The impact of baggage fees on passenger demand on US air routes

In recent years, US airlines have unbundled ancillary fees from base air fares. As a result, the carriers have implemented a variety of fees on a range of optional services. Among these, checked baggage fees now represent a significant source of airline revenues. This paper assesses the impact of baggage fees on passenger demand and airline fares. We study a sample of US domestic routes over the period 2007-2010 where passengers have a choice between carriers that charge fees for checked baggage and Southwest Airlines, which allows passengers one or two "free" checked bags. A system of simultaneous equations is estimated. Our results show that, on an average route, a $1 increase in baggage fee leads to a loss of 0.7 passengers and is associated with a $0.11 reduction in fare levels. Interestingly, an equivalent increase of $1 in fares results in a much greater decline in passengers (eight times greater). Therefore, our results support the idea that substituting additional baggage fees for higher fares may be a beneficial strategy for carriers in terms of generating revenues and maintaining market share.