WHAT'S FAIR IS FARE
By Joe Brancatelli
July 21, 2010 -- Before we think deep thoughts about the practical and existential implications of airlines "unbundling" their fares and selling all manner of products and services on an a la carte basis, consider this hardheaded assessment from a plainspoken airline executive I know:
"Airlines wouldn't be unbundling fares if they didn't think they they'd generate additional revenue," he told me last week. "This is about money."
Now that you understand the chronically unprofitable airlines' motivation for suddenly charging you for everything from checking a bag to choosing a less-uncomfortable seat in coach, we can get to those deep thoughts:
Does a la carte pricing actually raise more revenue for airlines than traditionally bundled fares?
Can airlines track these new revenue streams on a line-item basis so they know which fees are working and which aren't?
Do flyers have a fair basis for comparing the total cost of flying from one airline to the next?
Does the federal government have a role in requiring carriers to display prices in a way that allows passengers to understand the total cost of flying?
Are passengers defecting to carriers like Southwest and JetBlue, two airlines that minimize their reliance on ancillary revenue from items that were historically part of the airfare?
Are airlines using unbundled pricing as a dodge to raise the price of travel for companies that have negotiated fares and contract discounts?
Are airlines using a la carte pricing to duck taxes?
As I say, deep stuff for the usually languorous summertime, when the living is supposed to be easy and business travelers prefer not to think about business travel. It's all so convoluted and internecine that we have to start at the literal beginning: the definition of a "fare."
A generation ago, an airfare was an all-inclusive purchase. Except for a very few and very specific exceptions, when you bought your ticket, the airfare covered everything: your passage; an assigned seat; in-flight beverages, snacks and/or meals; carry-on and checked baggage; the right to change or cancel your flights without penalty; the right to use the payment method and the ticket-purchase venue of your choice; and all government-imposed taxes and fees.
But as deregulated airlines increasingly competed on price instead of service, the idea of all-in prices began to erode. First, airlines invented fees for changing your reservations or canceling your tickets. Then they separated some government-mandated charges from the ticket price. As the price of oil began to spiral, airlines invented the fuel surcharge, an add-on levy atop the quoted price. Airlines began reserving the "best" seats in coach and "early boarding" privileges for its most frequent flyers. Inevitably, however, airlines realized they could charge the hoi polloi for those perks. Then came charges for purchasing a ticket at the airport or via telephone. Some airlines even charge you for using a credit card when you purchase tickets at the carrier's proprietary website. Free meals disappeared, and airlines began peddling sandwiches and munchies.
The trend to a la carte pricing really took off when most airlines decided your "fare" did not include your luggage. So most charge for checked bags now, and, starting next month, Spirit Airlines will impose a fee for some carry-ons too. And there's an insidious new fee you don't even know about: the day-of-travel surcharge. What's that? It's an additional post-fare mandatory extra charge for flying on certain "peak volume" days.
Long story short: As far as anyone can tell, your "airfare" on most carriers now includes only the actual passage. And therein lies the first a la carte trip point: The word fare has both contractual and tax-code implications.
Companies small and large have negotiated volume-discount contracts with airlines. Virtually all of those deals are based on either an unpublished, set-price fare or a percentage-off discount against the prevailing published fare. But almost no contracts give companies discounts on any fees or surcharges that the airlines impose. That means fuel levies, baggage charges, day-of-travel surcharges, and anything else an airline creates is exempt from corporate discounts. That has naturally infuriated corporate buyers, who feel airlines are engaged in backdoor price increases.
The unbundled pricing regimen has also played havoc for the tax structure on airline tickets. All fares include a 7.5 percent federal excise tax that is diverted to the Airport and Airways Trust Fund, which is used to pay for improvements to the national aviation infrastructure. But guess what? Surcharges and fees are not taxed. A Government Accountability Office study released this month claims that airlines collected $2.5 billion from checked-bag fees in fiscal 2009. Had that revenue been part of the fare subject to the federal excise tax, the GAO concluded, it would have meant an extra $186 million for the aviation trust fund.
The tax implications of a la carte pricing also became an issue last week during a Congressional hearing on airline practices. Unintentionally hilarious exchanges between Democratic Representatives Peter DeFazio of Oregon, Laura Richardson of California, Jerry Costello of Illinois, and Spirit Airlines chief executive Ben Baldanza nevertheless yielded an astonishing claim: Baldanza insisted that luggage fees should not be taxed because, unlike passengers, checked baggage imposes no burdens or costs on airports or the aviation infrastructure.
An incredulous Costello was left to sputter: "I think it is pretty clear that it does."
There's also considerable hand-wringing on whether the Department of Transportation has a role in creating a level playing field to allow travelers to honestly compare travel prices. In a package of proposed regulations unveiled earlier this year, the DOT was at pains to admit that it was no longer sure of how wide a net to cast. It wants to make an apples-to-apples comparison available to travelers, but the agency says it needs help defining prices in these free-for-all days.
I know how the DOT feels. A few months ago, I needed to get to Rome and was prepared to book a great price on a business-class seat to Paris' Orly Airport on OpenSkies, the boutique carrier owned by British Airways. I was fully prepared to book a Paris-Rome connecting flight on Vueling, a Spanish airline that flew the route. But since I didn't know what Vueling offered as part of its "fare," I searched its website fruitlessly for details of baggage pricing, boarding procedures, seat assignments, and the like. Unwilling to be a sucker, I booked a Continental Airlines nonstop to Rome instead.
Not all travelers are lucky enough or savvy enough to be able to weigh their many confusing options, however. A recent survey by the Consumer Travel Alliance says that travelers now pay as much as 54 percent of the ticket price in additional "hidden" fees. Moreover, current airline websites, third-party travel agencies, and travel-industry reservation systems aren't equipped to display all of the ups and extras. So most travelers can't find out what their travel will really cost until after they make the fare purchase and start buying extras on an ad hoc basis.
The next obvious questions: Do airlines that indulge in a la carte pricing profit from the practice? And do they even know which fees work and which don't?
The answer, quite simply, is that no one knows. They may say that they know, but they don't. No two carriers account for extra fees or even define "extra" charges in the same way. Many still don't have the capability to drill down and do profit-and-loss assessments because their computer systems can't reliably tag each individual extra charge. One airline consultant recently told me that one of his clients was astonished to find a upsurge in ancillary revenue for checking ski gear in a Sunbelt city. It wasn't until a manager realized that ticket agents at the airport were coding baggage charges as ski equipment (the first extra-revenue item appearing on the agent's computer screen) that the "mystery" was solved.
The most recent "reliable" estimate of the extra cash that airlines create from a la carte pricing is this: About 4 percent of the industry's revenue comes from fees generated outside the fare purchase. But that estimate includes everything from long-established extra charges (club-lounge memberships, unaccompanied-minor fees, etc.) to all of the new revenue streams.
Some revenue-generating ideas have clearly failed. US Airways, for example, briefly tried to charge for soft drinks. All of its competitors have admitted that, despite initial expectations, charging for meals and snack boxes is not profitable. (Their fallback rationalization: At least they no longer "lose" money by serving free meals in coach.) Carriers are also rushing to find ways to exempt passengers from baggage fees. Several now promote affinity credit cards that include bag-charge waivers and all exempt their best and highest-paying flyers from the fees. Spirit's upcoming carry-on fee is unlikely to be matched because all of the major airlines have promised politicians they would not follow suit. And any widespread attempt to charge customers for the right to use their credit card for ticket purchases may have been shelved after a German court ruled that Ryanair must offer customers a fee-free method of purchasing passage.
Then there's this: Southwest Airlines has mounted a massive advertising campaign to alert travelers to the fact that it continues to allow travelers to check two bags free of charge. The result: Southwest gained a full point of market share last year, an astonishing growth spurt in the usually glacial airline industry. And, of course, Southwest has been profitable for 37 consecutive years and last week declared its 136th consecutive quarterly dividend.
The Fine Print
British Airways flight attendants, who have struck the carrier for more than 20 days this year, this week overwhelmingly rejected the carrier's latest contract offer. A new series of strikes now appear likely, although the union will be required to take another ballot and give seven days notice before any work stoppage. Earlier strikes have cost BA about $225 million and, by some estimates, upwards of $2 billion in lost revenue.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
THE FINE PRINT This column is Copyright © 2010 American City Business Journals. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2010 by Joe Brancatelli. All rights reserved.