Airlines See Revenue Increase From Fees

— -- Zach Bennett decided not to fly on Delta Air Lines this month after learning that the fee for taking his dog, Matilda, along was more expensive than his own ticket between Denver and Salt Lake City.

Delta charges $250 round trip to transport a pet — $52 more than the ticket Bennett considered buying for himself. He flew on Southwest, which charged $150 round-trip for Matilda.

"Southwest was more reasonable, but still, $75 each way was too much for Matilda to fly under my seat," says Bennett of Fort Collins, Colo. "Some fees are understandable, but the airlines have gone too far."

Airline fees for products and services, such as checking bags, rebooking flights and taking along pets, keep inching up. Airlines have become increasingly dependent on them for revenue. And they're a continuing source of disgruntlement for many fliers who keep looking for ways to avoid them.

During the first three months this year, U.S. airlines collected a record $1.38 billion in fees to check baggage and change reservations, the Transportation Department's Bureau of Transportation Statistics reported on Sept. 13.

That's $59 million more than they collected in the first quarter of last year, and $1.1 billion more than the first three months of 2007, when extra fees first began to appear.

"Ten years ago, airlines just raised fares," says Michael Boyd, an aviation consultant in Evergreen, Colo. "Today, ancillary revenues are a key part of the revenue stream and have resulted in fares not increasing as much."

The emergence of fees reflect a change in how airlines market and price themselves — and cover their costs. By unbundling the price of flying from a lump-sum ticket, airlines force travelers to choose the products and services they want to buy. They're also allocating part of the costs of getting people from one place to another based on the services passengers choose.

"Bag fees are an example of product unbundling that allows carriers to better align the total price a passenger pays with the cost of providing that service," says Darin Lee, an airline expert for Compass Lexecon, an economic consulting company. "Passengers who check bags impose additional costs on the airline, and bag fees are a means to pass that cost along to the passenger."

U.S. airlines lost more than $65 billion in the last decade and learned that airfares cannot cover their costs, says Steve Lott, a spokesman for the Air Transport Association of America, which represents U.S. airlines.

"Airlines have restructured to resume a path toward sustained profitability," he says. "Without sustained profitability, airlines cannot add routes, add workers or buy new airplanes."

Differing perspectives

To many consumers, though, the growing number of fees and their escalating prices have gone beyond covering costs.

"Fees are out of control and reflect badly on the airlines charging them," says frequent business traveler Scott Morris of Austin. "The fees have started looking more like gouging — opportunistic ways to collect money from a captive customer."

Lott, however, says "the marketplace and consumers are the ultimate judge" whether some fees are too expensive.

Airlines should simplify and eliminate fees, Morris says, and add them to ticket prices.

"I think it is fine to charge oversize baggage fees and fees for large amounts of luggage," he says. "But if someone is a normal traveler with a couple of bags — or is not actually creating cost for the airline — then the fees are unreasonable."

Frequent flier Lawrence Stocker of Newport Beach, Calif., says he thinks fees are airlines' way of hiding higher ticket prices. He says he's particularly disturbed by fees charged for baggage, roomier seats and priority boarding.

Fliers-rights advocate Kate Hanni agrees.

"The hidden fees are a deceptive way for airlines to give passengers the illusion of a lower fare, hide the truth of the total cost of a flight and avoid paying the 7.5% excise tax that feeds the vital Aviation Trust Fund," says Hanni, executive director of FlyersRights.org. "It's a totally diabolical scheme."

Stocker also dislikes checked-bag fees because many passengers try to avoid them by carrying huge bags onboard and stuffing them in overhead bins.

"In the event of a problem, we're not going to get hurt from flames," he says. "It will be excess baggage crushing us to death."

Frequent business traveler Bob Kleeman of Castle Pines, Colo., says the "dumbest fee" is the one to change a ticket at an airport for a different departure time.

"If I get done with my business, get to the airport early, and there are seats available, why should I have to pay $100 to $300 to take an earlier flight?" he asks. "I cannot imagine why that makes any business sense."

From a business perspective, "all fees are reasonable," says Boyd, the aviation consultant. "It's the airline's product, and they can price it as they see fit."

Yet, Boyd empathizes with fliers such as Kleeman.

"Some of the fees — like charging for a flight change when the customer is already at the airport — are just 'gotcha' fees," he says. "Ticket-change fees months away from the travel date are also unreasonable. If Grandma dies, that trip next July to visit her gets canceled for a hefty $150 service fee."

Ticket-change fees also get under the skin of Rick Seaney, CEO of FareCompare.com, a website that compares airfares for consumers.

"I think the most egregious fees are the $150 domestic and $250 international change fees on non-refundable tickets," he says. "In many cases, these are folks who have to change plans at the last minute. They are not only hit by the change fee but also by the change in fare price, which is typically much higher."

Avoiding charge

Many frequent fliers avoid bag and other fees because they have high-level status in airline frequent-flier clubs or use credit cards that cover the fees.

Nick Bova of Dublin, Ohio, is a very frequent Delta customer who doesn't pay bag fees and says they make him more loyal to Delta. His company's travel agent sometimes requests he buy a ticket for another airline's cheaper flight. But when all the fees are added up, he says, Delta's flight is less expensive.

If fees keep ticket prices down, "I'm all for it," Bova says

Many other frequent fliers who are exempt from fees remain bothered by them, though.

Mike Nicholes, a very frequent United Airlines flier from Portland, Ore., is one.

"The airlines," he says, "are out of their minds and need to put the fare where it is competitive (without adding fees).

"A la carte may work in a diner," he says, "but it is anti-productive and anti-customer in a service industry."

Fliers' disgust about fees has created a public relations headache for airlines.

"People do not like to pay for things they got free," says Nawal Taneja, professor emeritus at Ohio State University's aviation department. "Customers would be pretty annoyed in a restaurant if they had to pay for bread with their entrée."

Taneja also says airlines have done a poor job communicating the reason for fees to consumers.

"Airlines could explain better that, by unbundling the product, the basic fare has gone down — and like a restaurant menu, you pay for what you buy," he says.

He suggests airlines provide examples of the price of fares today vs. the past to convince passengers who don't believe fares have dropped, and fees are part of the reason why.

Despite many fliers' distaste for fees, aviation consultants and fare experts don't see them going away. And unlike fares, which have been unbundled, airline marketers may increasingly bundle fees.

"The bottom line is that fees are here to stay," Seaney says. "The future of fees is not only more fees, but the merchandising, bundling and subsequent discounting of these fees."