It appears as a stylized fact that airlines are getting an increased portion of their revenue through pricing channels other than the "basic ticket." Examples: baggage fees; ticket change fees; food and drink charges; charges for pillows and blankets; optional and priced plans for early check-in; charges for extra leg room. Kevin O'Leary of discount carrier RyanAir has repeatedly suggested charging for the loo, but I don't think that has been implemented yet.
Why the increased reliance on these new revenue channels?
a) Behavioral economics: Consumers don't notice such charges as readily as ticket prices. (I try this with my cat -- hide the pill in her food, but she outsmarts me every time. But don't let me influence your choice; cats might be smarter than people. One of my favorite econ profs used to famously tell his graduate students: You all think you are smarter than dogs, but you aren't -- you're just quicker.)
b) All these things have positive marginal costs, so the airlines are simply learning to price services in line with their costs.
c) Price discrimination. People who travel with lots of bags, for e.g., are more likely to have an inelastic demand for travel, so use baggage charges as a price discrimination scheme. This is similar to IBM in the old days charging their mainframe computer users by the number of "cards" that they consumed. (For youngsters, in the old days, data and even programs were coded onto paper cards and fed into computers. Yes, it was a pain in the butt.)
d) That perennial issue of taxes, and avoidance thereof. According to an IRS ruling in January, the kinds of fees being discussed are not subject to the 7.5% airline transportation tax. See here for details on the ruling, including the IRS private letter.
e) Because they can.
And the answer is.....
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