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More fees propel airlines' profits, and embitter travelers

Published Jul. 28, 2015

As a frequent business traveler, Wayne Miller, a distributor for an ethnic foods company, often pays extra to stretch out his legs. When he paid $38 for a window seat with extra legroom on a recent cross-country flight, though, Miller was upset to find out, when he boarded, that the seat didn't actually have window access.

"Nowhere in paying for the upgrade did it say, 'That's a windowless seat,' " he said.

Some airline passengers view high fees, an increasing number of fees and poor disclosures as sources of friction when traveling. But even with recent meetings among regulators, pressure from lawmakers and now a Department of Justice investigation into possible collusion among airlines, the airlines' penchant for fees is not going away any time soon in what has become a highly profitable industry.

"There's been sort of a major turnaround in the performance of the U.S. carriers," said John Thomas, head of the global aviation and travel practice for LEK Consulting. "Ancillary revenues are well and truly driving the bottom line of major U.S. carriers."

Travelers' frustrations are compounded by higher fares, even as airlines, buoyed by lower fuel costs, enjoy surging profits. Last week, American Airlines reported the most profitable quarter in its history, earning $1.7 billion.

A recent analysis of 63 airlines by the airline consulting firm IdeaWorksCompany and sponsored by the travel-technology service CarTrawler found that these airlines earned $38.1 billion in ancillary revenue, or revenue from nonticket sources, last year. That comes to $17.49 in extra revenue per passenger, an 8.5 percent increase over 2013.

While this figure also contains additional revenue sources like the sale of frequent-flier miles, fees are an increasingly important part of airlines' business models, said Jay Sorensen, president of IdeaWorksCompany.

"It's a very crucial part of the profit picture," Sorensen said. "Really, you could look at this and say without this activity you would not be looking at a profitable airline industry." Analysts say that fees for checked baggage and ticket changes are the two biggest contributors to the sector's total profit.

Erik Hansen, senior director of domestic policy at the U.S. Travel Association, blames the way airline tickets are taxed for the proliferation of fees.

"In some ways, Congress is actually incentivizing the wrong fees," Hansen said. Since ancillary fees are not subject to a 7.5 percent excise tax the way base ticket prices are, carving out fees allows the airline to present a lower total price to travelers. A curb on fees, which would result in rolling these costs back into ticket prices, would let the government collect more revenue, Hansen said — money that would be funneled to the nation's aging air transport.

The profit margin on those add-on fees, analysts say, is too high to ignore.

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"It's not just the top-line revenue; it's the margins they earn," said Henry Harteveldt, a travel industry analyst. "Some of this ancillary revenue has profit margins as high as 80 percent." Even the lowest-margin add-ons have profit margins of around 40 percent," he said. "The fees are where the airlines make money."

Ticket-change fees, for instance, which can cost $100 or more for a domestic itinerary, are almost entirely profit now that much of the process is automated or conducted by travelers themselves online, Harteveldt said.

"Because there's much less human interaction, it's probably no more than a couple of dollars," he said.

American Airlines referred questions about fees to Airlines for America, an industry trade group. Delta Air Lines and United Airlines did not respond to requests for comment.

Some consumer advocates want the government to step in and regulate these soaring fees. In June, FlyersRights.org met with the U.S. Department of Transportation's Advisory Committee for Aviation Consumer Protection to address a petition that the nonprofit submitted in February asking the agency to regulate international ticket change fees — which can cost several hundred dollars — and cap them at $100. The committee has yet to make a recommendation.

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