Monday, September 22, 2008

When Baggage Fees Unbundling Was First Introduced

In 2006, when Ryan Air decided to offer a no-frill service to keep its advertised price for airline ticket low, it offered a basic service and charged for everything else. The Economist reported (this time a news piece and not a views piece), posing the question, "Why airlines have started charging for check-in bags?". The article reported (bold format added by me)

As fuel costs have escalated, airlines have been tightening up their baggage rules. Some of those rules are now being completely rewritten. British-based Flybe introduced a "fair deal for baggage" scheme on February 1st, which it says means passengers unburdened by bags will no longer have to pay towards carrying other people's suitcases. Five days later, Ireland's Ryanair announced details of a similar plan to encourage passengers to travel with fewer bags.
...
Speeding up the check-in is likely to prove popular among passengers, especially those taking short trips. Flybe says only 55% of its passengers have bags to check, and it expects that number will now fall slightly. Because anything that persuades passengers to travel more lightly saves fuel and cuts the cost of ground services, other carriers will be studying this particular flight plan very carefully.
 The fairness argument appeals to the claimed 50% who do not check in bags. The airlines make this a "cost-based" argument, stating that, "if we don't incur the cost we won't charge you".
The issue is with differentiated pricing that aims to capture all consumer surplus for those who need this service and  does not reflect the cost. Consumers will view this as unfair pricing. For those who do use the service, it will  be unfair unless the airlines can show the value add that is more than the basic service that was included in the base price of the ticket.

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