Wednesday, June 18, 2008

Idiocy abounds with complaints about checked-baggage fees

Professor Mark Katz is the latest to complain about some airlines starting to charge for checked baggage. It's truly disappointing to see someone from such a good school hold such a misinformed opinion. Maybe he needs to talk to Don Boudreaux or Russ Roberts in the Economics Department, to gain an understanding of basic microeconomic principles.

Katz wrote,
On the surface, [charging for checked baggage] seems like a reasonable rationale and business strategy. But anyone who flies regularly knows what a disaster this will be.

Many passengers will simply avoid the fees by stuffing more and more of their belongings into the cabin. With overhead compartment and seat space already scarce, this policy could turn many flight boardings into a running of the bulls.

The new fees are also bad PR at a time of economic uncertainty. In most cases, they won't even apply to laptop-toting business travelers and first-class patrons. Instead, they'll end up being a heavy tax on families and other economy-class travelers.

It doesn't have to be this way. Instead of charging for checked bags, airlines could probably raise more revenue and improve the quality of the flight experience by doing just the opposite: charging for carry-on luggage.

Under this arrangement, flyers determined to keep their bags within arm's reach can pay a premium to do so. And those who want to save money can do so by checking bags free of charge.
Katz showed that he simply doesn't understand why airlines are charging the fee: it's to discourage you from checking in luggage. That's it! As I wrote last month (emphasis added here),
Because I am a rational person who understands that I'm not being "forced," my "hide" doesn't "chap" at all at what many airlines are doing. American Airlines will soon start charging economy passengers $15 for the first checked bag, unless you bought the full-price fare, but nobody's being forced into it. What it really is is a $15 across-the-board increase for economy passengers who buy discounted tickets, but with a $15 discount for bringing only carry-on baggage. Take the difference between 50 and 15 pounds, multiply it by a few hundred people, and that saves fuel.
I should have said, "and that saves a not insignificant amount of fuel." Katz is concerned about space, but he doesn't realize that airlines are concerned about weight. Every pound is significant now, especially with fuel prices doubling in the last 12 months. People have pointed out that airlines will probably start enforcing the size and weight limitations that they've specified for carry-ons. You betcha. Airlines in the Philippines strictly enforce cabin baggage restrictions, and Americans had better get used to that.

The weekend after American Airlines announced its new fee, one of its spokesmen was a featured guest on the "Money Talk" radio show. He made a logical, reasoned defense of the new fee for checked luggage, and the host indicated he disliked the fee but nevertheless extended an open invitation to return anytime. It was a very gracious offer. By contrast, nearly every caller protested the fee, using such words as "unfair" and "ridiculous," besides accusing airlines of "nickle-and-diming customers." People gripe and complain, acting like it's their "right" to fly. As I said before, any "rights" are purely contractual. When an airline sells you a ticket, you don't have to accept the terms.

It's a basic principle of microeconomics that if marginal revenue exceeds marginal costs, the firm will shut down until that situation changes or when it's believed the situation will change at an acceptable future point. Airlines were hit hard by 9/11, it's true, but their woes started before. They just weren't charging enough to cover costs. They should have been charging higher fees years ago, at that optimal point where revenue is maximized. Or perhaps there was no optimal point, if there was no way to achieve net marginal revenue because higher fees would drive enough passengers away? In such a situation, an airline should properly fail. Unfortunately the federal government's handouts (at our expense) prolonged their failures, when the airlines should have been left to their own, whether to succeed or die. If the latter, then their fleet, hangars, routes, terminals, etc., could have been liquidated and sold to efficient airlines, or to any other part of the economy willing to absorb the remnants.

Instead, we have the feds mucking up what could have been an efficient merger between Delta and Northwest, requiring assurance that the merger won't affect capacity. What's the point of the merger, then, but for the new airline to cut or expand as it sees fit? And that's not the only way that the federal government sustains what should be left alone. Airlines have no choice but to reduce flights and sometimes even cut entire routes to many smaller airports, because it's no longer efficient for them to maintain the old level of service. But thanks to the subsidies known as the Essential Air Service Program, "those cities and towns would continue to have air service even if it became unprofitable for carriers." It's all too easy to declare something "important" and "in need of government aid" when it's someone else's money you're throwing at the problem.

These smaller cities and towns are like New Orleans' residents, saying they're too important to the national economy and deserve government money. The very fact that government must give them money that's forcibly taken from others is proof that they aren't that important. If they were, the private sector would have already invested in them, to "spur on" the economic activity that they claim credit for. Unfortunately the subsidies will likely continue, but if only they'd stop, so that these "communities" will survive on their own. Their residents will have to learn to drive a few hours if they want to fly somewhere, rather than the convenience of local airports paid for with others' money. Or if there's enough demand (meaning they're willing to pay enough), and entrepreneurs can keep a successful operation going, the residents can have their own regional service that isn't funded by stealing money from the rest of us.

On the other hand, when airlines raise fares and/or institute new fees, while it's not in a true free market situation, at least that's their own business decision borne of competition. That last article summarizes the airlines' revenue dilemma:
To help put the aviation bind into perspective, think about this: In 2000, the average one-way ticket in the United States cost $175, according to Boyd. In 2007, the average was still $175, but 12 percent less of that now goes to the airlines because government fees have jumped. Airlines' fuel bills, meanwhile, have soared. In 2000, passenger and cargo carriers spent $16 billion on jet fuel. Last year, they spent $41 billion. They're expected to pay $61 billion this year.
Hard numbers, and hard decisions for airlines to make. So the difference after a mere 8 years is that airlines are expected to shell out $45 billion more for fuel. How do people expect airlines to refrain from a combination of raising fares (including fees for baggage) and cutting costs?


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