By Carl Dombek
When American Airlines (NASDAQ:AAL) and later, United (NASDAQ:UAL) instituted fees for checked baggage back in 2008, I wrote the CEOs of both airlines, expressing my dismay and disgust over the fees (“Who travels without some sort of baggage anyway?” I asked) and sharing my opinion that the better approach would be to charge for carry-ons.
“Why” you ask? Because I thought charging for checked bags would result in more carry-ons, which would result in more crowded airplanes as well as longer boarding and deplaning times. And I was right.
Didn’t matter. The charges stayed and grew over time, gaining the reputation as one of the “ancillary fees” that helped airlines remain solvent, especially during the time of very high fuel prices in 2008.
But, as it turns out, there’s more to it than that. Moving a share of the all-in cost of flying to “ancillary services” like checked bags enabled airlines to keep their ticket prices down, resulting in a higher position on the list when search engines rank fares from lowest to highest.
You can thank technology for that. But you can thank Congress for another, relatively unknown, benefit of charging for checked bags instead of raising ticket prices: tax breaks.
For every ticket an airline sells, it remits 7.5% to the federal government in the form of a transportation tax. However, fees for checked bags are specifically excluded from this tax by the tax code, as codified in the Code of Federal Regulations (CFR), 26 CFR §49.4261-8(f)(1).
It states that the 7.5% transportation tax is waived as long as “the charge is separable from the payment for the transportation of a person and is shown in the exact amount.” That means an airline which sold a $300 round-trip ticket that included a checked bag would pay $22.50 in taxes. If the airline instead charged $220 for the ticket, plus $40 each way for a checked bag, its tax liability would be $16.50 for the ticket price, a savings of $6. Multiply that by six million domestic air travelers daily, and we’re talking real money.
Of course, not everyone checks a bag, or pays a checked bag fee if they do. But the savings to the nation’s airlines are still significant.
“Why” you ask? Because I thought charging for checked bags would result in more carry-ons, which would result in more crowded airplanes as well as longer boarding and deplaning times. And I was right.
Didn’t matter. The charges stayed and grew over time, gaining the reputation as one of the “ancillary fees” that helped airlines remain solvent, especially during the time of very high fuel prices in 2008.
But, as it turns out, there’s more to it than that. Moving a share of the all-in cost of flying to “ancillary services” like checked bags enabled airlines to keep their ticket prices down, resulting in a higher position on the list when search engines rank fares from lowest to highest.
You can thank technology for that. But you can thank Congress for another, relatively unknown, benefit of charging for checked bags instead of raising ticket prices: tax breaks.
For every ticket an airline sells, it remits 7.5% to the federal government in the form of a transportation tax. However, fees for checked bags are specifically excluded from this tax by the tax code, as codified in the Code of Federal Regulations (CFR), 26 CFR §49.4261-8(f)(1).
It states that the 7.5% transportation tax is waived as long as “the charge is separable from the payment for the transportation of a person and is shown in the exact amount.” That means an airline which sold a $300 round-trip ticket that included a checked bag would pay $22.50 in taxes. If the airline instead charged $220 for the ticket, plus $40 each way for a checked bag, its tax liability would be $16.50 for the ticket price, a savings of $6. Multiply that by six million domestic air travelers daily, and we’re talking real money.
Of course, not everyone checks a bag, or pays a checked bag fee if they do. But the savings to the nation’s airlines are still significant.
For example, American Airlines brought in $1.5 billion in baggage fees in 2024, the highest among the 11 U.S. carriers who reported to the Bureau of Transportation Statistics. United was next at $1.335 billion and Delta (NYSE:DAL) came in third with $1.06 billion collected. In all, 13 U.S. carriers reported $7.27 billion in baggage fees, and by doing do avoided more than $545 million in taxes.
This information helps me to understand why U.S. airlines are more inclined to raise their baggage fees, as they’ve done multiple times since 2008, rather than raise taxable ticket prices. After all, as Woodward and Bernstein were advised in the movie, “All the President’s Men,” FOLLOW THE MONEY. As much as paying baggage fees still irks me, they at least make a little more sense.
Visit my main page at TheTravelPro.us for more news, reviews, and personal observations on the world of upmarket travel.
This information helps me to understand why U.S. airlines are more inclined to raise their baggage fees, as they’ve done multiple times since 2008, rather than raise taxable ticket prices. After all, as Woodward and Bernstein were advised in the movie, “All the President’s Men,” FOLLOW THE MONEY. As much as paying baggage fees still irks me, they at least make a little more sense.
Visit my main page at TheTravelPro.us for more news, reviews, and personal observations on the world of upmarket travel.
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