Crazy economics: baggage fees on airlines

The following weirdness just happened while traveling with my daughters to meet their mother in New York a few weekends ago.  Unwilling to carry on our bags, we paid $75 to check three bags with American Airlines.  Having passed through the TSA checkpoint, while waiting in the boarding area, the agent announced that anyone willing to check their carry on baggage at the door of the jetway could do so–free of charge.  Well, the agent didn’t actually say free of charge, but no one taking advantage of this option (to reduce overcrowding of the overhead bins on a full flight) was charged to check their luggage.  The flight was full, as usual, and people were trying to stuff large refrigerator-sized bags in the overhead bins–god forbid they would place them under the seat in front of them–while the flight attendant pleaded for all to be seated so that the door could be closed and the flight begin. (By the way, I hypothesize that the official record of when the flight took off is when the door is closed, and being sensitive to these widely published performance measures, airlines are quick to close the doors, even if the plane does not actually leave the ground until some unreasonable time later.)

Back to the checked luggage fee. I could never figure out why the airlines charged for checked bags which simply fill the empty spaces in the belly of the plane (read: marginal cost of carrying an extra checked bag, zero) but let people carry on steamer trunks for free! It seemed to me that the reverse would make more sense: let people check as many bags as they want for free, but charge them a stiff fee for stuffing those overhead bins (care must be taken when removing your items as they may have shifted in transit.) Passengers would all be seated much quicker, those sitting in the isle seats would be a little less bruised, and more departures would be on time. But further investigation has revealed a possible explanation for what I deemed folly.

I discovered that while airlines are charged a 7.5% excise tax on all flight related sales (tickets, change fees, etc.) they do not pay the tax on extra services such as checked baggage or early boarding. Also, about five years ago, in response to pressure from Congress, airlines agreed not to charge for carry on luggage. The incentives are clear: airlines want to avoid paying taxes (like the rest of us,) so they don’t just hike ticket prices. They increase revenue by charging for things people really can’t avoid when traveling (luggage.) They don’t care about the discomfort imposed by people carrying on tonnes of baggage while upholding the promise not to charge for carry-ons.

But there is a possible work around!  Don’t check your bags at the counter, take them to the gate and accept the agent’s offer to check them there,  for free!