TL;DR: Carry-on baggage fees may be a pain for passengers, but airlines are cleverly using people’s money-saving behavior to their increased advantage.
Not long ago, passengers on Canada’s two major airlines (WestJet and Air Canada) were allowed to check two pieces of baggage for free. This was reduced to one bag, and recently even one bag will cost you: at the time of writing both WestJet and Air Canada charge $25 + tax to check a bag on a domestic flight.
This recent change, as with many changes the airlines have been making, comes with a fair amount of protest. Customers don’t like to see extra fees here and there, people are willing to spend more money if they can have a service as a bundle, instead of feeling nickel and dimed all the way to their destination. This includes food purchases, checked baggage, and in-flight entertainment.
In theory, it may not be all bad. After all, if the airline is charging you $25 less for your flight, then it should even out. Passengers who travel light will see the savings, right?
While this may be true in theory, it’s almost certainly not the case in practice, since both WestJet and Air Canada have been reporting great financial success since switching to per-bag fees. This is mostly because airlines use a system of an economic phenomenon called price discrimination.
Economics of Price Discrimination
To understand price discrimination, let’s look at a box of corn flakes. In a standard supply and demand scenario, the price of that box of cereal is fixed at some number that is determined by market forces. Everyone pays the same price for the same product. Any potential consumer of corn flakes sees one price, and can choose whether or not to buy. Let’s say that price is $1.00
For some people, a dollar for a box of cereal is too high. They won’t buy it. For other people, $1.00 is a great deal (they would have paid $2!). As the cereal maker, I’ve missed the opportunity to make an extra buck off of that consumer, and that is inefficient.
Now suppose I decide to auction off my boxes of cereal. I get all potential buyers in a room, and I take the first box from my stack and start the bidding. The highest bidder will be the person who is willing to pay the most, and so I just sold that box to that consumer at the highest possible price and he walks off with a box of cereal having paid (for him) a fair price.
Now I take the next box and start the bidding again. The next highest bidder will win this one, and again I’ve sold the cereal box at the highest possible price. This process continues until everyone has bought cereal and I walk off with a lot more money than in the scenario before. They key difference is this: people have paid a different price for the same product. That is the essence of price discrimination.
Airlines do a similar thing, but use people’s differences in scheduling. If you are a price-sensitive person, you probably book early and check often for a good price. You like having your plans together in advance, and are willing to look at flights running at different times during the day, or even different days (e.g. planning a vacation). If you are a price-insensitive person, you are likely a business traveller – the company is paying, you have to fly last-minute, and you have to get to your location at a certain time. Airlines know these different people exist, and so prices will generally rise as the flight’s departure approaches, though they presumably can go up or down based on how fast the flight is filling up. Ever looked at flight prices and seen “24 seats left at this price”? Is there any indication the price will actually go up, or are they just playing at your sense of urgency?
The upshot of price discrimination in this case is that it makes it next to impossible to tell whether your baggage fee is part of the flight cost or if it’s just pure profit. Without knowing exactly how airlines calculate their prices it’s hard to look at “before and after” and really see if the passenger is saving. Because of this information gap, I tend to think the baggage fee is pure profit.
There’s another reason why this switch is a no-brainer for airlines. By explicitly charging for individual bags, passengers will try and make the most use of their carry-on allowance, essentially transferring luggage space they would have checked into the cabin. That valuable extra space down below can be used to haul cargo instead of passenger luggage. On top of that they have shifted the burden of moving luggage from the curb to the gate onto the passenger. Baggage handling systems are expensive.
Overall, this move is a smart one by the airlines, from a business perspective. For passengers, it’s just another fee.
But, maybe it’ll cause us all to pack a little lighter, use a little less fuel, and ultimately enjoy our trip more in the end.