Have Baggage Fees Subsidized Airline Fares? A Rebuttal of The Economist’s Claim

Don’t get us wrong.  We respect and enjoy The Economist, and regularly read their material.  But….

We came across an article they published this week headed ‘Bags of Cash‘, which observed that air fares have dropped 15.6% between 1995 and 2011, and claimed this was due to the airlines using baggage fees to recoup falling ticket prices.  Perhaps to show the article was an ‘in depth’ consideration of the total complex topic of air fares, they offered us a second factoid – airfares, inclusive of bag fees, were 40% cheaper in 2011 than in 1979 (when deregulation occurred).

Unfortunately, while their claim that baggage fees are recouping falling ticket prices has a certain visceral feeling of being correct, it is demonstrably utter nonsense.

When you stare at an ugly $50 (or sometimes very much higher) per bag fee added to your ticket price – each way – it is easy to see how you could think bag fees are a massive part of an airline’s total revenue.  And when you read about how the airlines are making hundreds of millions of dollars per quarter on baggage fees (the article cited Delta as getting the most, raking in $323 million in the third quarter of 2012) this perception seems confirmed.

But let’s now switch from sometimes irrational emotion and instead look at what you’d expect The Economist to focus primarily on – facts and figures.

Let’s first look at what has happened to the average domestic airfare in the US from 1979 through 2012, and express the fare in constant inflation-adjusted dollars.

This clearly shows that, yes, airfares have dropped in cost between the end of deregulation (1979) and the present day, although we have to uneasily note that the last three years have all seen airfare increases such that in real, inflation adjusted terms, airfares today are 17% up over the last three years (a 24% increase before taking out CPI based inflation).

While we’re happy that our airfares are less than they were in both 1995 and 1979, we’re not so happy that they’ve been steadily increasing over the last three years, and indeed, puddling around at about the same price for several years prior to that as well.  In other words, airfares stopped dropping about a decade ago and are currently increasing.

Never mind what happened in the 1980s and 1990s.  How does The Economist reconcile a 17% increase in airfares in the last three years with the baggage fee subsidy it claims exists?

Let’s see what the actual impact of fees is on airline ticket prices.  The excellent Bureau of Transportation Statistics service and the airlines lobbying site Airlines For America break down airline receipts into base fare, change and cancel fee penalties, and baggage fee charges.  Until 2000, the combination of both these fees were less than 1% of the total fare and fees paid, but since 2001 they have started to climb, and in 2008 they started to skyrocket.  They now represent about 6% of the total amount we pay an airline to travel.

Here’s an interesting chart showing the percent of total ticket price that both the change/cancellation fees and the baggage fees represent over the 1979 – 2011 time frame.

Fees have definitely increased in the last five years.  But they still remain only a tiny part of the total ticket price.

Let’s exaggerate the movement by zooming in on the y axis to only show the first 7% of the 100% totality.

Now you can more clearly see how the fees for bags and reservation changes/cancellations have changed, and most appreciably in the last few years.

This next chart shows basic air fare receipts and total receipts including fees, expressed in constant dollar terms per ticket, and we’ll exaggerate this to make what would otherwise have been too trivial a variation more obvious by starting not at zero but at $300 and now, with this ‘total picture’ view, the relativity of fees on total pricing becomes clear.

Now we’re not the highly qualified economists who provide papers for The Economist, but to our eyes, we can’t see any impact at all on airfares as a result of fees (and remember this chart magnifies the impact of fees, both by showing the combined effect of both baggage fees and change/cancellation fees) and also by zooming in on just the relevant part of the y axis).

But we do see three opposite effects.

1. The largest part of the reduction in constant dollar airfares occurred prior to, rather than subsequent to, baggage fees becoming an appreciable factor.
2. The last several years have seen airfares stop their fall and starting to rise again, while baggage fees have variously increased or stayed about the same.  Both the base airfare AND the baggage fees have been increasing simultaneously – quite the opposite of what The Economist suggested.
3. Baggage fees have always been insignificant.  They have never been as much as even 4% of the total airfare paid on average by a typical traveler for their ticket.

So our conclusion is unavoidably that there is no data to support The Economist’s suggestion that dropping airfares are caused by rising baggage fees.

It is true that, with one last desperate gasp, one could say ‘Ah, but if it weren’t for the baggage fees, airfares would have increased still further’ but that’s an imponderable that really can’t be accurately evaluated, short of having a collection of airline executives tell us ‘Yes, we held back on what we charged for the base fare as a result of increasing our baggage fees’, and as best we can tell, that statement has not yet been offered by any senior airline executive.

Even if this were true, the airfare drops cited by The Economist – 15.6% and 40% – are only partly explained by a 3.5% rise in baggage fees.

The Real Reasons Air Fares Have Dropped

There are several reasons why air fares dropped in the past and we should start off by pointing out that airfares have stopped dropping.  Pick a date somewhere in the early 2000s, and that represents about as good as it ever got for airfares, and since that time, there’s been an erratic but steady lift in fares in both raw dollars and inflation adjusted dollars (and both with or without adjusting for fees).  Which sadly makes any discussion about dropping airfares more a historical topic than a current one.

These various reasons for dropping airfares can be summed up in a single word.  Competition.  Airlines were inefficient and complacent prior to deregulation, and since that time, they struggled to change their ways.

One could also argue that the reason airfares have now bottomed out and started to increase again is due to the diminishing degree of competition over the last decade or so, with fewer and fewer airlines remaining, and with the ‘alliance’ linkages between the various airlines reducing the real number of competitive airlines even lower.  Indeed, with the latest trend – airlines simultaneously belonging to an alliance and also having direct arrangements with airlines from other alliances, the remaining elements of competition are becoming fainter and fainter.

Although it is hard to show any sign of competition, it is much easier to track airline efficiencies.

Efficiencies are primarily represented by cramming more people onto planes, and employing fewer people in every aspect of an airline’s operations.

Have a look, for example, at this chart, showing average passenger loads per flight – ie, the percentage of seats on each plane that were full.

Loads are now at levels which, less than 20 years ago, were thought to be operationally impossible.  An earlier airline rule of thumb was “50% = break even; 60% = profit; 70% = full”.  But now we’re approaching an unthinkable 85% average load factor, and while this official data only runs through 2011, the trend for 2012 has been for loads to continue inching upwards even further.

The greater number of passengers per flight, and the generally improving fuel efficiency of airplanes, has meant that in the thirty years 1980 – 2010, the fuel efficiency of flying, as expressed in terms of the number of passenger miles you get per gallon of jet fuel, has more than doubled.  Here’s an interesting chart that tracks the amount of energy (in BTUs so as to be able to accurately compare jet fuel, diesel, gasoline and electricity) used per passenger mile for a number of different transportation alternatives.

As you can see, these days only trains provide a more fuel-efficient method of travel than planes, whereas prior to 1995, planes were always massively less efficient than all other modes of transport.  (In case you wonder, the reason for the decline in efficiency in the 1960s was largely due to the introduction of the first generation of passenger jets.)

As a side-bar comment, it would be interesting to compare the energy efficiency of air travel to high-speed rail.  We’ve not seen such a comparison, but our understanding is that high-speed trains use a great deal more energy per passenger mile than do slow speed trains – as counter intuitive as it seems, it may well be that modern airplanes exceed the fuel efficiency of modern high-speed trains.

There’s another massive efficiency improvement too, and in two parts.  These days there are fewer airline employees, and those who remain generally earn less than was the case formerly.

In terms of staff productivity, each airline employee is now almost twice as productive, in terms of revenue passenger miles, than was the case in 1979, as can be seen from this chart.

We had to guess at how to equate the part time staff to full time equivalents, and we also note that the data we had omitted part time staff for the first three years (1974-76).  If they were known and included, the staff productivity would be even lower back then.

It is not easy to add a further factor to reflect what we believe to be lower average salary/wage and benefit costs per employee to end up with a table that would show employee cost per passenger mile provided, but we have to believe that the greater than 50% improvement in staff productivity over the last 20 years would be magnified still further by probably a 20% or greater drop in the cost per average employee.

However, we can look at one oblique hint as to the dropping costs per employee, and that is the significant increase in the number of part-time employees compared to full-time employees at the airlines.  Prior to deregulation, only one in 25 employees was a part-timer.  Nowadays, almost one in four is a part-timer.

Part-time staff are estimated to represent in the order of a 20% – 35% lower cost per employee than full-time staff.  So quite apart from paying their full-time staff less, the airlines have proportionally fewer full-time staff and more part-time staff to magnify those savings even more.

Summary

We have deregulation to thank for most of the drop in airfares between 1979 and the present day.  Deregulation has been the driving force that has encouraged airlines to become more efficient, switching from a simple ‘cost plus’ method of charging to a more competitive one, where profit could be obtained not just from higher airfares but also from reducing the underlying operational costs of the airline.

While baggage fees are outrageously expensive, the reality is that very few people pay them.  Airlines regularly waive baggage fees for elite level frequent fliers and as part of corporate contracts, and passengers now do all they can to carry their luggage with them onto a plane rather than pay $50 or more to check their bag.

So, while heart-stoppingly high, and sometimes higher than the underlying cost of the ticket for ourselves, overall the airlines only derive about 3.5% of their total ticket revenue from bag fees, and a similar amount from change and cancellation fees – another set of unfairly overpriced fees, but which happily few people ever incur.

There is no data to support The Economist’s claim that either the 15.6% fall in fares between 1995 and 2011, or the 40% drop in fares between 1979 and 2011 can be attributed to the tiny rise in bag fees received by the airlines.  Paradoxically, quite the opposite seems to have occurred.  Bag fee increases have happened in conjunction with airfare increases.

For Further Reading

We have two interesting and detailed article series on related topics.

A History of Airline Regulation 1911 – 1926

The Decline and Demise of Airline Competition