But those who avoided checking a bag might be. Additional fees for checking a bag have been around for some time now. A bill that was recently introduced in congress aims to change this.

Just before Thanksgiving, Senator Mary Landrieu of Louisiana announced legislation that would prohibit airlines from charging passengers for their first checked bag.

Many airlines consider checking a bag not to be a right, but a privilege – and one with a hefty fee attached. The Airline Passenger BASICS Act will guarantee passengers one checked bag without the financial burden of paying a fee, or the headache of trying to fit everything into a carry-on.

She explained the bill’s justification:

Air travel can be a stressful experience for many reasons, but unfair fees for basic amenities should not be one of them. Passengers have been nickeled and dimed for far too long and something has to be done about it. Air carriers should be required to provide a minimum standard of service to their passengers or face additional fees – that is what the Airline Passenger BASICS Act and the FAIR Act will do.

The advantage of dealing with businesses that “nickel and dime” is that those nickels and dimes can frequently be avoided. A customer pays a base price for basic service and then either adds on additional services for additional fees or refuses the additional services and saves the fees. Alternatively, having to cover the cost of checking a bag as part of base fare — even when a passenger only has carry-on — results in paying more than would otherwise be paid.

Senator Landrieu’s announcement characterizes bag-checking as a right, by which, I presume, she means everyone who purchases a plane ticket is entitled to check a bag. In addition to bag-checking, someone might wish to identify as rights all the other services that airlines currently offer for a fee and include them in the base ticket price as well. The problem is that the only people who would still be willing to pay for a flight are those who purchase first class seating, enjoy a drink, and watch the in-flight film while surfing the web and chatting on the phone.

“Nickel and diming” is one form of what economists call price discrimination, which itself seems to carry a negative connotation. Another, and some might argue more accurately descriptive, way of saying “price discrimination” might be “price matching,” or matching the price of what someone is willing to pay to the price that is actually charged. A business that price matches effectively is able to serve a larger population and operate more profitably than one that does not. The disadvantage of one-price-fits-all is that one price does not fit everyone. When services that could be delivered a la carte are lumped into a base price that goes up as a result, certain customers are no longer willing or able to make the purchase. This is to the detriment of both the customer and the business, each of which is better off making the basic purchase at the base price.

Yet another advantage of bag fees is it helps to avoid the free-rider problem. When bag fees are part of a base price, the passenger traveling out one day and back the next with no more than a back pack helps cover the cost of someone else who is packing skis and a boot bag.

Legislation against airline bag fees is similar to other legislation that recently took effect. This legislation, known as the Durbin Ammendement, restricted fees that banks charged to retailers for offering debit card services. Some legislators, including some who were responsible for the legislation’s passage, were outraged when banks responded by increasing fees charged directly to debit card users. Supposing that the BASICS Act passes and is signed into law, expect similar outrage when airlines respond by finding some other way to remain profitable.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2012/01/bagging-airline-bag-fees-wont-help-passengers/

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