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April 30, 2008

Airline Fee Frenzy: Where Will It End?

Airline Fee Frenzy
No one told him about the
baggage surcharge.

Photo: AP

by Barbara S. Peterson

Recently, I was on a radio talk show when someone asked me point blank: How high would fares have to go before people would stop traveling? It's an excellent question and one that most airlines spend large amounts of money trying to answer . . . before the customer does it for them by walking away. Airlines have always had problems trying to price products in relation to costs; they don't like the term fare increase because it's bad for business, so they use something like surcharge.

The last week has seen a wave of these fare hikes--er, fees. The latest fad is the charge for checking a second bag, which will cost you around $50 roundtrip. American has just joined its major-league brethren in adopting the levy; starting May 12 it will cost you $25 a second bag per flight, and $100 per third or fourth bag. But at least you have a choice about that--you can try to pack light--and some travelers, like VIP frequent fliers and those traveling overseas, are exempt. The tactic isn't limited to network airlines; JetBlue is now charging $20 for that second bag.

The other "fee" that has been popular since gas prices began surging a few years ago is that old chestnut, the "fuel surcharge." That one, you cannot avoid--after all, the plane can't take off without jet fuel, right? For example, Delta's fuel fee just went up by about $20 per leg of the trip, so depending on whether or not you change flights, you could be hit with nearly a $100 tab for the privilege of flying on a plane with a full tank of gas.

Other fees are multiplying like kudzu--you might be asked to pay extra for an exit row or bulkhead seat or even an aisle seat--and, of course, meals and other amenities long ago stopped being handed out gratis. It'll cost you to talk to a human being when you dial an airline reservations line, and changing your ticket is getting more expensive (United, for one, says it will now charge you $150 to alter your itinerary).

So why don't airlines simply cut out all the nickel-and-diming and simply give us the straight story? They need to raise fares by X amount because their fuel costs have risen through the roof. Anyone who drives a car knows that fuel prices have nearly doubled in the past year.

But there's one problem with that scenario. Airlines would inevitably run into that economic reality known as "price elasticity." For airlines, customers fall into two classes: those who respond to pricing incentives, and those who absolutely, positively have to be at that wedding or meeting. For the latter, pricing is a secondary concern. These days, most travelers have choices--including staying put--and even business travelers are getting more selective about where and when they travel. Which gets back to that question I raised at the beginning: When will airlines hit that tipping point where they'll just turn off customers?

One caller to the radio show told me he called off his travel plans when he couldn't find an affordable price. But the bottom line is that airlines can only go so far in raising fares outright. Often, this invites competitors to come in and undercut them (to steal market share, if nothing else). As former American Airlines chief Bob Crandall used to say, if you're running an airline "you are only as smart as your dumbest competitor."


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