Sunday was a momentous day for the U.S. airline industry, as United Airlines (NASDAQ:UAL) announced that it was doing away with change fees for regular economy and premium tickets on all domestic flights, effective immediately. United will also make same-day standby travel free for all customers beginning on Jan. 1, 2021.
In the ultra-competitive airline industry, it's risky for any carrier to be out of step with its closest rivals in terms of fees and policies. Not surprisingly, American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and Alaska Air (NYSE:ALK) all matched or even one-upped United by Tuesday morning. Let's take a look at what this means for airlines and customers.
Airlines race to match United Airlines
On Monday, Delta Air Lines and American Airlines revised their change fee policies to avoid falling behind United. However, they took different approaches to addressing this shift in the competitive environment. Delta simply matched United's new policies, removing change fees on domestic tickets (including Puerto Rico and the Virgin Islands), excluding basic economy fares. Delta did not alter its standby policies, though.
American Airlines took a much bolder approach. It eliminated change fees for flights to and from Canada, Mexico, and the Caribbean as well as the U.S., Puerto Rico, and the Virgin Islands (again excluding basic economy tickets). Additionally, whereas United's policy does not allow customers to claim a refund or voucher if they switch to a cheaper flight -- and Delta appears to be following United's lead -- American Airlines said that if the new flight is cheaper, customers will receive a voucher for the difference. Additionally, American is implementing free same-day standby on Oct. 1.
On Tuesday, Alaska Airlines followed its three largest rivals in updating its change fee policy. Alaska is eliminating change fees for all domestic and international flights, excluding saver fares. This is roughly similar to American's new policy, as Alaska Airlines doesn't operate any long-haul flights beyond North America.
What do the changes really mean?
United, Delta, American, and Alaska (and most of their peers) temporarily suspended change fees when the pandemic spiraled out of control earlier this year. Thus, in the short run, the changes announced over the past few days merely make permanent what was previously a temporary relaxation of the rules.
Furthermore, the new policies permitting free flight changes don't extend to basic economy tickets. That stands in contrast to Southwest Airlines, which doesn't charge change fees under any circumstances (and doesn't sell basic economy fares): a distinction the low-fare carrier has been promoting aggressively.
Last year, U.S. airlines pocketed $2.8 billion from change fees: 1.4% of their total revenue. While most airlines are still charging change fees for international flights -- at least long-haul international travel -- they will be giving up about 1% of their annual revenue by eliminating these fees for most short-haul tickets.
However, the corresponding advantages are significant. First, eliminating change fees will do away with booking anxiety: Customers will be more likely to book tickets without having their travel plans 100% nailed down. Second, by excluding basic economy tickets from the new free-flight-changes policies, airlines will give customers even greater reason to "buy up" from basic economy to their pricier standard economy fares.
A new routine
Offering free flight changes for standard economy tickets is certainly a customer-friendly move for United and its peers. Previously, many of these airlines had charged $200 change fees for domestic itineraries, a price completely out of proportion to the airline's opportunity cost. A no-change-fee policy will give people peace of mind when booking tickets in advance.
That said, it's too early to know what else airlines might change in the months and years ahead. As noted above, the new rules about flight changes give customers more reason to buy standard economy tickets rather than basic economy tickets. One distinct possibility is that airlines will attempt to capture that additional value by increasing the price differential between basic economy and standard economy fares.
Typically, airlines advertise basic economy tickets as a sort of teaser fare. If it costs more to upgrade to standard economy, airlines would effectively replace their change fee revenue with a stream of incremental "buy-up" revenue from customers who want to reserve the right to make flight changes later.
So don't cry for the airlines. Change fee revenue may be going away, for the most part. However, United Airlines, American Airlines, Delta Air Lines, and Alaska Airlines have plenty of options for offsetting the loss of this revenue stream as they strive to rebuild their profitability in the years ahead.