Americans love to hate the airlines. As airlines have transformed themselves over the past decade to become sustainably profitable, they have added bag fees, dropped meal service, reduced legroom, and adopted a litany of other fees.
All of these practices have made airline customers unhappy. Yet for the most part, these have been necessary changes to ensure that airlines are consistently profitable. While airfares have risen significantly in the past few years, they are still relatively low by historical standards, and would be higher without these changes.
But one innovation is particularly hard to swallow. The single worst practice of the airlines today is the imposition of punitive change fees. Change fees are often exorbitant compared to the actual costs they impose on airlines and create a massive amount of customer anger. This drives customers to Southwest Airlines (NYSE:LUV), which doesn't charge change fees.
The purpose of change fees
Most of the fees imposed by airlines in recent years have been directly tied to services that some (but not all) passengers need that are costly to provide. For example, handling checked luggage or supervising an unaccompanied minor clearly imposes costs on an airline that it wouldn't incur for an adult with no checked luggage. Thus, it's reasonable that airlines charge some level of bag fees and unaccompanied minor fees.
The basic justification for change fees is also relatively straightforward. When a passenger changes or cancels a ticket, it may no longer be feasible to resell that seat, especially if it is close to the day of travel.
This is a very real cost of doing business. Airline revenue management systems are carefully calibrated to sell just the right number of tickets at just the right time for just the right price. A sudden influx of canceled or changed tickets at the last minute will lead to lower revenue for that flight (and won't significantly reduce costs for the flight).
But change fees are excessive
That said, change fees tend to be excessive at U.S. airlines. The top three carriers, American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and United Continental (NYSE:UAL), all charge a $200 fee for changes to nonrefundable domestic tickets. Change fees can be more than twice that amount for international flights.
Most low-cost carriers have lower change fees, but these are still frequently $100 or more. Only Southwest Airlines has maintained a generous no-change-fee policy.
What makes these change fees the single worst practice of the airlines is that the fees bear no relationship to the actual cost to the airline. A fee as high as $200 might be reasonable for changing a long-haul transcontinental itinerary less than a week in advance. By that point, there isn't much time for the revenue management system to adjust in order to resell that seat.
On the other hand, a $200 fee is clearly excessive for changing a ticket months in advance -- particularly if the ticket was fairly cheap to begin with. Most airline tickets are sold within the last two months before the flight, so that leaves plenty of time for the airline to find another customer to fill the empty seat.
There's a middle ground
While almost all airlines (except Southwest) have clung to -- and even increased -- their high change fees, one jumped off the bandwagon less than two years ago.
In late 2013, Alaska Air (NYSE:ALK) increased its change fee from $75 (or $100 if made through a call center) to $125. But at the same time, it eliminated fees for flight changes made at least 60 days in advance, even for the cheapest tickets.
It's obviously not as good as Southwest Airlines' no-change-fee policy, but it's definitely a big improvement compared to the status quo. Customers can book tickets far in advance without being 100% sure of their plans. Since it doesn't cost Alaska Airlines much to change a ticket when it still has two months or more to fill the plane, it's a nice gesture to make the change for free. Meanwhile, the airline is still compensated for more-disruptive changes closer to the travel date.
Alaska's larger rivals should consider adopting this type of model, as they would likely gain some customer goodwill without giving up much revenue. In fact, waiving the fees for ticket changes made far in advance could help them gain market share, as some travelers fly Southwest because they can book flights "worry-free" without being sure of their plans.
Ideally, airlines would go beyond this and dramatically reduce (if not eliminate) fees for changes and cancellations made one to two months in advance. During that window, the airline still has a very high probability of reselling the seat. A relatively nominal fee of $25 to $50 would compensate the airline for the small risk of having the seat go empty. However, it's unrealistic to expect change fees to disappear entirely.
The single worst practice of the airlines isn't the mere act of charging change fees, but rather the excessive level of these fees and the complete disconnect to the airlines' actual costs. Alaska Airlines' compromise shows a way forward that could be good for both airlines and their customers.
Adam Levine-Weinberg owns shares of United Continental Holdings, and is long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. 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.