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This paper assesses the impact of the September 11th terrorist attacks and its after-effects on U.S. airline demand. Using monthly time-series data from 1986-2003, we find that September 11th resulted in both a negative transitory shock of over 30% and an ongoing negative demand shock amounting to roughly 7.4% of pre-September 11th demand. This ongoing demand shock has yet to dissipate (as of November 2003) and cannot be explained by economic, seasonal, or other factors.

This paper provides theory and evidence on airline bag fees, offering insights into a real-world case of product unbundling. The theory predicts that an airline's fares should fall when it introduces a bag fee, but that the full trip price (the bag fee plus the new fare) could either rise or fall. The empirical evidence presented in the paper provides strong confirmation of this prediction. The data also suggest that the average fare falls by less than the bag fee itself, so that the full price of a trip rises for passengers who choose to check bags.