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.
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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