Lost luggage happens, and it sucks, but it doesn't have to be the end of the world. Let's look first at a few tips on keeping your bags from traveling without you; at the bottom of the page, we'll talk about what to do if an airline has lost luggage (you're less likely to misplace baggage on trains and buses or in taxis, but that happens, too).
Carry On Those Wayward Bags
The best way to avoid lost luggage is to carry it on, but that's not necessarily convenient if you'll be heading out on a long-term trip, or want to carry large liquids. Airlines usually allow you to carry on two bags -- one daypack-sized bag and one that the airline will define as a purse, tote or such. I can pack for a month's travel in my carry-on sized expandable backpack, provided I'm careful with liquids and gels.
Check the airline's rules before you fly, and don't check bags unless you need to for your liquids and gels.
Label Your Baggage Outside
Before checking a bag, label it inside and out. Labelling bags is only a little helpful to the folks looking for your lost luggage, but very helpful when you need to claim them. Use the outside tag holder if the bag came with one *and* use one of the tags you'll find at airline check in counters; tie that tag's elasticized string around your bag's handle.
Keep the stubs you get when you check in, as you'll need them if you bag does go missing.
Label Your Baggage Inside, Too
I duct tape a card with my name and address to the inside lid of my backpack and leave a copy of my itinerary and tickets inside in plain sight in the hopes that someone might actually read it if trying to unite me with my bag. To my travel itinerary, I paper clip a sheet with my cell phone number and my home phone and write "phone number" on it in relevant languages. If your bag is discovered, it's far more likely it'll find its way home to you if it has your details inside.
Color Tag Your Bag
Get a small roll of bright tape and wrap a piece around something on your bag, like a backpack strap or handle. You'll then be able to spot your bag in a whole pile of similar-looking bags or in someone else's hand. You'll also be able to list it as an identifying mark if you do have to report it as lost luggage. If your backpack is plain, black, common with travelers, and has no labels on the outside, it's going to be a lot tricker for the airline to successfully track it down.
Keep the tape while traveling for labeling all kinds of stuff, like your food in a hostel kitchen fridge. Bright survey tape (hardware store), though not as sticky, works as a tag.
A Picture Is Worth a Thousand Descriptions
Take a picture of your bag, preferably with color tag, and store it in your phone's camera or in your digital camera. Print it out and keep it with your passport in your carry on or passport holder, too. If you have to report a missing bag, you have an easy way (your phone) to show the lost luggage people what your bag looks like. If you have it on your phone and have a hard copy, you can leave the copy at the baggage counter if you have to leave the airport without your bag.
Tear Off Old Tags
Before checking your baggage, rip off any old baggage tags another airline may have put on your bags -- big tags looped around a handle with flight information on them. (I also figure that if baggage handlers don't have to tear off my backpack's baggage tags from the last flight, that's a little less time my bag's literally being handled, lessening damage opportunities.) I also change the elasticized tag to that of my current airline.
Lock It Up
The harder it is to get into your bag, the less chance it will happen, so I lock my backpack with TSA approved locks. If someone really wants to steal a suitcase at an airport, they may move on to an easier target if mine is locked. I multitask my TSA approved locks while traveling, too.
Be Waiting for Your Bags
Get to the area of the airport where your baggage will be being unloaded as fast as possible after your flight lands. If you're going to the baggage claim, you'll arrive long before the bags; look above big oval carousels for your flight number -- that flight's bags will be dumped down a chute to that carousel. Watch for your color tag, if you decided to attach one. If bags are being unloaded on the tarmac from a small plane, watch yours until it's in your hand (you can probably walk up and grab it).
What Should I Do About Lost Luggage?
If your bag doesn't show up on the baggage carousel, look immediately for the airline's nearby baggage office or window (this would be the lost luggage people) and report it there at once (the office is near -- it's probably not on another level). Don't panic -- your bag may just be delayed and coming in on another flight. Give the window clerk your baggage stubs and wait for further instruction.
What Will Happen When I Report Lost Luggage?
The clerk at the baggage claim window will track your bag on the computer first, using your stubs. If the bag isn't on another flight, the clerk will begin calling around to track it down or send baggage guys who work for the airline to look for it. Describe your stuff and produce a picture of your baggage now. Use this time to get out your itinerary, as it can be wildly frustrating to listen to this search process.
The clerk will next ask you to fill in a claim form with pertinent personal info (use your itinerary) and bag description. Supply a way to be reached (like a working phone) over the next few days. Give the clerk your bag's picture and keep a copy of the form. It's always a good idea to take a photo of your luggage before you fly, so that you can show them exactly what it looked like if it does happen to go missing.
You'll then be told that the airline will look for your baggage and return it to you if it is found. Yes, ominous words. It's now safe to assume it may be officially lost luggage, unless the clerk tracks it as having been delivered to the carousel -- in that case, it may be stolen and you will now need to contact the police.
What the Airline Will Do If Your Baggage Is Gone
If the airline finds your bag, they'll get it to you. If not, the airline will try to replace the lost luggage itself with the closest match possible (this didn't work out very well in my dismal personal experience).
You're entitled to contents recompense -- varies by airline, but policy limits amounts; you may not get what you'd like. Do find out if you'll be reimbursed if you buy replacements for items from your lost luggage now (while you're traveling) like clothes and toothpaste.
Do keep your claim form for checking progress.
This Is Why You Should Get Travel Insurance
I'm a great believer that if you can't afford travel insurance, you can't afford to travel. And while I get it primarily for the medical cover while I'm overseas, having travel insurance will also help you out if you happen to have your luggage lost by your airline.
As soon as your luggage has been declared lost, you should call your travel insurance company to ask for advice on what to do next. They may tell you to wait to see if the luggage is recovered by the airline or they may reimburse you for any emergency purchases you need to make while you wait, such as toiletries and clothes. And if your airline refuses to compensate you for losing your luggage? Your travel insurance almost certainly will.