Baggage Fees Research Articles

Pricing Optimization for Perishable Primary and Ancillary Items with Time-Dependent Inventory Drawdown

There are many industrial applications where attempts are made to sell ancillary products or services with a primary item. For instance, a warranty is often offered as an ancillary product to those who buy television sets (the primary item). This has become even more important in the airline industry where ancillary products such as baggage fees have become crucial to the financial health of the industry. Rapid depletion of available seat inventory, akin to perishable assets, necessitates careful consideration of pricing strategies to maximize revenue. It can make a big difference to revenue if certain fare classes are likely to sell out quickly. For instance, if most of the fares without seat assignment sell out earlier than those with seat assignment, the airline would forego a lot of the revenue from the ancillary item. We formulate the problem allowing for time dependence. In this paper, the question of what price to charge for the primary and ancillary products will be investigated.

PENGARUH KEBIJAKAN BAGASI BERBAYAR PADA MASKAPAI LION AIR TERHADAP KEPUASAN PENUMPANG DI BANDAR UDARA DOMINE EDUARD OSOK SORONG

This thesis research is motivated by the paid baggage system policy implemented by Lion Air airline in 2019. Lion Air is known as an airline whose services use low cost carrier/LCC with cheap ticket prices and waived baggage fees. For the Papua route, Lion Air is the only airline that operates and reaches the interior of Papua with quite expensive ticket prices. With this policy, it might burden the community, especially the lower middle class. The purpose of this research is to determine the influence and how much influence the Lion Air airline's paid baggage policy has on passenger satisfaction at Domine Eduard Osok Sorong Airport. This research uses a quantitative approach with an analysis technique, namely simple linear regression. The results of this research show that the paid baggage policy at Domine Eduard Osok Sorong Airport has a significant effect on passenger satisfaction due to the significance value obtained where T count (20.695) > T table (1.662). T calculated with a significance level of 0.00 < 0.05 and a value of the coefficient of determination of 0.0831, this means that 83.1% of the variation in changes in passenger satisfaction can be explained by the paid baggage policy. So it can be concluded that Ha is accepted and Ho is rejected.

Competitive response to unbundled services: An empirical look at Spirit Airlines

AbstractIn 2010, Spirit Airlines announced that it would start charging passengers for carry‐on baggage. Using a vector of route‐level characteristics, we construct a matched group consisting of routes which best match those served by Spirit (the treated group). We then run a difference‐in‐difference estimation using the treated and matched group, and examine the impact of Spirit's baggage fee policy on its rivals' ticket prices. Our results show that Spirit's rivals reduce their prices by about 5.8% after Spirit charges carry‐on baggage fee. We also look into potentially heterogeneous responses across different types of rivals. There is no significant difference in how low‐cost carriers and legacy carriers respond to Spirit's policy change. However, relative to non‐subcontracting carriers, those which subcontract operations to regional carriers reduce their prices further by more than 10%, including average prices (linear or log) and various other points on the price distribution. We also develop a stylized theory model to help better understand our empirical findings.

Raising Rivals Costs by Customer Diversion: Evidence from Airline Baggage Fees

This study examines the effects of airline baggage fees as a method for diverting high cost passengers to rival airlines that do not charge such fees. We show that the latter in turn must raise their fares, thereby weakening their competitive constraint on carriers with fees and permitting the latter actually to raise their fares. Our empirical evidence focuses on routes where legacy carriers with baggage fees compete with Southwest, which has never had such fees. Consistent with the above implications of the model, we find nontrivial cost and price increases for Southwest and corresponding nontrivial fare increases by legacy carriers on routes on which they overlap with Southwest. These results provide support for the theory of "raising rivals’ costs", this in airlines, but common in other settings where unbundled pricing shifts customers between firms.

Airline baggage fees and airport congestion

This paper builds an economic model to investigate the interactions between baggage fee and airport congestion. With checked bag fees, we find that the socially optimal numbers of passengers and checked bags will not be achieved if the marginal congestion cost from carry-ons is larger than that from checked bags. However, it is possible with bundle pricing. Furthermore, we use numerical experiments to illustrate that checked bag pricing may underperform bundle pricing in terms of social welfare.

A REVIEW OF RECENT TRENDS IN AIRLINE ANCILLARY REVENUES

Airline ancillary revenue which refers to non-ticket revenue sold directly to passengers or indirectly as part of their travel experience, has become a mandatory component for the revenue mix of all airlines as well as a key reason for the improved financial performance of the airline industry in the recent years. It is generated by a large amount of activities that include „a la carte” services such as fees for checked bags, frequent flying miles to airline partners, miscellaneous sources like advertising and commission-based products such as inflight retail, and car rentals - virtually any service added to the core transportation service. Contribution of ancillary services to the total revenue streams of airlines has been increasing substantially over the past decade. In 2007, the top ten airlines, as rated by total ancillary revenue, generated $2.1 billion, while ten years later, the top ten airline total has reached $29.7 billion. The paper explores the recent growth and trends in ancillary revenue in the airline industry, particularly within in the last ten years and identifies significant differences in ancillary sources with regard to carrier type. Low-cost carriers pioneered the practice of charging for supplementary services that were previously provided free of charge by seeking revenue from checked bags, assigned seats and extra leg room seating. Traditional airlines moved from all-inclusive booking arrangement and started to adopt add-on bundling practice when selling flight tickets taking advantage of low headline price. Their ancillary revenue mostly comes from the use of frequent flyer program, a mix of baggage fees and premium seats. Top airlines in overall ancillary revenue performance measured as total revenue, a percent of revenue, or on a per passenger basis are determined in the paper and new trends in creating ancillaries are elaborated. In order to improve profit performance, the airline revenue management and distribution systems should consider total revenue from each passenger, by linking his ticket value and his ancillary revenue potential.

The Impact of Carry-On Baggage Fee and the Differential Burden on Regional Airlines

In 2010, Spirit airlines announced that it would start charging passengers for carry-on baggage. Using a vector of route level characteristics, we construct a matched group consisting of routes which best match those served by Spirit (treated group). We then run a diff-in-diff estimation using the treated and matched group, and examine the impact of Spirit's baggage fee policy on its rivals' ticket prices. Our results show that Spirit's rivals reduce their prices by about 5.8% after Spirit charges carry-on baggage fee. Looking into potentially heterogeneous impacts, we find that the policy impact is smaller on low-cost carriers relative to legacy carriers. We also take into account subcontracting status. Relative to non-subcontracting carriers, those which subcontract operations to regional carriers reduce their prices further by more than 10%, including average price (linear or log) and various points on the price distribution. We also develop a stylized theory model to help better understand our empirical findings.

The impact of a baggage fee waiver on airline choice: Evidence from the Washington-Baltimore region

Using the revealed choices of airline passengers assessed from survey data, we investigate the impact of baggage fees (or baggage fee waivers (BFW)) on airline choice. We find that when segmenting passengers, the BFW is a significant inducement for passengers who potentially have a greater need to check bags; that is, passengers traveling on long flights, for long distances, or for leisure purposes. Further, we find that the greatest impact of implementing the baggage fee is in changing the behavior of passengers at the fee-charging carriers (significantly reducing the proportion of passengers that check bags) rather than in inducing passengers to switch to the BFW carriers from the fee-charging carriers.

Do Bags Fly Free? An Empirical Analysis of the Operational Implications of Airline Baggage Fees

In 2008, the majority of U.S. airlines began charging for the second checked bag, and then for the first checked bag. One of the often cited reasons for this action by the airlines’ executives was that this would influence customers to travel with less baggage and thus improve cost and operational performance. A popular customer belief, however, is that airline departure delays got worse due to an increase and size of customer carry-on baggage. A notable exception to the charging for checked bags trend was Southwest Airlines, which turned their resistance to this practice into a “Bags Fly Free” marketing campaign. Using a publicly available database of the airlines’ departure performance, we investigate whether the implementation of checked bag fees was really associated with better operational performance metrics. At the aggregate level, using all publicly recorded U.S. flights from May 1, 2007, to May 1, 2009, we find that the airlines that began charging for checked bags saw a significant relative improvement in their on-time departure performance in the time periods after the baggage fees were implemented. Surprisingly, we also find that airlines that did not charge for checked bags also saw an improvement, although not as big, when competing airlines flying the same origin-destination city markets implemented the fees. The improvement in on-time departure performance was the largest for flights during peak evening departure time blocks. This paper was accepted by Serguei Netessine, operations management.

Airline baggage fees and flight delays: A floor wax and dessert topping?

We examine the linkages between the implementation of baggage fees and late flights in the airline industry. We find that baggage fees policies result in improvements in on-time performance as assessed through late flights, directly through improvements in airport-side sorting and loading efficiencies, and indirectly through lower air travel demand. We further find that these relationships are contingent upon the presence of a hub airport on a route. Our findings have important managerial and public policy implications as baggage fees have often been cited as a driver of security queue, aircraft alley, and overhead bin congestions, and ultimately delayed flights. Our results suggest that these suppositions could be misplaced.

When Do Firms Offer Higher Product Quality? Evidence from the Allocation of Inflight Amenities

This study examines when firms offer higher product quality. We measure product quality by examining four different inflight amenities provided by airlines: Wi-Fi, seat size, entertainment, and seat power. Using daily flight level data for over 800 routes and spanning nine weeks in third quarter of 2015 we observe that carriers were actively retrofitting aircraft to expand their inflight amenity offerings. We find significantly lower product quality (Wi-Fi, entertainment, and power) on more concentrated routes. While considerable research has been done on airline pricing, less well known is how airlines pursue other revenue streams from ancillary services. Recent work by Brueckner et al. (2015) explores the role of baggage fees in airline pricing. We examine additional revenue streams provided by Wi-Fi and entertainment inflight amenities. We find that carriers are lowering the posted base ticket prices on routes with Wi-Fi and entertainment and then charging passengers for using these amenities. The IV price estimates reveal that magnitude of the posted fare reduction is larger than the additional revenue generated from the inflight amenity.

Measuring the Benefit of Offering Auxiliary Services: Do Bag‐Checkers Differ in Their Sensitivities to Airline Itinerary Attributes?

When firms evaluate their service system design choices, there is typically more uncertainty surrounding the value that a particular auxiliary service provides than there is on the cost of providing that service. To help inform this decision, we propose an approach where we compare the relative value of the segment of passengers who use an auxiliary service to the relative value of the segment that does not use it. We demonstrate this approach for a typical auxiliary service common to the airline industry. In 2008, most US airlines implemented checked baggage fee policies to decrease their costs by reducing the number of customer service agents needed in the check‐in and baggage handling processes. The success of this change has led to a current debate at many of these airlines on whether to make further staffing cuts in these areas, essentially making it even less attractive for passengers to check their baggage. Our proposed methodology helps answer whether passengers who continue to check bags in today's baggage‐fee era are more or less valuable than passengers who do not check bags. We explore this question empirically by examining, through a stated preference survey, if a history of checking or not checking bags can be used to segment passengers based on how their itinerary choices are influenced by common airline service attributes (on‐time performance, itinerary time, number of connections, airfare, and schedule delay). Contrary to the opinions of some top airline executives, we find that the passengers who continue to check bags at airlines that charge baggage fees are generally less sensitive to differences in three of these important service attributes and are less likely to switch airlines when a competing airline improves its offerings along these dimensions. Thus, airlines that charge for checked bags should consider improving the customer experience for their bag‐checking passengers, as they represent a potentially more valuable segment class to the airline.

Baggage fees, operational performance and customer satisfaction in the US air transport industry

In recent years, there has been a “de-bundling” trend in the US airline industry, where specific services that used to be included in a ticket fare are now priced separately. Although a major reason for these fees is to raise revenues for the airlines, the fees may also impact the operations of carriers. Among the new fees implemented by most US carriers is a payment for checked baggage. This paper analyzes the association of baggage fees with airline operational service outcomes, as measured by flight delays, mishandled baggage rates and the rate of customer complaints. Using data from the US domestic air transport market over the period 2004–2012 and estimating a series of equations, our results show that, on average, an increase in baggage fees is associated with a decrease in the mishandled baggage rate and to a reduction in the percentage of delayed flights. No significant association is found between the fees and the rate of customer complaints.

Measuring the Benefit of Offering Auxiliary Services: Do Bag-Checkers Differ in Their Sensitivities to Airline Itinerary Attributes?

When firms evaluate their service system design choices, there is typically more uncertainty surrounding the value that a particular auxiliary service provides than there is on the cost of providing that service. To help inform this decision, we propose an approach where we compare the relative value of the segment of passengers who use an auxiliary service to the segment that does not use it. We demonstrate this approach for a typical auxiliary service common to the airline industry. In 2008, most U.S. airlines implemented checked baggage fee policies to decrease their costs by reducing the number of customer service agents needed in the check-in and baggage handling processes. The success of this change has led to a current debate at many of these airlines on whether to make further staffing cuts in these areas, essentially making it even less attractive for passengers to check their baggage. Our proposed methodology helps answer whether passengers who continue to check bags in today’s baggage-fee era are more or less valuable than passengers who do not check bags. We explore this question empirically by examining, through a stated preference survey, if a history of checking or not checking bags can be used to segment passengers based on how their itinerary choices are influenced by common airline service attributes (price, number of connections, itinerary time, schedule delay, and on-time performance). Contrary to the opinions of some top airline executives, we find that the passengers who continue to check bags at airlines that charge baggage fees are generally less sensitive to differences in three of these important service attributes and are less likely to switch airlines when a competing airline improves its offerings along these dimensions. Thus, airlines that charge for checked bags should consider improving the customer experience for their bag-checking passengers, as they represent a potentially more valuable segment class to the airline.

Jointly Optimising Prices for Primary and Multiple Ancillary Products

There are many industrial applications where attempts are made to sell ancillary products or service with a primary item For instance, a warranty is often offered as an ancillary product to those who buy the television sets (the primary item). This has become even more important in the airline industry where ancillary products such as baggage fees have become very important to the financial health of the industry. In this paper, the question of what price to charge for the primary and ancillary products will be investigated.

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.

A Simple Framework for Estimating Consumer Benefits from Regulating Hidden Fees

Policymakers are increasingly turning to regulation to reduce hidden or non-salient fees. Yet the overall consumer benefits from these polices are uncertain because firms may increase other prices to offset lost fee revenue. We show that the extent to which firms offset reduced hidden fee revenue is determined by a simple equation that combines two “sufficient statistics,” which can be estimated or calibrated in a wide range of settings: (i) a parameter that captures the degree of market competitiveness and (ii) a parameter that captures the salience of the hidden fee. We provide corroborating evidence for this approach by drawing upon evidence on the effect of fee regulation under the 2009 CARD Act. We also illustrate the applicability of our approach by using the framework to assess a hypothetical regulation of airline baggage fees.

A Simple Framework for Estimating Consumer Benefits from Regulating Hidden Fees

AbstractPolicy makers are increasingly turning to regulation to reduce hidden or nonsalient fees. Yet the overall consumer benefits from these policies are uncertain because firms may increase other prices to offset lost fee revenue. We show that the extent to which firms offset reduced hidden-fee revenue is determined by a simple equation that combines two sufficient statistics, which can be estimated or calibrated in a wide range of settings: a parameter that captures the degree of market competitiveness and a parameter that captures the salience of the hidden fee. We provide corroborating evidence for this approach by drawing upon evidence on the effect of fee regulation under the 2009 Credit Card Accountability Responsibility and Disclosure Act. We also illustrate the applicability of our approach by using the framework to assess a hypothetical regulation of airline baggage fees.

Revenue management for fare families with price-sensitive demand

Fare families are becoming a popular way to organize and market airline products. Typically, fare families correspond to product categories that differ by relatively more important features such as refundability or baggage fees while products within a family may be differentiated to a lesser degree. Organizing product offerings in this way is thought to help with better management of price-sensitive demand. We propose a way to accommodate fare families by building upon the traditional yield demand concept. Namely, we introduce a new demand component consisting of customers seeking the lowest priced product regardless of the product category and its restrictions or privileges. We discuss a plausible approach to forecast it and we show how to incorporate the new demand model in the optimization. To this end we adapt the marginal expected revenue data transformation and show, by example, comparisons with heuristic approaches that may more directly fit into the existing optimization frameworks. We discuss some extensions of the model.

From ‘free’ to fee: Acceptability of airline ancillary fees and the effects on customer behavior

Businesses in various consumer service industries have begun to unbundle their service offerings by introducing numerous fees for products and services that were previously provided as “free.” Anecdotal evidence in the media indicates that these fees cause widespread public displeasure, frustration, and outrage. This paper develops a framework of fee acceptability, negative emotions, and dysfunctional customer behavior, which is tested using data from the airline industry. Findings identify the strongest effects on betrayal in the case of baggage fees, followed by charges for comfort. Also, betrayal has a direct effect on complaining, whereas anger mediates the relationship between betrayal and negative word of mouth.