United Airlines just announced that they are increasing their fee on the second checked bag from $25 to $50 for, essentially, economy seats on North American domestic flights. Their 1st check bag fee remains $15. This is great timing for me, personally, because the subject of my business law class this morning was tort law. The connection being that damages available under tort law include compensatory, nominal, and punitive. Airline fees seem to be falling into the same categories lately, with some airlines adopting what can only be considered punitive fees. $50 for a second checked bag being a prime example.

Continental Airlines reported last week that it expects to generate up “in excess of $100 million dollars in net benefits” from their baggage fees over the next year. Following the trend of many U.S. airlines, CAL has put in place a $15 fee for the first checked bag for its domestic economy passengers. You have to wonder if their definition of “net benefits” would show that a customer lost to the competition is a “net benefit” since you won’t incur the cost of servicing that customer. Frontier Airlines demonstrated this week that it really isn’t a whole different animal by following the industry trend and introducing its own checked baggage fee schedule that starts with $15 for the first checked bag, $25 for the 2nd and 3rd checked bags, and $50 for the 4th and higher check bags.

Now, getting back to tort law, Frontier’s checked baggage fees make good fodder for my “damages” example. I.e., a $15 fee could be considered “nominal” meaning that it isn’t that big of a deal and gets the point across that, yes, checking in a bag for a flight is in fact a service that one could reasonably be expected to pay for. The $25 fee being more “compensatory” in nature, meaning that it is really just there to cover the costs of handling the extra baggage. Then, lastly, my favorite. The punitive fee of $50 for the 4th and all subsequent bags. Punitive meaning that it is really more like a fine than a fee. Clearly, such behavior is harmful to society and you need to be made an example of, lest others commit similar atrocities.

As fun as that all is, baggage fees really are, by and large, simply revenue grabs. An appropriate nominal fee would be $1, and a justifiable compensatory fee would be in the $5 - $10 range. I do hold, however, that $50 for any checked bag is really a punitive fee. It makes sense that handling and transporting baggage is a service, and providing that service costs the airline money that it should be able to recoup and, dare I say, profit from. However, what do you think it actually costs an airline to carry a 50lb bag on a flight? Well, if you are a 737-800 flying 1,200 nautical miles, throwing one more 50 lb bag onto an already loaded aircraft would mean that would burn about 1 extra gallon of fuel on the flight. In economic terms, the marginal fuel burn for 50lbs is about 1 gallon. An A321 flying coast-to-coast would need about 2 extra gallons of fuel to take on that extra 50lb bag. Keep in mind, though, that most short haul flying is less than 500 nautical miles. Granted, there is also a ground handling cost involved which I don’t have a good estimate for, but I would guess to be around $1 per bag at the margin.

Now, no one will blame a money losing airline for trying to increase revenues, but in a highly competitive market you have to be suspect of prices that grossly exceed the marginal cost of providing the product/service. They are just not sustainable. In other words, if there is that much margin built in to baggage fees, then you have to expect that they’ll eventually be competed away. Indeed, Southwest is making quite a big deal of the fact that it does not charge such fees. Now, that isn’t to say that baggage fees, in some form, won’t hold. I think “nominal” and “compensatory” level fees, to stick with the analogy, can stand up to competitive pressure, but $50 for a second bag will likely cost United more money in lost customers than it will generate in revenues.

When I wrote about door to door service back in September I didn’t realize that Emirates has been offering such a service, called Chauffer-Drive (Note to Firefox users: this link may crash your browser) to its first- and business-class customers for years. While it’s nice to have my line of thinking validated, it also illustrates how hard it is to have a unique idea in a world of over 6 billion people.

Steven Levitt, of Freakonmics fame, blogged yesterday about his invitation to be interviewed by Sky Radio Network, airing on American Airlines. Although accustomed to turning down dozens of interview requests a week, he decided that he would agree to this interview request. That is, until he realized that this was not an interview request, but a sales pitch to get a sound bite delivered to a captive audience under the auspices of journalism. Dr. Levitt was afforded the opportunity to pay just $3,995 to get his interview aired on AA via Sky Radio Network’s programming.

All of my flying over the past several years has pretty much been limited to short haul flights on so-called regional airlines, so Sky Radio Network was new to me. Jumping over to their website you are instantly greeted with a long list of prominent personalities and the ability to listen to their interviews. Had I just stumbled upon the site, my first impression may have been that I found a treasure trove of information, but, finding it as I did, my first thought was “Wow! Look at all these people who shelled out four grand to make an infomercial!”. However, given some of the names on the homepage, I think it’s a safe bet that not all the interviews were paid for by the interviewee. And therein lies the problem: if you can’t tell the difference between an interview and an infomercial, the the credibility of all of them becomes suspect. My guess is that the masking of the fact that the “interviews” are paid for by the interviewee is part of Sky Radio Network’s business plan. To be fair, at the bottom of each web page the statement “Guests on our shows may have paid a fee to appear.” can be found. How many of you frequently read the footers of webpages?

I just listened to about 15 minutes of “Radio Entrepreneur” as broadcast by Sky Radio Networks on American Airlines, and I have it say it was a little painful. It started out decent enough, with what was probably a “real” interview, but then turned into a series of infomercial-esque “interviews”. One was particularly amusing at the “interviewer” said something like “this is exciting” in a dead monotone voice. I’m sure it’s pretty obvious to most people that these interviews are really advertisements, but no where in the programming was that explicitly made clear.

It is easy to see how Sky Radio Network is attractive to the airlines. As airlines become more savvy at finding and exploiting “ancillary” revenue streams, getting paid to broadcast radio programming on flights is a great proposition. My initial line of thought was that American Airlines, or any other airline broadcasting this programming, could be adversely affecting by associating their name with the broadcast. However, I think that is really pretty unlikely given what I just listened to, just like I doubt a passenger would look down on an airline for making the Home Shopping Network available through a seat-back TV.

Perhaps Sky Radio Network and/or American Airlines should reconsider their existing model. Obviously there is a market where passengers will pay to listen to or watch CNBC or ESPN, but ad-supported broadcasting on airlines likely has more potential than is currently being exploited. I’ve stared at a moving map display in the seatback of a Frontier flight for hours because I was too cheap to pay for the programming, but I would have happily sat through commercials in order to have something free to listen to or watch. Likewise, I’m sure a lot of passengers would be interested in hearing a thoughtful interview of Steven Levitt, and he was there for the taking until he was asked for $3,995.