As I am typing this, JetBlue had just announced that they were going to increase the checked bag charge to $35. Back in the day when I frequently flew into New York and Syracuse, JetBlue was responsible for a good portion of my mileage. Back then, my first checked bag with JetBlue was free. Several years ago, JetBlue changed ownership and joined the rest of the airlines industry with the notable exception of Southwest to make passengers pay for all check-in baggage. Both you and I probably wouldn’t cheer to the news. Who wants to pay for something that used to be free? Yet the underlying story is a lot more complicated than the eyes can see.
Let’s say you fly on JetBlue with a carryon and no checked bag, and I, the sucker, take the exact same flight but with one checked bag. You pay $300 for a round-trip from LAX to JFK, and I pay $335, happily, because I really need that extra baggage allowance. Let’s say half of the planes are people like me and the other half are people like you, and there are 200 seas in total. The airlines’ revenue is then $635,000. Hypothetically, if JetBlue didn’t want to charge for the first checked bag. How would the ticket fare be different for you and me? To make the same revenue, JetBlue would have to charge both of us $317.5 each. So what happens? I stick with JetBlue because I get one hell of a deal, but you, disgusted by the upcharge for nothing, vow never to fly with JetBlue again. So JetBlue under-charges me for what I’m willing to pay, $335, and over-charges you for what you’re willing to pay, $300. In economic terms, this scenario results in a deadweight loss.
By charging extra for a checked bag, JetBlue is able to bring down the cost for passengers who travel light, and also able to gain the most from other passengers who have more stuff to bring along. On a society level, this represents an optimum.
This pricing scheme is no difference from Apple charging different prices for different iPhone models. You want the barebone iPhone to make calls and check emails with? $500 would give you a solid phone. Want state-of-the-art cameras with beautiful screens and whatever other features that I personally don’t care about? Pay up $1k+ and you’ll get those additional perks packed in your phone.
So why do people hate it when airlines charge extra for additional services? I have several hypotheses. One is that people tend to under-value services and over-value material things. The features of a $1k iPhone are very visible and obvious, whereas it is hard to put a dollar amount on the ability to check a bag for a flight. The other hypothesis is that people associate flying with an unpleasant experience, and paying extra for an unpleasant experience is, well, unpleasant.
In short, airlines charge you more when you fly with a checked bag in order to charge you less when you fly without. I’m not trying to portray airlines as charity organizations, but if they can create a win-win scenario like this, I am in.
Richard Anderson 