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Airline Fees Take Off; Troubled Carriers Charging for Ticket Changes

Posted on: Sunday, 25 September 2005, 15:00 CDT

As Hurricane Rita hit the Gulf Coast this weekend, the nation's airlines canceled flights to and from Houston just a few weeks after Hurricane Katrina forced similar cancellations in New Orleans.

Both natural disasters mark another rare move for airlines: the waiving of "change fees." Those charges, which typically run up to $100, occur when airline passengers reschedule flights for different days or times.

With the airline industry under heavy financial pressure, including bankruptcy reorganizations for some of the nation's largest carriers, change fees have become an area of greater interest, according to aviation industry sources. And it typically takes a big event, such as a hurricane, to cajole airlines into dropping the fees.

"In an era of looking for new sources of revenue, airlines are beginning to recognize" change fees, said Carol Skornicka, senior vice president of corporate affairs at Oak Creek-based Midwest Airlines Inc.

"There has been a sharpening of focus" on the fees, said Steve Hendrickson, a senior partner at Sabre Airline Solutions, a Southlake, Texas-based company that sells management software to airlines.

Change fees generally account for only around 1% of a typical airline's revenue, Hendrickson said. But at a time when most airlines, including Midwest, are losing money, even a small boost in revenue is prized, he said.

Airlines began tightening the rules on change fees around two years ago, Hendrickson said, after an extended drop in demand for air travel coupled with high labor costs for some airlines forced carriers to pay more attention to alternative revenue streams.

Midwest, the largest carrier at Milwaukee's Mitchell International Airport, didn't even have change fees until a few years ago, Skornicka said.

The airline now charges $100 for changes on its "signature service," which uses Midwest's traditional two-across seating arrangement, and $50 for changes on its "saver service," which uses less roomy three-across seating and focuses on vacation destinations such as Orlando, Las Vegas and Phoenix.

The customer also has to pay for any difference in fare. So, for example, if a customer changed a saver service ticket, originally purchased at $200, to a fare that cost $240, he would pay an additional $90.

Calculating opportunity costs

The fees are typical of most airlines, Skornicka said.

"We wouldn't do it if our competitors didn't do it," she said.

Midwest's decision to waive change fees for passengers forced to rebook flights because of Hurricane Rita's effect on Houston's airports is also typical.

Skornicka and other aviation industry sources said the change fees are justified.

When a customer books a flight, for example, at $300, the airline is holding that seat and turning away other chances to sell it, Hendrickson said.

If a customer decides to change a flight to a different time or day, then the airline incurs "an opportunity cost" because it spurned chances to sell a seat on that original flight to someone else, he said.

That argument, however, sounds hollow to Michael Boyd, president of Boyd Group Inc., an aviation consulting firm based in Evergreen, Colo.

More than 90% of airline tickets are non-refundable, Boyd said, so the airline has already made money on the initial booking. And, depending on when the customer changes a flight, the airline may have time to resell that seat, Boyd said.

"If the flight is tomorrow, and this afternoon you make the change, you can make that argument" that the airline has an opportunity cost, Boyd said. "But if the flight is three weeks from now, that's a pretty weak argument."

Boyd also said airlines have few operating costs from changing flight tickets, especially as more tickets are sold and processed electronically.

The bottom line, Boyd said, is that airlines are making money on change fees. And money is something that's in short supply these days at most airlines.

Airline bankruptcies

Three of the country's largest airlines United Airlines Inc., Delta Air Lines Inc. and Northwest Airlines Corp. are reorganizing in Chapter 11 bankruptcy, while US Airways Group Inc. is emerging from Chapter 11 and merging with America West Holdings Corp.

Midwest Air Group Inc., the corporate parent of Midwest Airlines and regional carrier Skyway Airlines Inc., lost $24.1 million for the first half of 2005, compared with $10.3 million a year earlier, as it struggles with fuel prices that are up 34% over last year.

Still, airlines have dropped or reduced change fees even when a hurricane isn't canceling flights, said Dave Bradford, an account executive at Rockville, Md.-based Manugistics Group Inc., which sells management software to airlines. He cited Delta, which in January cut change fees through its SimpliFares program which forced some competing airlines to react.

Industry sources also say fares remain very competitive, even as airlines struggle with higher fuel prices.

"It's really a buyer's market out there," said Kurt Ebenhoch, Northwest Airlines spokesman.

Copyright 2005, Journal Sentinel Inc. All rights reserved. (Note: This notice does not apply to those news items already copyrighted and received through wire services or other media.)

Source: Milwaukee Journal Sentinel

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