INTERVIEW: Airline Fees — Up, Up and Away

By Reuvain Borchardt

Ryan Bourne, the R. Evan Scharf Chair for the Public Understanding of Economics at the Washington-based Cato Institute, discusses a new rule implemented by the Biden administration’s Transportation Department mandating upfront disclosure of add-on fees by airlines.

Airline trade group Airlines for America has sued to halt the regulations, saying the Transportation Department’s “attempt to regulate private business operations in a thriving marketplace is beyond its authority.”

“Airlines go to great lengths to make their customers knowledgeable about these fees,” Airlines for America said. “The ancillary fee rule by the Department of Transportation will greatly confuse consumers who will be inundated with information that will only serve to complicate the buying process.”

The Transportation Department has said in response that it “will vigorously defend our rule protecting people from hidden junk fees and ensuring travelers can see the full price of a flight before they purchase a ticket. Many air travelers will be disappointed to learn that the airline lobby is suing to stop these common-sense protections.”

Among the nation’s six largest airlines, only Southwest — which operates mostly with flat prices rather than add-on fees — did not join the suit. 

Bourne holds a BA and an MPhil in economics from the University of Cambridge. Before joining the Cato Institute, he was head of public policy at the Institute of Economic Affairs, and was head of economic research at the Centre for Policy Studies, both in London.

In addition to appearances on broadcast media in the U.S. and U.K., Bourne writes a weekly column for The Times of London focused on the economics of public policies.

The essence of the rule is that all U.S. air carriers, foreign air carriers, and ticket agents operating in the U.S. have to disclose baggage, change and cancellation fees to consumers upfront, whenever they’re advertising a fare for flights within this country. This is predicated on the idea that a lot of the fees and charges for additional services are currently hidden or shrouded, and it will be good for consumers in terms of access to information to be told this information up front.

Ryan Bourne (Cato Institute)

The norm at the moment is that individual customers will have this information revealed to them as they go through the process of booking a ticket. First they’ll see the base fare, and then as they proceed in personalizing their flight experience, any additional fees or charges for baggage or other services will be revealed to them. And usually, before they click to finalize and pay for the service, they’ll have the cancellation fee or change fee revealed to them.

That’s right.

The Biden administration calls this type of pricing practice “drip pricing,” whereby certain charges and fees get added as you go through the process of booking. They regard this as kind of secretive and non-transparent, and so they want to counteract that with this rule.

It could distort consumers’ flight choices, in the sense that at the moment, airlines offer different types of packages and options for add-ons when it comes to the services any consumer can obtain. 

Southwest Airlines, for example, currently bundles most of its baggage fees into its main ticket price. So if you compare a Southwest fare directly to another airline’s like American or Delta and they would have to have all of these different lines of fees at the outset, it’s going to look very confusing to customers. If companies have to reveal this information up front, I think that could provide a competitive advantage to certain companies who already bundled all of their prices, like Southwest, because Southwest will just list the price, while the other airline might list a lower price but have all these added fees.

And I think it will lead to airlines perhaps rationalizing their fees a bit, perhaps not charging as many different fees and charges, which, in some ways, could harm certain customers. At the moment, airlines make quite a lot of their revenue through these various fees and charges. And to the extent that these may now be bundled up into a higher basic price, certain low-income customers and people who don’t want some of these services bundled up will be paying more than they otherwise would. 

So it’s not just the case that everyone will benefit from the transparency. Rather, to make their prices look less confusing and avoid having to list all these potential fees upfront, airline companies may choose to not charge as many fees, but increase their basic price.

I don’t really understand why the federal government is pushing these rules. There are already a lot of third-party websites that do this job of aggregating all the fees and charges if you select the types of services that you’re looking for, so you can compare the prices across airlines.

So it’s not entirely clear to me that this will have a dramatic impact on anything. And any promises or illusions that this is going to save consumers tons of money, I think, are incorrect.

Yes. If you’re advertising a fare on your website having like six or seven lines outlining all of the different pricing aspects, it is not going to look very attractive to customers, as opposed to just seeing a basic fare. So this might change the nature of how businesses decide to price. 

Until now, we’ve had “unbundling” — we pay separately for lots of services that used to be bundled into the basic price. Whether that’s baggage fees, for some airlines even taking a carry-on bag, having seat selection at the time you board the plane — these are all things that a lot of airlines have decided to unbundle and charge separately for. One consequence of doing that is that people who highly value those services are willing to pay more, and that enables the airlines to offer a lower basic ticket price to the rest of their customer base and remain competitive.

That’s not really my area of expertise, but I suspect one reason is that airlines are operating a technology that’s been around for decades, and, unlike certain other sectors, it doesn’t appear as if the quality of service has improved dramatically. In some ways, as a result of unbundling, consumers feel like they’re having to do more of the work than they were before: you have to check in yourself, check your own bag, stick your own bag tag on. There are often delays and canceled flights. So it’s an industry where there hasn’t been that much obvious technological improvement over the years. And to the extent that there has been technological improvement, it’s being used to lower basic fares in part by shifting some of the services onto the shoulders of customers, rather than them being undertaken by the airline.

That’s exactly right. 

Michael O’Leary, the CEO of Ryanair, a European budget airline based in Ireland, recognized a decade ago that price is a stronger predictor of customer demand than anything else when it comes to airlines, and that people just want to get their basic ticket price as cheap as possible. 

In some ways, the developments in the airline industry have been hugely democratizing. The fact that we have low-cost airlines that do these cheap, no-frills flights has broadened access to air travel to many of the poorest people in the country. And that’s a good thing. 

Airlines think they can attract consumers this way, with low base prices and the optional add-ons. Individuals can tailor their experience based on their own needs. If consumers really hated it that much, then everybody would always fly Southwest, or another airline would come along that would bundle all these fees up. 

I’ve taken flights where I’ve realized that it will be quite expensive to check a bag, and so I’ve decided to cut down on how much clothing I travel with and take a carry-on instead. Individual consumers can make those choices.

I don’t think it’s dishonest. 

I can see that somebody booking a flight for the first time might be annoyed or feel like they’ve been misled. But let’s face facts: Most people who fly are repeat consumers. And once you become accustomed to it, and once you’ve flown once and know what to expect, I don’t think anybody is really that surprised.

When people complain about this type of stuff, it almost feels as if they’ve been transported from the 1930s.

Trump basically paused the onslaught of the regulatory state. There were certainly regulations that he eliminated, but overall his big achievement was stopping most meaningful new regulations from coming through. The Biden administration has expanded regulation in lots of different areas. FTC Chairwoman Lena Khan has made a big push on antitrust, for example. Obviously, there have been a lot of environmental regulations. And the biggest change — and perhaps, I think, we weren’t expecting it — is this anti-junk-fees agenda, which seems like a whole-of-government effort to really involve the administrative state with designing how businesses’ pricing should be structured across a range of industries. 

It’s a really dangerous development. It presumes that bureaucrats know better than businesses and customers how prices should be structured and what customers want out of pricing structures. And it could really risk stifling pricing innovation. We’re at a period in time when there are lots of potential opportunities for sectors to introduce more dynamic pricing, where algorithms enable prices to fluctuate in real time according to supply and demand conditions.

This onslaught from Biden’s regulatory state could risk squelching a lot of these experiments from businesses.

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