![]() They’re using the fees to try to direct behavior.” “That supports the argument that airlines aren’t using the fees as a way to segment customers. “If you write out an economic model of segmentation built around baggage fees, the results just don’t match what you see in practice,” Lariviere says. Note, however, that this is precisely the opposite of what actually occurs in the industry, where business travelers can usually check bags for free. (Who wouldn’t jump at a highly discounted fare?) Thus, heavy travelers should be offered a high base fare and a low baggage fee. It is difficult for these travelers to avoid checking bags, and the only way they would accept high baggage fees is if the base fare were steeply discounted-but this pricing structure would also be very attractive to customers who can easily suffice with a carry-on. Customers who place little value in checking bags, such as business travelers who frequently travel with just a carry-on, should pay a low base fare and a high baggage fee-a structure that would discourage them from checking bags while still remaining attractive overall.īut other customers, such as leisure travelers who often travel heavy, highly value checked luggage. ![]() If airlines really wanted to maximize revenue, they would encourage individual customers to take the pricing structure that is meant for their segment. ![]() However, airlines’ other rationale-that baggage fees allow airlines to price-discriminate across customers by their need for the ancillary service-does not hold up in practice. In other words, baggage fees harmonize the airlines’ interests with those of passengers, lowering costs on both sides. This synergy creates lower ticket prices for the customer, meaning that more people can afford to fly, which is good for the airlines. Their model shows that explicitly charging for ancillary services rather than bundling the cost of them into the ticket price is an effective way to shape customers’ behavior and lower the airlines’ operating costs.īy charging baggage fees-and encouraging customers to avoid checked bags-operating costs for the airlines fall, since they need fewer check-in staff and luggage handlers, and their planes use less fuel. To test these rationales, Lariviere and his colleagues built an economic model of airline pricing and baggage fees. It was about persuading people to change their travel behavior-to travel with carry-on luggage only.” Changing behavior this way is in the airlines’ interest because it lowers their operating costs. As one airline executive put it, explaining why his airline implemented baggage fees: “ wasn’t about getting revenue. The other rationale given for the baggage fees is that they lower airlines’ operating costs by shaping travelers’ behavior. That’s great if you like dessert but, if you don’t, you would prefer the option to pay less for the meal and not take the dessert.” Unbundling the price of checking a bag from the price of flying allows airlines to extract additional revenue from customers who value that service most. Imagine if you went to the restaurant and all the meals came with dessert. Said Ben Baldanza, the chief executive at Spirit Airlines, “We believe it is important to let customers decide what is of value to them. This self-sorting, in turn, allows the airline to more profitably serve different types of customers.Ĭlaims from some airline executives suggest some truth to this rationale. Under this rationale, baggage fees play a similar role to “pay as you go” utilization charges in cell phone plans: they lead different types of customers to self-sort into the pricing structure that fits them best. One rationale for baggage fees is that they allow airlines to charge different customers different prices according to customer characteristics that the airlines do not directly observe. Lariviere and two colleagues, Gad Allon and Achal Bassamboo, also professors of managerial economics and decision sciences at the Kellogg School, have tested the merits of two different rationales that airlines have given for the fees.
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