Monday, October 28, 2013

Have airline change fees gotten out of hand?

If you run an airline, load management is a key determinant of whether you make money.  Left to their own devices, customers would gladly reserve seats and then decide at the last minute whether to show up or not.  An empty airline sheet is like yesterday's newspaper - no one is going to buy it.  To create an incentive for passengers to book flights that they plan to take, airlines came up with cancellation fees 20 years ago.   In 1991 they generated $51m in revenue; today they generate more than $1b.  (Aside: these fees are not subject to federal air service taxes or local fees for airline use.  Ditto for baggage fees and other incidental charges.  We have seen airlines shift their revenue flow significantly over the last five years to these untaxed revenue sources.)

Airlines now charge between $150 and $200 to change a reservation.  For an international flight, this is a charge that is hard to avoid, especially if you already have completed one leg of your journey.  But for domestic flights, passengers can compare the cost of a one-way ticket home and the cost of changing their reservation.  WP reports that more and more domestic customers are booking their own return flights and, if warranted, pulling no shows at the gate. 

In a nutshell, the change fees may have gotten so high that airlines are now facing a problem with no shows.  Given the choice between paying $200 for changing a reservation and paying $150 for a one-way return, the no show approach makes economic sense.  Better to pay $150 and never engage with the airline that sold the ticket than to spend 30 minutes on the phone and pay more. 

My take is that companies usually think through their pricing structure strategically, but in this case they may need to reconsider.  They may need to think about changing the penalty for changing a booking to a percentage of the cost of the flight. 

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