Why do we see so many airline fees today? To paraphrase a quote that infamous bank robber Willie Sutton never said, “Because that’s where the profit is!”
The proliferation of airline fees this decade is hard to dispute. But nailing down just how significant the numbers are is more challenging. Fortunately, the US Government took on the task in the form of a GAO report released this week. Rather than just reporting on the numbers GAO staff also spoke with airline and industry representatives. Those conversations provide great color around how much the average passenger is paying and how the airlines are turning the fees in to big profits (though maybe not as big as you think).
How much does that cost?!?
Perhaps the most telling bit that comes from the report is that airline executives admit most fees are not tied to the cost of delivering the services. This should not come as much of a surprise, even as some airline fees rise far more quickly than they probably should. But if the airline can convince the passenger there is value to be had then someone will likely pay for it. Perhaps the most notable on this front is American Airlines’ policy of charging extra for an aisle or window seat closer to the front of the plane. The seats are no different than those in the back in terms of space, comfort or other amenities. But the company charges more to choose those seats in advance.
One airline official said that the airline does not always incur costs when offering some optional services, for example allowing a passenger to select a seat in a preferred location, such as a window seat or toward the front of a cabin, but the airline will sell the service because customers value it enough to pay for it. `
Other executives admitted that in many cases determining the true cost of delivering a service was too complicated and didn’t really matter since competitors mostly match the fees anyways.
[O]ne airline official explained that calculating the cost of cancelling a reservation requires consideration of the cost of the reservation system, corporate overhead, and possibly opportunity costs.
…[E]choed by several airline officials who said that calculating the cost of checking baggage, for example, requires consideration of a multitude of factors, including labor, ground infrastructure, and fuel costs.
Average Airfares
Lies, damn lies and statistics. Oh, and average airfare data, too.
The Bureau of Transportation Statistics publishes a report every month on average airfare for domestic trips. And, for the most part, the data shows that compared to 2010 average airfare is down. But, as is often the case, there’s more to that story. For starters, the average fares do not include ancillary and optional fees, which have gone up during the period. But there’s also something about the way the data is calculated and a general shift in travel patterns and fare rules that skews the numbers.
[A]ccording to DOT officials, DOT does not weight one-way tickets differently than round-trip tickets when calculating the average fares. DOT officials told us that customers are more likely to purchase one-way tickets now than they were 10 years ago because airlines no longer charge a premium for one-way tickets. As a result, a higher share of oneway tickets would result in lower average fares.
The GAO review also notes that, despite airline executives saying that passengers who don’t pay the fees (i.e. don’t need to check bags) will pay less when they travel, the reality is that any documented fare drop likely was less than the associated fee rose. In other words, just like Basic Economy, it is another way to raise fares.
Are people really paying more in fees?
By now it seems obvious that with the fees involved travelers must be paying more to fly than in the past. But there’s another bit about the numbers that is interesting. When looking at baggage fees and reservations/change fees – the only two categories specifically reported separately – the increase from 2010 to 2016 runs about 13%, with change fees slightly higher than bag fees. But so has the number of passenger enplanements.
While revenue from baggage and reservation change and cancellation fees has increased, so has the number of passengers traveling on U.S. airlines. From 2010 to 2016, the number of passenger enplanements and the revenue from these optional services increased at similar rates. As discussed earlier, total enplanements on U.S. airlines increased by about 14 percent, from about 721 million in 2010 to 825 million in 2016.
This suggests that, on average, a passenger is probably paying about the same today when it comes to these airline fees as they were in 2010. But these are only two of four categories the airlines report on.
The other two categories cover everything from inflight connectivity to food to selling spare parts to other airlines. They also cover fees for transporting pets & minors as well as selling points in their loyalty programs to 3rd parties.
[T]he miscellaneous category includes, for example, revenue for transporting unaccompanied minors and pets, as well as revenue from sales of miles to airlines, credit card companies, hotels, rental cars, or other business partners that are frequent flyer partners. From 2010 to 2016…revenue from the miscellaneous account increased by 87 percent, from $3.3 billion to $6.2 billion in constant 2016 dollars.
Most of that is easily attributed to the sale of frequent flyer points, a multi-billion dollar business for the industry. That’s good for the airlines and possibly good for consumers, given that any increased costs there are indirect and often come with some other benefits as well.
Why is the government involved?
So, yes, most of the fees are charged simply because the airline can. And there is no direct link between the fees and the costs to deliver services. Much like most other industries I’m familiar with.
Unlike most other industries, however, there is a separate 7.5% tax levied by the US against airlines. And most of these fees are not included in that tax base. So, yeah, not too surprising that the government wants in on 7.5% of those extra airline fees. Hundreds of millions of dollars is at stake.
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The people writing and talking about this don’t understand the difference between accounting fiction and profit, or even what a cost is.
This is especially obvious when airfares are falling and fees are rising. Some of what was the fare is simply broken out. And the fees themselves aren’t pure profit, more checked baggage fees means more bags being carried on and a more cumbersome boarding process which imposes costs on the airline operation including in the most efficient use of aircraft which has revenue implications as well. I’m NOT suggesting that these completely offset, but talking about revenue without tradeoffs in this context is silly.
And any discussion that doesn’t LEAD WITH the tax treatment of fees versus fare on domestic tickets misses the point completely (as does any politician who grandstands about fees without proposing to address the disparity in tax treatment!).
Meanwhile a statement like “the airline does not always incur costs when offering some optional services, for example allowing a passenger to select a seat in a preferred location, such as a window seat or toward the front of a cabin” fails to understand that there are a limited number of forward and window seats, giving them to one passenger trades off with giving them to another, so there is an economic cost (tradeoff) even if there’s not a marginal cost (incremental cash out the door).
So much sloppy thinking out there about airline fees!
Gosh, I guess I didn’t lead with your preferred angle so I’m a moron, huh? Or are you calling the airline executives quoted in the GAO study morons?
I can’t wait to read another of your posts about “free” points or trips that doesn’t take in to account the opportunity cost of acquiring those points or alternate redemption options. But at least you’ll have a few more credit card links to include, right?
Of course the tax implications are significant to the feds. But that’s not the whole story. And, quite frankly, for most travelers it is not the story at all. And the US Government is not my target audience.
My comment wasn’t aimed at disagreeing with anything you wrote in your post, Seth. It was commenting on how this issue is being covered in the broader space. In other words, I was reacting to the issue you raised. With zero disagreement. If I was criticizing you then somewhere in my comment would be “here’s what you say, Seth, and here’s why it’s wrong.” But that’s not in my comment at all.
No one called you a moron. Or said you were engaged in sloppy thinking. The coverage of this issue broadly and the way the report is framed misses a lot.
The tax implications are huge to the incentives the airlines face in pushing for fees vs base fare, but my point is about grandstanding over fees by politicians in the coverage of this issue.
Your emotional response about points and credit cards are total non sequiturs. Even in terms of ‘whataboutism’ no one emphasizes the importance of opportunity cost in this space more than I do so I don’t think you can reasonably say I’m falling down here.
To be sure there are things you’re wrong about but that wasn’t the point I was making in my comment 😉
This article is what happens when you get an economic illiterate writing about economics. Fees are not increases, they are unbundling and more efficient allocation of resources. On Southwest, the ‘Wandering Aramean’ travelling light pays for my heavy baggage. Many thanks, but why should you? I don’t expect to pay for your driving lessons through a bundled lesson plan in new car prices.
Seats with more legroom are preferred by me, more than by small Wanderering Arameans (mini-Arameans). Before seat location was unbundled I could not express that preference. Likewise, Basic Economy is a label where essentially everything unbundled is stripped from the fare. Judging from the success of Ryanair (largest airline by passenger numbers in Europe), basic economy is what most people prefer and we can expect it to grow quickly in the US.
Except that you could express a seating preference in the past. And you didn’t have to pay to do so. So how is assigning a fee to it better for you? You can assume that others won’t pay that fee so you’re sure to get it if you will pay. But that’s very often not the case.
As for singing the praises of Ryanair (and this is a particularly interesting week to do so given the mess it is in right now), the airline also doesn’t offer connections. Perhaps every airline around the world should emulate that as well??
I do pay for the legroom seats and priority boarding on Ryanair and easyJet when I fly with them. But I’m also under no illusions that those fees otherwise make my travel cheaper. Especially not in the US market where the data suggests that unbundling the products and fees didn’t really drop fares at all.
Have fees and unbundle. But don’t tell me it is also dropping fares when that turns out to not be so accurate.
“Except that you could express a seating preference in the past.”
Simply wrong. it was taken by me, who doesn’t care about legroom, but booked earlier because I am a student and don’t have to be at work. You weren’t able to force me to value legroom. First-come-first served is usually a lousy way to allocate resources. Lowering the prices on middle seats and raising them on exit rows allocates seats to the people who value them most highly.
Where do you get your news? You remind me of people who believe CNN. Ryanair has the strongest financials of any airline in Europe (and maybe the world). And if people valued connections, Ryanair would offer them.
“But I’m also under no illusions that those fees otherwise make my travel cheaper. ”
You mean ‘more expensive’ . It is economic illiteracy to think that the supply or demand of seats has shifted when location is unbundled. Airlines are just getting better at picking various points on the demand curve. You slept during the economics class on ‘discriminatory pricing’ didn’t you? Re-read and come back to thank me for the free lesson.
You could select it. That’s expressing preference. Doesn’t speak to strength of the preference (i.e. what you’d pay). But if you didn’t care you wouldn’t pick a seat at all, like so many other passengers do every day, even before ASR fees came into play. Also, I never said that there is no reason to charge for those seats. An airline exec simply admitted that they don’t have reason to other than that they can make money doing so. Which, of course, is all about expressing value by passengers.
And this particular week has Ryanair cancelling thousands of flights because it screwed up crew scheduling so badly it doesn’t have pilots available to work. I’ve also paid enough attention to the conversations with MOL to know that even he admits Ryanair is suited to a very particular type of market and type of operation. You can listen to him say it in the video here: http://blog.wandr.me/2017/07/ryanair-michael-oleary-future-european-aviation/. That only barely applies in the US market (though far fewer large cities, particularly in the middle of the country compared to the distribution across Europe) or to long-haul travel, something where MOL repeatedly said his approach doesn’t work.
As for the overall cost of travel and unbundling/Basic Economy, I’d settle for airline executives to be more honest, like they were with the GAO team, about the real motivations. After months of everyone saying that Basic Economy was about ULCC competition Scott Kirby was honest enough to admit it was about raising fares, revenues and profits. That’s the part of the conversation that gets glossed over far too often, and the part I’m keen to focus on.
“And this particular week has Ryanair cancelling thousands of flights because it screwed up crew scheduling so badly it doesn’t have pilots available to work.”
Irrelevant. A diversion from what they have done to European airfares — for over 30 years.
” I’ve also paid enough attention to the conversations with MOL to know that even he admits Ryanair is suited to a very particular type of market and type of operation.”
I should hope so! Focus. One reason they are financial successful, but irrelevant to this issue. Nonetheless, I have never met an airline that did not have a business model that applied to certain types of market, except for ones whose business model didn’t apply to any existing market (e.g. pre-deregulation airlines post 1978).
“…Scott Kirby was honest enough to admit it was about raising fares, revenues and profits. ”
He wants to. So does every airline. The point is, and this is where you don’t understand the economics, it is COMPETITION that prevents him from doing so. Indeed, the frustrating experience he cites is exactly competition in action.
Seth, I’m with you on this one. There is no evidence that the airlines lowered their base fees when they unbundled all of these fees. In fact, the evidence is to the contrary. Airlines suddenly became profitable as soon as they segregated fees and people (the market) accepted and paid them. It is supply and demand, but people should be under no illusion that airlines made their lives better (or cheaper) by coming up with all of these fees.
“There is no evidence that the airlines lowered their base fees (sic) when they unbundled all of these fees. ”
Where have you looked?
You can simply look at the stock market price of the major airlines to correlate the change in financial performance due to fees. Take a look at the Government statistics on fees gathered by airlines as Seth cites, compared with their overall revenue. Fees amount to about a third of overall revenue.
And when you find that the stock of Southwest Airlines has done the best what do you conclude about your “fees hypothesis”?
Reject it right?
You take a trend, not an outlier, to evaluate hypotheses. C’mon that’s basic academics. Suggest you own some airline stocks and take a look at a complete analysis.
Let me first disclose that I like your posts way more than Gary’s posts but in this argument, Gary is right. Your argument that airlines suffer no cost for unbundling is simply untrue but I am not also sure if the cost is large enough to justify the price, so on that front I agree with you. The margin is higher when the firms have more market power, which is the trend in airline industry these days.
Also, Andrew is quite right about efficient allocation by unbundling. However, the point he is missing is probably price discrimination he mentions achieves efficiency at the cost of consumer surplus, which is probably why many people, including Seth (and me), are not happy about the unbundling. In Ryan air’s case, the price is low enough to justify unbundling because competitors have a high cost structure and charges higher prices, so reference point for consumers is different there. Andrew is also quite right about price being stable due to less competition. Mergers happened as US airlines started unbundling. So we won’t be able to tell the correlation Glenn mentions is due to mergers or due to unbundling. Logically speaking, less competition due to mergers probably increased the price but unbundling decreased the price a bit, so we won’t see much decrease due to unbundling. But I would be happy to see some empirics on this.
Finally, I also agree with Seth about government tax and fees. I think fees are going out of control because it gets a differential treatment everywhere. It is economically rational for airlines to decrease the base fare and increase the fees/carrier imposed “taxes”. Government should fix this but of course the problem is that airlines have lobbying firms to protect them. Politicians usually do not work for average citizens unless it becomes a rage. Unfortunately, an average citizen does not travel enough to understand all of these and be affected by these to have a rage about it.