The U.S. Senate is taking a surprise stand against airline fees.
The Forbid Airlines from Imposing Ridiculous Fees Act of 2016 (FAIR Fees Act), introduced this week, would prohibit air carriers from imposing fees that are “not reasonable and proportional” to the costs incurred by the air carriers. And the Senate version of the Federal Aviation Administration reathorization bill, also introduced this week, contains a provision that would commission a government study on how air carriers calculate some of their most profitable fees.
The proposed laws came as a surprise to industry observers, who are accustomed to a hands-off approach to regulating airlines. Taken together, the developments suggest that even in a Republican-controlled Congress, there’s a limit to what the airline industry can get away with.
Grounding “soaring” fees
Fees are a chronic source of complaints among constituents. Airlines have sought to inoculate themselves from regulation by waiving ticket change fees for members of Congress and with generous campaign donations. But now, even that appears to be insufficient to stop proposed regulation.
“This measure will ground the soaring, gouging fees that contribute to airlines’ record profits and passengers’ rising pain,” said Sen. Richard Blumenthal (D-Conn.), who co-sponsored the Fair Fees Act. “With all the frills of flying already gone, airlines are increasingly resorting to nickel and diming consumers with outrageous fees.”
Take checked baggage fees, for example. Between 2009 and 2014, three airlines increased checked baggage fees by 67 percent, a recent investigation by the minority staff of the U.S. Senate Commerce, Science and Transportation Committee found. It’s a jarring increase, when you compare the modest $464 million earned in 2007 to 2014’s astonishing $3.5 billion. In the past, airline executives have said fees like this can represent the difference between a profit and a loss.
Blumenthal also notes that four airlines increased domestic cancellation fees by 33 percent between 2009 and 2014, while one increased the fee by 50 percent, and one increased its fee by 66 percent, according to the Senate study. The numbers are dramatic here, too — cancellation fees skyrocketed from just $915 million in 2007 to $2.9 billion in 2014.
It’s difficult to argue that the airline’s cost to transport a checked bag or make a ticket change has increased by that much in just a few years, according to Blumenthal. He says these “runaway” fees can, in some cases, double a passenger’s airfare, and that people who are least able to afford them — non-elite level parents who are traveling with young children — are hardest-hit.
“A parent who wants to sit with his young child, a customer who wants to check or carry on a bag, or have Wi-Fi, or a traveler who needs to change or cancel a reservation should not incur exorbitant, unnecessary fees on the whim of an airline,” he adds.
An airline industry representative predicted that regulating fees would lead to higher fares.
“When the government last dictated airline pricing, many couldn’t fly because it was cost prohibitive,” warned Jean Medina, a spokeswoman for A4A, a trade association for airlines. “Customers have choices today. They can purchase non-refundable fares that are highly affordable. If they would like the flexibility to change their ticket at the last minute, they can do so as well.”
Undermining the airline business model
The measures would effectively undermine the airline industry’s current business model of “unbundling” fees from their base fares. That effectively keeps airfares low, while charging consumers for extras that used to be included in their ticket, like a seat assignment, a checked bag, and in extreme cases, a carry-on bag or the ability to print a boarding pass.
Airlines argue that these “à la carte” fees should be optional, but they effectively increase the price of a ticket and take advantage of a perception among many passengers that airline tickets still include many of the amenities stripped away long ago. What’s more, say advocates, the fees have little or no relation to the actual costs of providing the services — in other words, they are often pure profit to the airline.
The FAIR Fees Act would require the Secretary of Transportation to create a regulation prohibiting an air carrier from imposing fees that are unreasonable or disproportional to the costs incurred by the air carrier. It would also establish standards for assessing whether such fees are reasonable and proportional to the costs incurred by the air carrier.
The bill would cover any fee for a change or cancellation of a reservation for a flight, any fee relating to checked baggage, and “any other fee” imposed by an air carrier. More importantly, it requires airlines justify the fees, demonstrating they would have lost money by the cancellation or were unable to resell the seat. Airlines would also have to show the actual cost of transporting luggage, including labor costs. It requires the Transportation Secretary to set standards for the fees, effectively regulating what airlines can — and can’t — charge.
Airlines will only be authorized to charge fees that cover the costs of the baggage handlers, ticket agents, baggage processing, or anything that reasonably pertains to checking a bag. For example, American Airlines, Delta Air Lines, and United Airlines currently charge more money for the second checked bag than the first, yet there appears to be no appreciable cost increase for processing the second bag, according to Blumenthal.
For change and cancellation fees, airlines would only be authorized to charge fees that cover the cost of processing the new tickets and any potential loss of revenue due to the cancellation, since any loss of revenue would be minimal or even zero because the airline can resell the seat for a potentially higher fare.
“Airlines may wish that they could charge whatever they want, but even in markets in which fares have been deregulated, U.S. law still prohibits unfair and deceptive practices,” says Edward Hasbrouck, a consumer advocate and airline industry observer. “The problem has been in getting the reluctant Department of Transportation to exercise its authority to determine which fees are unfair or deceptively-labeled.”
The FAIR Fees Act, if passed, would give the DOT that authority, he says.
The proposed law could get additional help from the just-introduced Senate version of the FAA reauthorization bill, which contains a provision that would require the Comptroller General of the United States to conduct a study of existing airline industry change and cancellation fees, and the current industry practice for handling changes to or cancellation of ticketed travel on covered air carriers. The bill asks the Comptroller General to consider whether and how each airline calculates its change and cancellation fees, and the relationship between the cost of the ticket and the date of change or cancellation as compared to the date of travel.
Airline supporters are likely to argue that limiting fees restricts a free market. But Kevin Mitchell, chairman of the Business Travel Coalition, says the current, consolidated airline industry is not competitive.
“In a perfectly competitive market, an airline industry consumer would be able to exercise his right to walk away from the $200 change fee and instead deal with other airlines eager to gain market share,” says Mitchell, whose group represents corporate travelers. “However, now that the U.S. marketplace has gone from 11 airlines controlling some 80 percent of seat capacity to 4 airlines, the opportunities to vote with one’s wallet have been considerably reduced.”
Whether these bills succeed or not, one thing seems clear: The days of airlines naming their own price when it comes to fees and surcharges are numbered.