President Biden has popularized the term ‘junk fees.’ These are fees that companies charge because they can, but provide no value to the consumer. The President has talked about these for multiple industries, including banks, cable companies, and hospitality. But airlines have taken most of the brunt, following years of active price unbundling and recent operational challenges. It is popular to rally against fees, and so we should expect to be hearing the term junk fees for quite a while.
But not all fees are junk, and many offered by the airlines put pricing power into consumers’ hands. Insurance company Liberty Mutual has, for a few years, used the phrase “only pay for what you need” as an empowering tagline. Consumers have saved billions of dollars thanks to lower fares augmented by optional fees, as compared with all-bundled options. The use of the term junk fees is poisoning to what is fundamentally a consumer benefit.
Unbundling Versus Tacking On
Years ago, an airline ticket included the ability to check two bags, pick your seat, and eat whatever food was offered onboard. This made airfares higher than they otherwise would be, as people paid for these services even when they didn’t use them. In 2007, at Spirit Airlines, we saw that just over 30% of our customers did not check a bag. It seemed unfair to us to have those people pay for the people, bag belts, and IT needed to deliver checked baggage. So, we decided to institute a $20 bag fee and at the same time lowered everyone of our fares by $20. Those who checked a bag would pay no more than they did before, but those who didn’t check saved $20 on every ticket.
We learned a lot from this. Fewer people checked bags, because they thought the ticket price savings was better than the bag service. Over time, we started playing with different prices for bags and different reductions in our fares. We extended this idea to seat assignments and more. Before we did any of this, our average one-way fare was about $105 and we collected about $5 in other charges (mostly overweight bags and alcohol sales onboard). Five years later, Spirit’s average fare was about $70 and we collected about $45 in after-ticket fees. This $115 total price compared with $110 five years earlier, even though fuel prices had risen 30% during the same period. This is unbundling — giving consumers the ability to modify their behavior to save money, while not penalizing those who still took advantage of the original services.
Beginning in 2008, the industry began to match Spirit’s bag and seat fees. But, in most cases they didn’t lower their fares. They just tacked on these fees. In 2014, I was flying on Southwest. While waiting in line, two guys in front of me started talking. One said, “You know why I like flying Southwest? Everyone knows what to do on boarding, and it’s all very civil.” Not wanting to lose the opportunity, I said, “You know what I don’t like about flying Southwest? I didn’t check any bags but paid for two checked bags in my ticket price.” The two guys looked at each other and said,” We didn’t check bags either. We’re subsidizing all the bag checkers!” We all laughed but the point was clear.
Giving Customers Choice
Giving consumers say in their total price means giving them options. We began to think of this idea more broadly — what would save us money if customers didn’t do this thing or did it themselves? This led to fees for things not originally in an airline ticket, but that gave people choices in their service. This became a passion for us at Spirit as we fought to keep base fares low, and the more customers could choose their fare based on choices made, the better.
At the same time, the industry had noticed that fees, often called ancillary fees, were “stickier” than ticket prices. Ticket prices changed often and fluctuated by time of day, day of week, and time of year. But the ancillary fees stayed largely constant, making the total revenue less volatile and more predictable. Even the big airlines that just “tacked on” the fees saw this and consumers benefited even within their higher price structure.
Are Any Airline Fees Junk?
The short answer is yes. Airlines used to charge very high change fees, often higher than the price of the original ticket. Led by United, these largely went away during the pandemic and have not returned. Some airlines today charge customers for using certain kinds of platforms when buying a ticket, ostensibly to recover the higher cost of those platforms. But they use odd names, like Frontiers’ ”Electric Commerce Charge.”
Airlines risk more Congressional ire by adding fees with unusual names or that cannot be easily avoided with simple behavior changes. The using of the term junk fees, however, suggests that many fees are junk, when most are not. Regulations to limit fees risks throwing out the baby with the bathwater, and raising all consumer fares as a result.
The Challenge Of Third-Party Sales
Airlines sell tickets on their own websites, and it is easy for them to be transparent on what the charges are and how they can be avoided. But more customers buy from sites like Expedia, or aggregators like Kayak. These so-called third-party sites sell hundreds of airlines and even more hotels around the world. It is difficult for them to list the unique fee structures of each airline, so they put generic language to say that other fees may apply. This is frustrating for customers, because without the transparency of the direct sale they sometimes get surprised at the airport when hit with a bag fee or another charge.
Airlines have tried to work with Expedia and others in ways so that consumers can be treated more fairly. But to date it is still difficult to share all news about extra charges when buying, and sometimes customers who buy must then go to the airline’s site to finish the transaction.
Risks Of Regulation
Consumer-based regulations at the Department of Transportation is rarely proactive, and often follows in response to a specific situation. Frustrated by the growth in ancillary fees, the agency created the “full fare advertising rule.” The idea was to make it easier for consumers to see the total price they would pay while shopping. But, unable to require bag fees, seat fees, or others to be included, since that agency has no pricing authority and not all customers pay these fees, the regulation requires airlines to bundle government taxes and government-imposed fees into airline ticket prices. They did this using “unfair and deceptive” protection. Essentially, they said that a $100 ticket with $20 in government taxes cannot be shown as $100 + $20, because that is unfair and deceptive. To fix this, they require airlines to show only $120.
Recognizing this, the industry faces potential regulation in the fees area that is put in place to protect consumers, but in reality will raise their fares and reduce transparency. Consumers deserve transparency and choice, and the use of junk fees as a term poisons the debate around what is good and what is really junk.