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Analysis: U.S. Airlines Drop Change Fees
United Airlines announced over the weekend that it will permanently drop change fees on domestic flights in a move most likely intended to win over passengers while demand stays low amid the coronavirus pandemic. A day later, on Monday, American Airlines and Delta Air Lines followed suit and published press releases announcing major overhauls to their own fee structures.
Delta’s fee changes are applicable for domestic U.S. travel as well as flights to Puerto Rico and the U.S. Virgin Islands; American is including Puerto Rico, the U.S. Virgin Islands, Canada, Mexico and the Caribbean as well as the domestic 50 states.
Travelers with standard economy and premium class tickets will be allowed to change reservations without paying the once-standard service fee on all airlines. They will only be responsible for changes in ticket prices if they change to a more expensive option, and there will be no limits on how many times a flight can be changed. American is going an extra step to allow passengers to retain the whole value of their ticket, so they will issue travel vouchers if a second flight costs less than a passenger’s original ticket.
United’s changes will go into effect in January, while American and Delta are making the changes effective immediately.
Per United’s plan, passengers who book basic economy tickets will still need to pay applicable fees to change since basic economy does not allow for changes, though United has extended its change-fee waiver on all tickets through the end of the year regardless.
However, American announced that it will allow passengers booked in Basic Economy to purchase “add-ons” for an additional cost. While base fares for the product will stay the same, Basic Economy travelers will be allowed to purchase extra upgrades, priority boarding, Preferred/Main Cabin Extra seats and same-day confirmed flight changes. AAdvantage members with Elite status will also be able to retain all of their benefits, like upgrade privileges, Elite Seat privileges and same-day confirmed flight change benefits no matter the ticket class they book, though Basic Economy tickets will no longer earn elite qualifying dollars, miles or segments effective Jan. 1.
In addition to waiving change fees, American and United will allow paying customers to depart on standby without paying the same-day change fees; American is allowing passengers to depart sooner on the same day without charge, while United is extending its standby offer to flights both before and after a passenger’s original departure.
How these changes will be implemented with the airlines’ regional partners is unclear. Change and cancellation fees will remain in place for each airline’s transoceanic flights as well as most of Delta’s international flights and all of United’s.
“Following previous tough times, airlines made difficult decisions to survive, sometimes at the expense of customer service,” said United CEO Scott Kirby in a news release. “United Airlines won’t be following that same playbook as we come out of this crisis. Instead, we’re taking a completely different approach – and looking at new ways to serve our customers better. When we hear from customers about where we can improve, getting rid of fees is often the top request.”
United says it has dropped change fees “forever.”
Kirby said United is trying to serve its customers better. The airline has had a myriad of PR disasters in recent years, like when a doctor was forcibly pulled off an overbooked United flight 2017 or when several animals died in its care in cases that received lots of media attention.
“In a world that’s constantly changing, American is resolute to our purpose of caring for customers at all points of their travel journey,” said American Airlines Chief Revenue Officer Vasu Raja in the press release that announced the change. “American is offering more flexibility and ease than ever before, should travel plans change. By eliminating change fees, giving customers an opportunity to get where they want to go faster with free same-day standby on earlier flights and providing access to upgrades and seats for all fare types, we’re giving customers the freedom to make their own choices when traveling with American.”
“We’ve said before that we need to approach flexibility differently than this industry has in the past, and today’s announcement builds on that promise to ensure we’re offering industry-leading flexibility, space and care to our customers,” said Delta CEO Ed Bastian. “We want our customers to book and travel with peace of mind, knowing that we’ll continue evaluating our policies to maintain the high standard of flexibility they expect.”
In its announcement, Delta revealed it is also extend the expiration dates for travel credits for tickets booked before April 17, 2020 through December 2022. That airline will continue blocking middle seats through Jan. 6, 2021, a move that also sets it apart from the other two legacy airlines who started selling flights completely full at the start of the summer season.
United’s move to announce the change a full day earlier than either of its other legacy competitors was undoubtedly a calculated one. Doing so will make passengers associate United with the change first since its early announcement makes it stand out from either American or Delta, which made the announcements close together.
The carriers’ announcements will be especially welcomed by leisure travelers, which are driving much of the industry’s recovery at the moment. While business travelers often do not pay for their flights – companies pay instead – and therefore don’t mind as much if change fees are eliminated, leisure travelers do pay their own fares and will certainly be more apt to consider flying for travel when there is less possibility for fees throughout their trip.
Though these announcements represent a big change for United, American and Delta, Southwest Airlines has employed the same tactic for years. It’s one of many perks, including others like two free checked bags, that draw many to Southwest over other airlines that have become notorious for charging an increasing number of fees.
Southwest has said on multiple occasions that it uses its lack of fees to attract customers disgruntled over how high costs are at other airlines. That carrier’s practices are one of the big reasons that many see Southwest as especially good to its customers.
History of Fees in the U.S.
Fees on things like flight changes and checked bags gained traction in 2008 during the industry downturn associated with the Great Recession. Fees have since been added for things like priority boarding and extra legroom.
Airlines have long used change fees as a way to offset the lost revenue they could have made if the now-empty seat had been filled. They are meant to cover the cost of the seat a passenger is abandoning in case nobody else books it.
“We have the change fee policy to protect against revenue dilution,” Morgan Durrant, a Delta spokesperson, told Frommer’s. “In other words, it helps us retain revenue that otherwise could have been lost through another sale.”
Yet passengers worry that the massive amounts of money airlines bring in from fees – they made a collective $2.8 billion in ticket change fees alone in 2019, per the U.S. Department of Transportation – is really being used to unreasonably bolster profits.
At the time of writing, none of the three legacy airlines have made any other changes to their fee structures, so at the moment Southwest’s fee structure, which includes things like free checked bags, still beat United, American and Delta. But that’s not to say the big three won’t make other changes down the line.
Fees’ Long-Term Role
Questions still linger about what fees could look like in both the short- and long-term. Immediately, the fact that airlines canceled its change fees during an economic period similar to that in which they introduced them raises questions. Granted the nature of the coronavirus crisis is much different than 2008’s financial crisis, it seems that, now, airlines think scrapping change fees to attract more customers is a better way to raise money than adding or increasing – or at least retaining – fees at their previous levels.
In the long run, the airlines’ announcement could impact how they price flights. In the past, change fees were a big source of revenue for airlines, especially if they managed to resell seats once occupied by a rebooked passenger. By eliminating change fees, airlines may need to slightly increase fares across the board to offset lost revenue, which means that all passengers could have to pay for the airlines’ choice.
Still, the moves could prove to be part of a larger revamp of each airline’s pricing structure, which could impact the industry in a much-more influential way. We could see a bigger gap develop between basic and regular economy, or we could see a more drastic change in how the airline charges passengers.
The decisions could also impact passenger booking behaviors, which airlines have long used to develop algorithms to determine how to price flights. It will take time for airlines to collect new data on how passengers book and change flights with the new plans, which could throw fares off balance for months or years until new trends are identified and accounted for. Algorithms that determine how much airlines can safely oversell flights could also be impacted, forcing the airline to adjust its data and potentially bump more passengers involuntarily for a time. This will be especially prevalent for passengers wishing to fly standby on a different aircraft who may have to deal with bumped passengers also trying to fly get back onto a flight the same way.
Despite all the uncertainties, United is confident that this move is one of multiple that will help it stand out as demand continues returning.
“We believe that when demand returns, based on the work the entire United team has accomplished in cutting costs to respond to the crisis, we will be in the best position to reach cash burn breakeven, which we expect will be in an environment where demand and capacity are down around 50%,” United CFO Gerry Laderman said in July, per Business Insider.
U.S. airlines lost a combined $10 billion in the second quarter. As the third quarter enters its final month, airlines will be preparing to announce their profits for the summer months — often considered among the busiest of the year — though passenger counts have not been much higher than totals in April.
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