Five of the six major US airlines have increased their checked baggage fees starting in January 2024.
I'll fly American Airlines. In 2023, it cost $30 to check a standard bag with an airline. As of March 2024, the fare at U.S. airports is $40, a whopping 33% increase.
As a business school professor who studies travel, I'm often asked why airlines turn away customers with baggage fees instead of bundling all fees together. There are many reasons, but an important and often overlooked cause is hidden in the U.S. tax code.
loophole in tax law
Airlines pay 7.5% of the ticket price to the federal government when they transport passengers on domestic flights, along with other fees. Airlines hate these fees, and airline industry groups say they increase consumer costs for a typical ticket by about a fifth.
However, the U.S. Code of Federal Regulations specifically excludes baggage from the 7.5% transportation tax, so long as “the fee is separable from the payment of the person's transportation fee and is expressed in an accurate amount.”
This means that if an airline charges you a total of $300 for a round-trip ticket and baggage within the United States, you will have to pay $22.50 in taxes. If the airline charges you $220 for the flight, plus an additional $40 each-way fee for baggage, the total cost will be the same, but the airline owes the government $16.50. Only dollar taxes. By splitting the baggage fee, the airline saves $6.
Six dollars may not seem like a lot, but it can add up to a lot. Last year, more than 800 million passengers flew on major airlines. Even if only some people check their bags, that would mean significant savings for the industry.
How big? The government has been tracking revenue from baggage fees for decades. In 2002, airlines charged passengers a total of $180 million in baggage screening fees, which equates to approximately 33 cents per passenger.
Today, as any flyer can attest, baggage fees are extremely high. Airlines collected more than 40 times more in baggage fees last year than they did in 2002.
Once complete data is available in 2023, total baggage fees will likely exceed $7 billion, which equates to about $9 for the average domestic passenger. By splitting the cost of baggage, airlines avoided paying about $500 million in taxes last year alone.
In the 20 years since 2002, flyers paid approximately $70 billion in baggage fees. This means airlines could save about $5 billion in taxes by charging baggage separately.
I think it is clear that due to the specificity of the law, tax savings are a contributing factor to the unbundling of baggage fees.
The U.S. government does not apply the 7.5% tax on international flights that cross the border more than 325 miles. Instead, there are fixed international departure and arrival taxes. This is why major airlines charge $35 to $40 in baggage fees for domestic flights, but no baggage fees for flights to Europe or Asia.
Will travelers get anything for their money?
This system raises interesting questions. Will baggage fees force airlines to be more careful with baggage? Because customers who pay more expect better service. To find out, I turned to the Bureau of Transportation Statistics, which has been tracking lost packages for decades.
For years, we calculated the number of reports of baggage mishandling per 1,000 airline passengers. According to government data, baggage mishandling peaked in 2007, with about seven reports of lost or damaged luggage for every 1,000 passengers. That means he can expect to go on a trip about once in every 140 flights, where his luggage is different from his normal trip. By 2018, that estimate had dropped to 1 in 350 flights.
In 2019, the government changed the way mishandled baggage is tracked, calculating the figure based on the total number of checked bags rather than the total number of passengers. New data shows that around 6 bags out of every 1,000 checked bags are lost or damaged, which is less than 1% of all checked bags. Unfortunately, the data shows no improvement since 2019.
Is there anything I can do about the increased baggage fees? Complaining to politicians probably won't help. Two senators tried to ban baggage fees in 2010, but the bill failed.
Given the failure of Congressional action, there is an easy way to avoid skyrocketing baggage fees. Travel light and don't check baggage. It may sound like a pain to not take all your belongings with you when you travel, but it may be your best option as it will reduce your baggage fees.
