Loose Tea is usually made up of whole leaves, or at least larger parts of tea leaves. Because the flavor and aroma of tea is primarily made up of essential oils that evaporate quickly, the smaller bits of tea leaves primarily found in Bagged Teas, known as fannings or dusts, allow more of the oils to be exposed to air permitting them to evaporate thus diminishing the flavor of the tea.
Another difference in the quality of Loose Tea and Tea Bags is the ability of water to circulate around the leaves. If Tea Bags are packed too tightly the tea leaves will not have the room to absorb water, swell, release oils, or uncurl. This means that the tea will lack body and subtle nuances that play part of the crucial flavor of tea.