Surprise! Lower Airline Fees Would Be Bad for Customers

By Markets Fool.com

Earlier this month, Senator Richard Blumenthal of Connecticut and Senator Ed Markey of Massachusetts introduced the cleverly named "Forbidding Airlines from Imposing Ridiculous (FAIR) Fees Act." This proposed legislation would essentially regulate airline fees to ensure that each fee is commensurate with the cost of whatever service it covers.

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The senators lament that airlines -- led by American Airlines , Delta Air Lines , and United Continental -- have introduced or increased numerous fees since 2009. Indeed, U.S. airlines made $6.5 billion just from baggage and change fees in 2014 (the most recent full year for which data are available).

Airline fees have risen precipitously in the past few years. Photo: American Airlines

On the surface, the FAIR Fees Act seems to be a piece of consumer-friendly legislation. Not surprisingly, numerous consumer groups have expressed their support for this bill. However, regulating airline fees would not be good for most travelers in the long run.

The bill in a nutshell
The FAIR Fees Act would "prohibit airlines from imposing fees, including cancellation, change and bag fees, that are not reasonable and proportional to the costs of the [services] provided."

For example, Sens. Blumenthal and Markey note that American, Delta, and United charge more for a second checked bag than for the first checked bag. Since there is no difference in cost to the airline, the FAIR Fees Act would ban this type of pricing policy. The senators also note that many airlines impose $200 domestic change fees even though the average revenue loss from a ticket change or cancellation is much lower.

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The bill calls for the DOT to establish standards for determining whether a particular fee is "reasonable and proportional to the costs." It would then use these standards to enforce the ban on unreasonable fees.

Bad consequence No. 1: less transparency
While Sens. Blumenthal and Markey may be trying to protect consumers, the FAIR Fees Act would make things even worse for most travelers.

First, tying airline fees directly to costs could lead to less transparency for customers. Today, airlines may have high fees for certain services, but they are usually standard fees that are disclosed on the carrier's website.

If airlines have to justify each fee, they will presumably charge passengers who "cost more" a higher price. For example, the cost to an airline of checking a bag depends on its weight, its dimensions, whether you reserve a spot for the bag in advance, and how much help you need to check your bag in at the airport. If bag fees vary depending on all of those criteria, it would be a lot harder to figure out in advance how much checking a bag would cost.

Bad consequence No. 2: rising compliance costs
Calculating the cost attached to an airline fee is not always straightforward. Take seat assignment fees, for example. What's the cost of allowing customers to choose their seats for free? It might seem like there's no cost at all.

However, what if a business traveler who's willing to pay $500 for a last minute ticket looks at the seating map and finds that there are only middle seats left? If another airline has better seats available because it imposed a seat-selection fee, the first airline would lose out on a lucrative $500 fare. That's a very real cost of allowing everyone to select seats for free.

The FAIR Fees Act would force airlines to quantify costs like this to prove that their fees are reasonable. The cost of doing so could become a significant burden, especially for smaller airlines. And high compliance costs would undoubtedly get passed along to passengers, one way or another.

Bad consequence No. 3: service cuts
The three big carriers that Sens. Markey and Blumenthal singled out -- American Airlines, Delta Air Lines, and United Continental -- have all reported declining unit revenue over the past year. Indeed, airline ticket prices have fallen dramatically in many markets: a fact that advocates of the FAIR Fees Act have conveniently ignored.

Big airlines like United Continental wish the airline industry was as uncompetitive as consumer advocates seem to think. Photo: The Motley Fool

Ancillary fees represent one of the few steady sources of revenue for airlines in this environment. If fee revenue is undercut by new legislation, airlines will have to cut flights to the point where they can start raising ticket prices again. Otherwise, they won't be able to earn enough money to cover their cost of capital, particularly in down years.

Consumer advocates may yearn for the days when it was cheaper to fly -- but it was only cheaper because airlines weren't covering their costs. That wasn't a sustainable solution. In the long run, forcing fees down will leave travelers with fewer flight choices and higher base fares.

Bad consequence No. 4: less competition
Finally -- and most importantly -- regulating airline fees would hurt competition. In the past year or two, the growth of ultra-low cost carriers like Spirit Airlines and Frontier Airlines has helped keep airfares low. These carriers rely on charging high fees to make up for their extremely low base fares. (Spirit Airlines' average fare was less than $60 last quarter.)

Forcing Spirit, Frontier, and other ULCCs to cut their fees would blow up their business model. At best, this would cause them to raise their base fares and significantly cut back their growth plans. Without the threat of being undercut by Spirit or Frontier, airlines like American, Delta, and United would have that much more freedom to raise their own prices.

Transparency is good -- price-setting, not so much
Not surprisingly, airline industry trade association Airlines for America opposes the FAIR Fees Act. The group noted that the government used to regulate airfares, and when it did, fares were much higher (adjusted for inflation) than they are today.

While many travelers complain about the rise in airline fees in recent years, this "unbundling" of airfares -- particularly when pushed to the extreme by Spirit Airlines -- has opened air travel to millions of people who could not afford to fly otherwise.

High fees allow airlines like Spirit to offer rock-bottom fares. Photo: Spirit Airlines

This isn't to say that all regulation is bad. In early 2012, the DOT implemented a rule requiring airlines to include all mandatory taxes and fees in their advertised ticket prices. This rule made it easier for consumers to see what they would actually have to pay. The same rule also requires airlines to provide a prominent link on their website to a bag fee disclosure.

Ensuring the transparency of airfares and fees is an important task for regulators. Consumers deserve to know what they're going to pay before buying an airline ticket. However, regulating airline prices -- whether for fares or fees -- is a step too far, and consumers would ultimately pay the price.

The article Surprise! Lower Airline Fees Would Be Bad for Customers originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Spirit Airlines and United Continental Holdings, and is long January 2017 $40 calls on Delta Air Lines,, long January 2017 $30 calls on American Airlines Group, and long June 2016 $30 calls on Spirit Airlines. The Motley Fool is long January 2017 $35 calls on American Airlines Group. The Motley Fool recommends Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.