On average, it costs an airline $70 to get a lost bag back to its owner. The airline industry as a whole lost $2.3 billion to mishandled luggage in 2015.
Currently, when you check at bag with an airline, a barcode sticker is printed out and stuck on your bag. On a good day, only 90% of those bar codes are readable. Luggage with bar codes that are not readable end up being pulled out of the automated conveyor belt. These bags are manually processed which is when the chance of your bag not arriving with you at your destination skyrockets.
Better technology exists for luggage tracking. Delta Air Lines (NYSE: DAL) recently invested $50 million in an RFID-based luggage tracking system. Radio frequency identification (RFID) involves tagging luggage with labels that have embedded microchips and antenna. The airline’s tracking system picks up the tag through radio waves; a direct line of sight such as that required by a bar code reader is not required by RFID. The tracking system reader just needs to be in the general proximity. The accuracy rate of these RFID systems is over 99.9%. Once a plane lands, baggage handlers can also prioritize luggage handling for the bags of customers with tight connections. With an RFID system, airline customers install an app and track their bags.
The International Air Transport Association has mandated that airlines improve luggage tracking by 2018.
Questions
1. What information would you need to calculate the NPV of the RFID luggage tag system?
2. Calculate the payback period for the RFID-based luggage tracking system, assuming that Delta handles 400,000 checked bags per year.
3. What qualitative factors might have been factored into Delta’s decision to adopt the RFID-based system?
4. Which tool, NPV or payback, would most likely have been used to assess whether Delta would implement the RFID system? Explain.