The Warped Economics of Carry-On Luggage

I just got home from a quick trip to Denver, where I spoke at a Concord Coalition event on our nation’s dire fiscal outlook. That’s a big, complex problem, but today I’d like to share some thoughts on an even more vexing problem: the warped economics of carry-on luggage.

As you probably know, most major airlines now charge fees if passengers want to check luggage. Many travelers object to these fees in principle (as you can easily confirm by surfing around the blogosphere), but what’s most interesting to me is how people respond to them.

Based on my travels, I see three related issues.

1. If you charge fees to check bags, passengers will bring more and larger carry ons. Like everyone else, airline passengers respond to incentives. So if you make it more expensive to check bags, they will bring more carry-ons. The overheads thus fill up more quickly and are often at capacity before everyone has boarded. More travelers thus get to experience the ignominy of losing the carry-on equivalent of musical chairs (and flight attendants have to waste time removing bags and checking them).  (This observation is hardly new; my student Kerry mentioned it to me last week, for example, and others have written about it.)

2. This effect may get magnified when airlines offer to check bags for free at the gate. As I was waiting to board my flight to Denver, the gate agent announced repeatedly that customers could check bags for free if the overheads ended up being full. I presume that the airlines do this in order to avoid adding insult to injury for the passengers who lose at musical bags. (Imagine the flight attendant telling you: “Sorry, the overheads are full; please give me your bag and $35.” ). This does have the side effect, however, of encouraging even more customers to bring their bags onto the plane to see if they will fit. The worst case (financially) is that they end up avoiding the fees for checked luggage.

The increased competition for overhead space is worsened by the lack of property rights. Just as competing boats can over-exploit a fishery, so do airline passengers overexploit overhead space. In econ-speak:

3. There is a tragedy of the commons as passengers compete for overhead space. Without enforceable property rights, travelers engage in all sorts of inefficient behavior to gain overhead space (e.g., fighting to be among the first in their seating group to get aboard). Perhaps the most galling is when passengers seated in row 35 bring on two over-sized roller bags and stow them in the overheads around row 15. They then saunter, unencumbered and without shame, to their seats in the back of the plane, while the unsuspecting souls in row 15 (who usually board later) face a major nuisance: what to do with their bags. Let me tell you, it’s not a pretty sight when the folks in row 15 have to stow their luggage in the overhead space back in row 35 — if there’s any left at all.

The fees worsen this tragedy of the commons, of course, since even more bags are competing for the limited resource of overhead space.

So what’s the solution?  Well, one option would be to create property rights in the form of assigned overhead space. One roller-bag sized space could come bundled with each seat, for example, or perhaps the airline could sell spaces separately. Maybe there could even be a secondary market in which passengers buy and sell spaces among themselves. Row 35 person: If you really want this space over my seat in row 15, how much are you willing to pay?

OK, that vision is a bit fanciful, and there are a host of challenges (e.g., different size bags and the transaction costs of running a real-time overhead bag space market) that may make it impractical. But it is fun to dream.

27 thoughts on “The Warped Economics of Carry-On Luggage”

  1. What I don’t understand in this whole situation is:

    If the presumed reason for the checked bag fees is the cost of transporting them in terms of fuel used, why aren’t the passengers weighed along with their total luggage, and charged accordingly?

    1. Hi Diana — Thanks for visiting my blog. I think there are two possibilities.

      First, managing checked luggage is costly for the airlines. As a friend of mine noted on Facebook (where I posted a link to the blog): “Yes, they would love to disincentivize heavier bags and save fuel, but if you have to carry your heavy bag all the way to your seat you may pack lighter. Plus, there is an additional fee for bags over (usually) 50 lbs. But TSA has mandated a very expensive screening/handling regime for checked bags, and the older carriers have entrenched unionized baggage handlers. More carryons means fewer baggage handlers and less capital investment in baggage screening/moving systems.”

      Second, the airlines may be looking for creative ways to raise revenue, without having to raise ticket prices across the board.

  2. I noticed a lot more space in the overhead compartments after the restrictions on liquids were introduced, then the checked-bag fees pushed in the other direction. If they finally end the restrictions on liquids, it may overload the overheads. Then will we see the end of checked bag fees, or the start of carry-on fees? I imagine the latter is more efficient.

  3. I can think of similar, possibly more equitable ways (defined in this instance as “those options which I would enjoy more”) of doing this. The biggest obstacle to any of these being implemented is the extreme price sensitivity regarding airfare.

    I’ve watched my mother run this scenario a number of times: She looks for airfare online, finds the absolute cheapest flight going from home to wherever she is going. This is when she calls me to tell me about the smokin’ deal she got on a plane ticket. She books it, then acts surprised when it’s super-substandard service in any number of ways, from paid check baggage, to 1 flight attendant, to the plane only has one wing, or whatever. If the general paying public could remember more often the price *over*-consciousness drives service cuts to assist in competition, flying might still be enjoyable (maybe) and we might be able to buy consumer goods worth their salt (where applicable, as not all consumer goods contain salt).

    Southwest lets 1 bag fly free. Because they’re the only airline advertising it, I don’t even check anyone else’s airfare before booking Southwest, so they could be gouging the ever-loving whoa out of me and I would have absolutely no idea. And you know what? I’m okay with that, because I don’t even have to think about it. I was raised with the idea that if it can’t fit into one bag, there’s too much, or you need a bigger bag.

    1. Hi Michael — Judging from what I see on the web, you are not alone. Southwest (and Jet Blue) have both distinguished themselves by not charging fees for the first (or possibly more) checked bags. And they have been doing better than other airlines. Some analysts think the two facts are related.

      Of course, Southwest does have another tragedy of the common problem: getting on board early. On occasion, I have done online check-in about 23 hours and 45 minutes in advance of my flight, and still found myself deep in group B.

  4. One response to this by the airlines was experienced by my wife recently. The airlines offered her “early boarding” (for a fee) for the express purpose of finding space in the overhead compartments. She declined the offer.

  5. Another problem is that gate-checked bags are unloaded first, adding to the incentive to play carry-on lottery.

    My guess is that it costs airlines a lot less to handle gate-checked bags than checked luggage. If they could get away with it, they might require everyone to carry all of their bags to the gate. They didn’t, even before the limits on items in carry-on luggage, because checked luggage is a convenience for some passengers–especially if they have connecting flights. The question, then, is whether the value of checking luggage is greater than or equal to the airline’s cost. In that context, it makes sense to charge.

    They shouldn’t charge the full cost of baggage handling, because of the congestion costs you identify associated with carry-on luggage. But they probably also shouldn’t charge zero.

    Unless you consider behavioral economic responses (e.g., Michael’s indifference to the charge Southwest builds into ticket prices for baggage handling). I wonder if the airlines would have gotten a different response if they had offered a $35 discount for those who fly without luggage (and kept baggage handling costs in their base ticket price). It shouldn’t matter, but…

    1. Hi Len — I bet the airlines did exactly the thought experiment you suggest … and then quickly decided that their optimal strategy is low sticker prices plus add-on fees. Just as eBay buyers are more responsive to prices than shipping costs, so, I suspect, are flyers more sensitive to ticket prices than the fees. At least until they get to the airport and decide whether to check luggage :).

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