Evan Soltas
Jun 18, 2012

That's the Spirit!

Spirit pushback
One of the things I hate most about airline travel -- and there's a lot to dislike, for sure -- is how non-business passengers grossly abuse the carry-on baggage system, lugging massive suitcases into the cabin that should be checked.

I forgive the frequent flyers who, usually for business, carry their (usually quite light) bags on. But for the recreational travelers, who do this merely to avoid paying for checked bags, I feel nothing but frustration and contempt.

The time they waste runs in the tens of man-hours, cumulatively for all passengers and crew, in loading and unloading their usually massive bags from the overhead compartments.

This is a problem created by incentives. Passengers used to check their luggage, but when airlines added fees, passengers responded. They quickly figured out that they could circumvent the fees by carrying the bags on -- or when the overhead compartments filled, brimming with suitcases, they could check them at the gate for no cost.

Some airlines then tried to attach fees to this practice, but Senator Charles Schumer extracted promises from five major carriers against charging for carry-on luggage too large to fit beneath the seat, according to John Cochrane, who shared my frustration in a recent blog post.

But some smaller carriers ignored Schumer and charged fees. And, reporting firsthand from my flight yesterday on Spirit Airlines, I can report to you that "people [do indeed] respond to incentives."

Spirit charges $30 for the first carry-on bag on domestic flights, not including something that can go under the seat, when a standard passenger reserves that right online during booking. But, in what constitutes a $2 incentive, they charge $28 for the first checked bag when booking online.

And the incentives keep coming: if you wait until you show up at the airport counter to decide that you need to carry on or check a bag, it costs $40 and $38 respectively. That means there is a $12 incentive to decide during online booking you will check a bag than deciding at the counter to carry the bag on. Again, a $2 incentive exists at that moment to check rather than to carry-on.

If you wait until the gate, instead of getting a freebie, you get punished with a $45 per-bag charge for carry-ons. The cumulative incentive against doing what everybody does on every other airline is $17 per bag.

Spirit Airlines has the incentives aligned correctly. They want people to pack light, or failing that, to check their bags and check them early, rather than waiting until the last minute to drop them off at the gate.

The incentives work wonders. Instead of completely-filled overhead compartments, I estimate there were fewer than ten suitcases stored. The total difference time to board and disembark the aircraft, again estimating, was roughly a half-hour. Multiplied for a cabin of roughly 180 passengers, total time saved is 90 man-hours.

Assuming that people value their time at $8 per hour, and that 80 percent of passengers would have otherwise carried large bags on, the per-bag benefit of the incentive structure is $5. Remember, Spirit Airlines effectively pays its passengers $2 to check their bags.

If you consider the $5 per bag as an externality -- the cost imposed by the bag-wielding passenger on the rest of the passengers -- then Spirit's incentives are in effect a side payment which generates a Pareto-efficient outcome. Vive le Coase theorem!

(Add onto that your own estimate of the opportunity cost to Spirit Airlines of keeping the plane running with crew for the additional half hour, and moreover the fuel costs for the total difference in baggage weight.)

I never thought I would use this blog to publicly praise an airline -- heck, I never thought I would praise an airline, period -- but Spirit Airlines' bag-fee incentives serve as a remarkable example of the power of economic incentives, as well as a practical application of  side payments to resolve an externality problem.