Time to Declare American Airlines a "Microeconomics-Free Zone"

Sun, 25 May 2008 14:09:12 +0000

The proposal from American Airlines to charge $15 for the first checked piece of luggage is so bad that even The New York Times story was able to list the key problems. Among them:

It is also likely to make the fight for already-tight space on planes more fierce, as passengers try to stuff more carry-on luggage into overhead bins.

American officials said the company had not devised a way to collect a $15 fee at boarding from passengers whose bags are deemed too big to carry on and must be stowed.

I'm not sure if doing it this way shields the $15 from travel agent commissions and that is playing a role. Even so, a better way to do it would be to simply raise the price of the discounted fare by $15 and credit elite frequent flyers with an additional 1500-3000 miles per flight (taking the value of an additional mile to be 1-2 cents). Given that the alternative taxes all tickets, not just those who check bags, it could be a smaller surcharge, even if it were to be split with travel agents.

But an even better way to do it would be to add a fuel surcharge to the tickets, since that's the input cost that is squeezing their profits. Plenty of businesses now do this. For discounted tickets, there could be a fuel surcharge that roughly offsets the cost of a barrel of oil beyond, say, $100. The fee could be determined as of 3 months before the flight. Those who book more than 3 months in advance could pay the surcharge based on the price of oil when they book and be entitled to a refund of the difference if the price falls in the intervening period. If fuel were to drop below $100 per barrel, then perhaps the surcharge could be waived or turn negative.

I don't think most passengers would mind the fuel pass-through as much as they mind this unrelated surcharge. It would allow the airlines to be honest with their customers, which goes a long way.