The essential oils in the leaf is where the flavor of the tea comes from. Once the leaves are broken, they lose most of the essential oils, leaving a less flavorful tea. This is why loose leaf tea results in a better tasting tea over tea bags and tea sachets which contain broken leaves and tea dust.
Water circulation is also important. With loose leaf, there's plenty of room for the leaves to unfurl and expand, bringing out more flavor. Tea sachets with their pyramid shape, are better than tea bags for this reason. There's more room for the water to move around the tea as it steeps.
Loose leaf, with little packaging, are less expensive than tea bags or tea sachets since you're not paying for the packaging. However, with tea bags and tea sachets you can't beat the convenience.