Airlines and economics

American Airlines is making headlines this morning with plans to charge passengers $15 to check one piece of luggage one way . That may seem outrageous - and will no doubt lead to even more cramped planes as folks take their baggage on board- but the WSJ's Scott McCartney says that with fuel costs the way they are the airlines have no other choice than to nickel and dime us.

It's very difficult for airlines to simply raise prices to levels that cover their higher fuel costs. Raising prices chokes demand: If tickets get too expensive, business travelers make alternate plans, pick cheaper airlines or buy discounted tickets further in advance. For vacationers, if prices get too high, they don't buy or they switch to cheaper destinations. Airlines can price themselves right out of a sale. So to avoid that, carriers have been slap-happy with fees added at the airport, not at the ticket purchase point. A family heads off to Disney because they got a good fare – then find themselves paying $300 extra at the airport in baggage fees. Fees are essentially fare increases that airlines hope won't choke demand.

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But slapping fees on customers here, there and everywhere won't solve the problem. Airlines will have to make big cuts in capacity, eliminating flights that just aren't profitable with oil at $130 a barrel (as of Wednesday morning). Fewer flights means skimpier schedules for many travelers. More important, it means higher fares. The price of flying has to go up if airlines are to survive. Some may not survive, and instead of reorganizing in bankruptcy court, they may have to liquidate. That would actually be healthy for the industry – take the weakest competitor out and the survivors can raise prices back to where they may be able to make a profit or two.

Keep in mind that the major carriers make little or no money on standard domestic routes. It's international travel where they're able to recoup at least some of their costs. By the way, American also announced plans to take up to 85 aircraft out of its fleet, which translates into an 11 to 12 percent cut in service. That includes service to Oakland, starting this fall.