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Baggage Economics

By Chris | July 6, 2008

I just got back from a trip to Florida.  On the trip back to Kansas, I flew on American Airlines which has recently started charging passengers to check luggage.  It costs 15 dollars for the 1st bag and 25 dollars for the second bag.  I’m normally in favor of such fees.  Handling luggage costs the airline money.  Including the cost of handling luggage in the airfare results in too much luggage being checked.  If I value 15 dollars more than the hassle of carrying around my suitcase, it is efficient for me to carry on my luggage (assuming that 15 dollars is the airlines marginal cost of handling the luggage).  Bundling luggage handling and airfares means that passengers with no checked luggage are effectively subsidizing those customers who do check bags.

However, I think charging a surcharge for checked luggage is inefficient in this case.  The problem stems from security constraints.  Terrorists are not very price sensitive.  If checking luggage is the most efficient way to smuggle in explosive devices, weapons etc. they will not be deterred by a nominal charge.  But, I suspect that smuggling items through carry-on luggage represents a greater potential security breach.  By charging for checked luggage, airlines such as American are providing travelers an incentive to carry on more items.  More carry-on items in circulation means more screening and more congestion at security stations.  As travelers try to sneak sunscreen and toothpaste past security, it will become more costly and difficult for the TSA to spot offending violators with more sinister motives.  At the very least, it seems that by charging for checked luggage American Airlines is cutting its expenses while imposing external costs on a federal agency.

The new policy also creates wasteful incentives for travelers who choose to follow TSA liquid regulations.  My travel companion and I decided to throw away 10 dollars in shampoo, conditioner, and sunscreen in order to avoid a 15 dollar checked luggage fee.  Throwing these products in the garbage was a waste of resources.  Society would have been better off if we had transferred 15 dollars to American Airline shareholders and kept our 10 dollars worth of liquids, but we didn’t.  I can’t help but thinking that if The Terminal had been filmed today, Tom Hanks could have made a lot of money in sunscreen arbitrage: purchasing leftover sunscreen from departing Florida tourists with carry-on luggage and selling it new arrivals. (Okay…The Terminal is set in JFK, but nonetheless)

Topics: Economics, Travel | 5 Comments »

5 Responses to “Baggage Economics”

  1. Frankie Stix Says:
    July 26th, 2008 at 1:27 pm

    What do you think about giving discounts to skinny people who fly? They could raise prices on tickets then discount them down for skinny people (as opposed to simply raising the prices for fat people, which would be a PR mess). This way the marginal revenue from the increased fare could come closer to the marginal costs of the increased weight. Just food for thought.

  2. Lorenzo Says:
    August 20th, 2008 at 6:25 am

    Uh, isn’t that discrimination, except reversed?

  3. Chris Says:
    August 20th, 2008 at 3:41 pm

    Frankie,
    I think it would be hard to do. Very few people would want to engage in a public weigh-in. Moreover, I think its impacts on profits would be limited. Yes, more passenger weight means higher fuel costs, but airlines aren’t setting prices on a cost-plus basis anyway. They engage in price discrimination to milk as much money as possible from every consumer. I’m trying to buy a last-minute one-way ticket to Atalanta, it is twice as expensive as it would have been a month ago. The price is set at a profit-maximizing level, if they charged a surcharge for weight they would have to correspondingly reduce the fare by a customers average weight. There would be some efficiency gains, but they would be limited. There are a lot of externalities caused by passengers, and this one is too politically charged to implement. However, I do think your discount would be more palatable than a surcharge. Thanks for the comment.

  4. Frankie Stix Says:
    August 23rd, 2008 at 9:07 pm

    Chris.
    I agreed it would be difficult/ almost impossible to implement. If the price of gas gets high enough though, the benefits of doing so will continue to increase. Here is a recent example of this dilemma.

    http://www.news.com.au/travel/story/0,26058,24124958-5014090,00.html

  5. Frankie Stix Says:
    August 23rd, 2008 at 9:29 pm

    http://archives.cnn.com/2002/WORLD/europe/10/22/virgin.payout/index.html

    maybe they are already discriminating

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