In today’s Finshots, we take a look at the economics of lost, stolen or mishandled luggage and how airlines are dealing with it.

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The Story

Planes are full. People are exploring new cities. And global air traffic is at around 95% of pre-pandemic levels. The aviation industry is making a solid comeback and many carriers are reporting their first profits after 4 sordid years.

But there’s a warning too.

The net profit margins are still abysmal. On average, airlines are netting a measly $2.25 per departing passenger. And you could blame things like rising pilot and staff salaries, higher fuel costs, interest rates and aircraft leasing cost.

But there’s one other often-overlooked culprit too — luggage! The kind that’s lost and mishandled.

See, airlines are known for being quite clumsy with people’s luggage. Online forums are replete with images of people sharing how an airline damaged their bags. Or how they ended up in a city for a wedding and didn’t have any of the clothes they’d packed. Just because the airline misplaced their bags. And this got quite acute during the summer of 2022 — 26 million bags went missing. And this lost luggage figure hit a 10-year high. The media called it ‘the summer of lost luggage’.

Now, airlines obviously don’t enjoy losing or damaging your luggage. Because it increases their costs massively — it cost the industry a whopping $2.6 billion last year. They might have to reimburse you for dents and bruises on the bag. And if it’s lost in transit, there’s the hassle of flying the bags back to their intended destination. That adds on in terms of fuel and manpower costs. Heck, US-based Delta Airlines even had to fly a plane from London to the US stacked with just 1,000 pieces of lost luggage instead of passengers.

That’s quite an expensive endeavour, eh?

But wait…these are just the direct costs. There’s the lost goodwill too which can be a massive blow. After all, who wants to fly an airline that’s notorious for losing luggage, right? No one wants to fly with the constant anxiety of not having clothes to wear during a holiday. Or worrying that the compensation for damage will not be enough. So airlines could lose repeat business from flyers if they break this trust.

Where is it all going wrong for airlines, you ask?

Well, to be honest, airlines have gotten much better actually. If you look at the trend, while global air traffic doubled between 2007 and 2019, the number of mishandled bags nearly halved.

For starters, there’s some tech involved. If you’re an older millennial, you might remember that the airline didn’t always stick a luggage-tracking barcode on your boarding pass back in the day. It’s quite a recent phenomenon.

Also, domestic flights let you check in multiple bags as long as they weighed under 15 kilos. But over the years, they revised that policy to just 1 check-in bag per traveller with the same weight limit. So, passengers would have to shell out a fee for every additional bag or kilo. While this brought in some extra bucks, it also discouraged passengers from loading more baggage onto the airline. And fewer bags translate into lower mishandling rates.

It’s just that things got really bad during the pandemic. Airlines had to cut costs massively to survive and staff were laid off. And when everything subsided and revenge travel boomed, airlines were caught napping. They realised that they didn’t have enough people to deal with all the luggage anymore. The end result? 17% of mishandled bags were simply never loaded onto the plane in 2022.

Oh, and while airlines were getting hammered, guess who was smiling?

Apple!

Yup. See, the tech giant had announced something called an AirTag in April 2021. And they called it a “private and secure way to easily locate the items that matter most”.

You know where we’re going with this now, don't you?

Well, iPhone users simply decided to slip these nifty devices into their checked-in baggage and let Apple do the dirty work of tracking. Sales soared. And Google searches for "Apple air tags for luggage" hit the roof too. People were taking things into their own hands.

Now, needless to say, this isn’t the ideal solution. Airlines can’t simply palm off their responsibility. So they’re back to fixing things. There’s more staff on the payroll to handle such stuff. And a couple of days ago the BBC reported that the lost luggage situation is easing too. Almost back to the pre-pandemic levels. But at the end of the day, if they really want to cut their costs of mishandling and pad their bottom line sustainably, they can’t simply keep hiring more people. They also need to spruce up the tech.

And that’s why everyone’s now eyeing the RFID or Radio Frequency Identification technology. Think of this as an upgrade to the barcode-based bag tags. See, barcodes have black vertical lines and you’ll need a person to scan them using a barcode reader. And here’s a little problem with it. You can’t really scan a barcode if the scanning device isn’t at a straight angle. It’s called the line of sight. But RFIDs are simply easier. These low cost tags don't need a battery  and you can read them at a distance. You can even track the real-time location of the bag. Unlike barcodes, it doesn’t need manual intervention either. You could simply install scanners at multiple points in a typical bag’s journey and it’ll track each and every movement. The icing on the cake is that it can even give real-time updates to passengers.

Who wouldn’t love that?

Sure, these things don’t come cheap. In 2016, Delta Airlines poured $50 million into an RFID system. It was the first of its kind in the US. But it’s really short-term pain for long-term gain. It could save airlines millions of dollars annually.

But while tracking is great, what happens if a bag ends up in the wrong place? Especially during transits. The thing is, 42% of baggage handled by the aviation industry loses its way because of too many transfers. You still need people to manually figure out how to bunch these mishandled pieces of luggage and put them on their intended route.

But airlines are trying to automate this reflighting process too.

SITA, a tech firm that solves problems for the aviation industry, recently ran a trial with Germany-based Lufthansa. And they figured out that 70% of its mishandled bags at Munich Airport could be automatically rerouted. This could save the industry about $30 million a year.

So yeah, the answer is clear — add some manpower to deal with passengers, invest in tech to deal with luggage, and airlines could maybe become more sustainably profitable by keeping their flyers happy.

Until next time…

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