Airline ticket change fees: are they on the way up?
In April, United Airlines announced that ticket change fees would increase from $150 to $200. Most other large US airlines matched the increase. In this article, EyeforTravel guest columnist Tom Bacon wonders if the new higher fee will ‘stick’, what the future holds for ticket change fees and whether fees could even increase further?
Data released recently by the US Bureau of Transportation Statistics, says US airlines collected a record $6 billion in baggage and reservation change fees in 2012, up 5.2% from 2011. Of that ‘ticket change fees’ totalled $2.6 billion.
Delta was No. 1 in reservation cancellation and change fees, collecting with $778.4 million, while at American those fees rose 39% to $517.7 million. Now as the industry jumps on $200 change fees, those numbers will go up.
Let’s dissect the ‘ticket change fees’ to see what might be next. There are two parts to this:
1. Rationale/economics of Change Fees
What is the cost of a change from the airline standpoint? Obviously, to process a change – either online or with an agent – is cheap – certainly in the single digits. However, change fees should be more based on fare levels than any notion of the cost of issuing a change. As airlines achieve higher and higher load factors, the opportunity cost of someone changing their plans at the last minute – and leaving an empty seat - can become very high. Airlines are obviously fully protected when a fare is non-refundable/non-changeable. But they are only partially protected if fares are changeable with a fee.
2. Change Fees Vs Fare Rules
In some sense, the change fees are effectively re-packaging more restrictive rules. Rather than insist that certain fares are completely non-changeable, airlines charge a fee that makes a low fare effectively non-changeable since it costs more to change the ticket than to purchase a new ticket.
For many airlines, the threshold for ‘effective’ changeability is currently $150. With a change fee of $150, tickets that cost less than $150 are effectively non-changeable. Holders of reservations for $149 tickets might as well throw away their ticket and simply book a new trip.
Some airlines’ sale fares are non-changeable based on the restrictive fare rules associated with those low fares. The $150 change fee adds another subset of tickets that are notionally changeable but effectively not. Increasing the ‘change fee’ to $200 moves yet another subset of tickets to the effectively non-changeable bucket.
What the airlines are thinking
Average domestic airfares in the US averaged $374 in the fourth quarter of 2012, according to the Bureau of Transportation Statistics.
So, with a change fee of $150, airlines are protected by only 40% if a change results in unexpected empty seats. A change fee of $200 drives protection up to 60%. Even with a change fee of $200, airlines may bear a loss of $174 if a customer who has made a reservation unexpectedly changes it at the last minute. The airline may have been able to sell the seat to someone else for $374 or more.
Of course, it’s not this simple. There are many considerations for the airline besides the average fare:
· Not all flights are full.
· A change made way in advance can be dealt with by the airline more easily than a change made at the last minute.
· Airlines try to anticipate changes by overbooking flights.
· Changes can be one-way or roundtrip.
· And, on average, an empty seat on a very long-haul flight is higher opportunity cost than an empty seat on most short-haul markets.
Still, average fares provide a helpful point of reference.
Based on their economics, change fees should increase as average airline fares increase and as average load factors increase. Both of these drivers have increased since change Fees became more significant in 2008. And many analysts expect both to continue to increase with increased airline consolidation.
With average fares over $300 per trip, why not $300 for a change fee? From the airline perspective, there is clearly rationale for $300 Change Fees. We have probably not seen the end of Change Fee increases.
Change fee variations – a closer look
Based on the economics airlines face – and marketplace differences across the globe- there are other variations of change fees that have been implemented:
· Same day change/standby
Many airlines charge less for a change made the same day as the flight. If there is an empty seat at that point, the airline knows it is offsetting an empty seat with filling an empty seat on another flight when a customer changes his plans. Thus, it can afford to rebook a passenger on an earlier flight at a much lower (opportunity) cost.
· Fees based on the number of changes or ‘first change free’ (‘FCF’)
This is more common internationally. Markets that are accustomed to greater customer flexibility are easing into the ‘change fee’ world by charging for changes after the first one.
· Premium for FCF or premium for changeability upfront
American Airlines and Frontier Airlines are offering ‘branded fares’ that allow customers to pay a premium on their fare that provides either no change fee or a discounted change fee.
· Different fees based on when the change is made
As discussed above, the airline incurs a much higher cost of a change that occurs close in – after the airline has already begun to close out the lower fares and turn away the more price sensitive passengers. Airlines could, logically, charge the $150 or $200 (or more) if a change is made within 30 days and a much lower fee for changes made greater than 30 days before the flight. JetBlue has recently announced a lower change fee for changes made greater than 60 days before the flight.
As the last example above demonstrates, the current pricing system for changes by most large US carriers does not correspond perfectly to airline economics. This is primarily because airlines gravitate toward simple pricing that is easier to implement and easier to match.
Ticket change fees are an important new revenue source for airlines. Many airlines have recently announced higher ticket change fees but, even after this initiative, there is still opportunity for more revenue from such fees.
Don’t be surprised if you see change fees increase again next year. My guess is that change fees will eventually hit $300. And look for variations on the basic change fee that could add even more ancillary revenue to innovative airlines.
This guest article was written by Tom Bacon, former airline executive and industry consultant in revenue optimisation. His views are entirely his own. Contact Tom at email@example.com.