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Five of the six largest U.S. airlines have increased their checked baggage fees since January 2024.
Take American Airlines. In 2023, it cost $30 to check a standard piece of baggage with this airline; today, in March 2024, it costs $40 at a US airport – a whopping increase of 33%.
As a professor of travel studies at a business school, I’m often asked why airlines alienate customers with baggage fees instead of bundling all fees. There are many reasons, but one important, often overlooked cause lies hidden in U.S. tax law.
A gap in tax law
On domestic flights, airlines pay the federal government 7.5 percent of the ticket price, among other fees. The airlines dislike these fees because their industry association argues that they increase the price for the consumer of a typical airline ticket by about a fifth.
However, the U.S. Code of Federal Regulations specifically exempts baggage from the 7.5% transportation tax as long as “the charge is separable from payment for the carriage of a person and is accurately stated.”
This means that if an airline charges a total of $300 for your round-trip flight within the U.S. and for your luggage, it must pay $22.50 in taxes. If the airline charges $220 for your flight and charges an additional $40 for luggage each way separately, your total cost is the same – but the airline only has to pay the government $16.50 in taxes. By splitting the baggage fees, the airline saves $6.
$6 may not seem like much, but it can add up. Last year, passengers took more than 800 million flights on major airlines. Even if only a fraction of those checked their bags, that represents a big savings for the industry.
How much? The government has been tracking baggage fee revenue for decades. In 2002, airlines charged passengers a total of $180 million for checked baggage, which worked out to about 33 cents per passenger.
Today, baggage fees are much higher, as any passenger can attest. Last year, airlines earned over 40 times more money from baggage fees than in 2002.
When full data for 2023 is available, total baggage fees will likely exceed $7 billion, or about $9 for the average domestic passenger. By sharing baggage costs, airlines avoided about half a billion dollars in taxes last year alone.
In the two decades since 2002, airline passengers have paid a total of about $70 billion in baggage fees. This means that airlines have saved about $5 billion in taxes by charging separately for bags.
It seems clear to me that tax savings due to a legal loophole are one reason for unbundling baggage fees.
The U.S. government does not impose the 7.5 percent tax on international flights that go more than 225 miles beyond the country’s borders. Instead, there are fixed international departure and arrival taxes. This is why major airlines charge $35 to $40 for luggage when you fly domestically, but do not impose a baggage fee when you fly to Europe or Asia.
Do travelers get something for their money?
This system raises an interesting question: Do baggage fees force airlines to be more careful with luggage, since customers who pay more expect better service? To find out, I checked with the Bureau of Transportation Statistics, which has been tracking lost luggage for decades.
For many years, it calculated the number of mishandled baggage reports per thousand passengers. Government data showed that the number of mishandled bags peaked in 2007, when there were about seven reports of lost or damaged baggage per thousand passengers. This means that you can expect your baggage to be taken on a different journey to the one you are taking about every 140 flights. By 2018, this estimate had dropped to once every 350 flights.
In 2019, the government changed the way it records misdirected baggage. The figures are now calculated based on the total number of checked bags rather than the total number of passengers. The new data shows that around six out of every thousand checked bags are lost or damaged, which is less than 1% of checked baggage. Unfortunately, the data shows no improvement since 2019.
Can you do anything about higher baggage fees? Complaining to politicians probably won’t help. In 2010, two senators tried to eliminate baggage fees, but their bill failed.
Since Congress hasn’t done anything, there’s an easy way to avoid higher baggage fees: travel light and don’t check any bags. It may sound harsh not to have all your belongings with you when you travel, but with baggage fees rising, it may be your best option.
Jay L. Zagorsky is an associate professor of markets, public policy, and law at Boston University.
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