Why did Airlines Start Charging for Bags and Meals?

Twenty years ago, it was taken for granted that the price of your airline ticket covered checked luggage—and a meal if the flight was long enough to justify one. Today most airlines—the major exception is South-western—charge for each checked bag. All airlines within the U.S., in my experience, charge for meals. Soft drinks and peanuts are still usually free.

Looking at it as an economist, charging for extras that cost the airline something to produce seems like a sensible enough policy. If it costs the airline five dollars to provide dinner in the air, passengers who want the meal should be indifferent between the current fare and a free meal and a fare five dollars lower, accompanied by a five dollar charge for eating. Passengers to whom the meal is worth less than five dollars should prefer the latter arrangement. So charging for a meal, or any other costly add-on, while adjusting fares accordingly, benefits some customers, hurts none, and costs the airline nothing.

Bag charges may be an exception. As my wife likes to point out, the result of charging for checked bags is that people carry more as carry on, making it harder for everyone to board. At least one small airline I know of solved that problem by charging for carry on luggage as well, but, so far as I know, none of the majors have imitated it.

Charging for things makes sense now. Not charging for them made sense forty years ago. Under airline regulation, the industry functioned as a cartel; an airline could not lower its price without CAB approval. That held fares well above their competitive level, making it in the interest of airlines to compete on non-price terms—including free meals.

If the airlines had switched to charging for meals and luggage in the late seventies or early eighties, shortly after deregulation, there would be no puzzle—but they didn't. As best I can determine by a quick google, the first airline to do so was American, which only started charging for checked luggage in 2008. Airlines started dropping free meals earlier, about 2001, and started offering meals for sale a few years later. Why then?

One possible explanation for when free meals started to disappear might be 9/11, which caused considerable financial problems for the airlines—perhaps they decided they could no longer afford them. But that does not make sense from an economic standpoint. After deregulation, the airlines were free to raise or lower their fares. If meals cost the airline more than they were worth to their customers, why not abolish them earlier and lower prices accordingly? If not, then dropping the free meals was a less attractive alternative to raising fares, so why do it?

The closest I can come to an explanation of this puzzle requires me to replace the economic assumption of rational behavior with a form of predictable irrationality—the widespread belief in just prices, a subject I discuss in an old article linking economics to evolutionary psychology. 

Many people act as if they believe that they have a moral right to continued transactions on whatever terms they are used to having them in the past—that a seller who raises his prices is somehow trying to cheat them. It is not an unqualified belief—evidence that the seller's cost has increased may sometimes rebut it—but it is at least a presumption. And one way of acting on it is to avoid doing business with sellers who act that way, who offer you the same transaction at the same price for a period of years, then suddenly raise the price or reduce what they are giving you in exchange. 

For instance, airlines that stop providing you with free meals.

Of course, airline prices change all the time. But then, they also vary according to where you are flying, when you are flying, and how long in advance you bought your ticket, a pattern complicated enough so that the average passenger cannot easily keep track of whether the airline is offering the same fares this year as last. He can notice if the airline stops offering free meals or starts charging for checked luggage. And resent it.

If this analysis is correct, an airline that stopped offering meals with no obvious reason would suffer a reputational loss. Customers would decide that that airline was not their friend, was trying to exploit them, and would avoid it when possible. 9/11 offered an excuse. I do not know what set off the later switch to bag charges, but it may be significant that, within a fairly short period of time, most airlines were doing it, perhaps because the later ones had the practice of the earlier movers to justify their charges. And it may be significant that South-western, a very successful firm, continues to carry bags for free and makes a large point of that fact in their advertising.

This is a possible, partial, explanation of what happened, but not a very convincing one. Readers with better answers to my puzzle are invited to offer them.