The Hidden Cost of Charging for Luggage

About a year ago Delta Airlines made a decision to start charging for luggage. The plan was simple. $15/bag for suitcases under 50 lbs and a $90 surcharge for bags over 50 lbs. Delta ran the numbers and figured out it would be an easy way to drive additional revenue. Their research probably showed that the only thing people really care about is the price of the ticket, and it was probably further rationalized by the fact most trips are short enough that a carry-on bag can suffice. Charging for bags would make flights more profitable, but it would also have consequences.

The biggest consequence of this decision was expected. Delta knew customers would be upset when they had to pay $15 for baggage, so I'm not going to focus on that. What's more interesting are the consequences they didn't plan for.

A $90 surcharge on bags over 50 lbs is an extremely large fee. It's potentially a 1/3 or more of the total ticket price. Naturally people will want to avoid this fee. However, the 50 lbs mark is right at the upper limit of what a large bag would weigh, so a large number of customers will carry bags that are 51-55 lbs (especially for couples who share a single bag), and the majority of customers who encounter this fee will be barely over the "limit." These customers will try to do anything to avoid a fee of this magnitude. In fact, many customers start to unpack their luggage while it's sitting on the scale in order to try and get below the arbitrary 50 lbs limit.

The question now becomes, how much longer does delta spend interacting with each of these angry customers unpacking their bags at the check-in counter to avoid the $90 fee? A normal bag drop-off takes a minute, maybe two minutes. Each customer who unpacks their bag at drop-off to avoid the fee will generally take 7-10 minutes. One customer now takes the same amount of time to deal with as 3 used to. This an efficiency cost, and it won't be offset since the overweight baggage fee goes uncollected.

The other unintended consequence of this decision is that it encourages people to use larger carry-on bags. This means more bags must now fit in the carry-on compartments. Boarding is no longer about getting people to their seats, it's about finding space for all the carry-ons. Instead of preparing for take-off, flight attendants spend 10-15 minutes moving and re-packing carry-on compartments.

It's not that Delta doesn't understand behavioral economics, they do. And, it's not that they didn't carefully study this decisions, they did. They just failed to account for the unintended consequences. They were so focused on the potential increase in top line revenue that they ignored the hidden costs associated with it.

Written by Adam Harrell on August 11, 2009

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Amaze?-- that is fairly in depth, thanks.

Joseph Haskle says:

Unfortunately my wife and I were hit with this fee coming back from our vacation this past month. Compounding the problem was extremely poor customer service where the red-jacket manager unnecessarily hurried us so much as to not really give us a chance to redistribute the weight between the other bag. So, we were forced to pay the $90 surcharge on top of the $25 surcharge for baggage. And still were too early for boarding at our gate, wondering why we were hurried along so much. They went as far as to tell us to fly Northwest next time if we had an issue with their fees. I, as a long time Delta flyer with a large amount of miles built up with them, will be cashing in my miles and choosing a different option in my further travel needs. What a sad state of affairs!

Hey Steve,

Thanks for joining the conversation.

I'm sure there are a hundred different ways they could have built a revenue stream that would equal the amount brought in by baggage fees with a smaller impact on customer experience. Whether that is selling advertising on the back of tray tables (or in the urinals), or creating a premium ticket class that gets to board last and get off first for a fee. In fact they're probably still considering all these other ideas in addition to the baggage fees.

Hey Steve,

Thanks for joining the conversation.

I'm sure there are a hundred different ways they could have built a revenue stream that would equal the amount brought in by baggage fees with a smaller impact on customer experience. Whether that is selling advertising on the back of tray tables (or in the urinals), or creating a premium ticket class that gets to board last and get off first for a fee. In fact they're probably still considering all these other ideas in addition to the baggage fees.

Adam,
Great topic. I have often wondered just how these bag fees came to be, and what consequences they have created. Off the top of my head, I know that there is more competition for overhead space, resulting in more grappling, flight attendant grumpiness, and I suspect fewer on-time departures/arrivals. I wonder what amount it would take per ticket to offset the revenue generated by these per bag fees? Is it $3? $5? If that was to happen (amortizing the added rev over all seats), would timeliness increase? What about consumer experience?

I agree completely that reducing fuel costs are probably a motivating factor, but I'd also be curious to see how much it reduced overall luggage weight. Are people just carrying heavier carry-ons and checking smaller bags? Dunno.

Although, I'm not sure everyone is packing bottles of whiskey in their checked luggage, which are both heavy and definitely disposable (in the right hands at least). Although it would make for an interesting flight if all the passengers finished a bottle before boarding in order to save $90.

Jasdeep Jaitla says:

Great analysis!

Is the avoidance exactly what they're looking for actually? That's the question. Perhaps fuel charges account for a much higher cost than is offset by baggage fees. Total baggage weight might increase the fuel costs significantly over thousands of daily flights and millions of miles.

I was one of those 50lb+ bag people once, and it turns out it was mostly disposables (shampoo, conditioner, whiskey) and books that accounted for much of the weight. Books I could hold, so they're not saving any weight since I am still bringing them. Liquids you have dispose of now, post 9/11. But it is interesting how disproportionate the baggage fees are, not pro-rated by weight over 50lbs.

Good point. The thing about the $90 surcharge on 50lbs+ is that I imagine it's probably almost never collected. It's so large it actively encourages avoidance, and it creates a bad customer experience on top of that.

Joe Miller says:

Given the constant fluctuation and variability of airfare these days, a smarter alternative move might be to just bump up ticket prices marginally (which would hardly be noticed, if at all), and then introduce some special marketing messaging about how Delta is no longer going to stick customers with the baggage fee - which would be a nice differentiator these days.

Exactly. When you squeeze for profits in the short term and don't keep the long term customer relationship in mind, it all falls apart.

excellent post Adam... This is all about the difference between 'good' profits and 'bad' profits. This is an obvious 'bad' profit and it's going to take away opportunities for the good ones.

Case in point, yesterday I returned my rental car to Avis. I had driven 15 miles. The fuel gauge hadn't even moved and I figured it's a bit of a waste of my time to go and put $1.30 of gas. Plus, 'topping off' gas tanks is bad for the environment and a waste of fuel.

What did Avis do? Charged be $14 (that's fourteen dollars) because I didn't produce a receipt for gas even though I explained and proved the mileage. The manager produced the contract I had signed and took delight in showing that I had signed it and the fine print.

I offered to pay for a gallon of gas but the manager refused and said I only had the option of paying $14 or going to the gas station and topping it off.

This is the first time I've used Avis in a long time, I normally use Eneterprise, and I can tell you that I will never use them again. I'll walk first.

excellent post Adam... This is all about the difference between 'good' profits and 'bad' profits. This is an obvious 'bad' profit and it's going to take away opportunities for the good ones.

Case in point, yesterday I returned my rental car to Avis. I had driven 15 miles. The fuel gauge hadn't even moved and I figured it's a bit of a waste of my time to go and put $1.30 of gas. Plus, 'topping off' gas tanks is bad for the environment and a waste of fuel.

What did Avis do? Charged be $14 (that's fourteen dollars) because I didn't produce a receipt for gas even though I explained and proved the mileage. The manager produced the contract I had signed and took delight in showing that I had signed it and the fine print.

I offered to pay for a gallon of gas but the manager refused and said I only had the option of paying $14 or going to the gas station and topping it off.

This is the first time I've used Avis in a long time, I normally use Eneterprise, and I can tell you that I will never use them again. I'll walk first.

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Adam Harrell
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