How Airlines Turned Your Vacation Plans Into a Losing Bet
To appreciate how crazy the airline fare-shopping game has become, you have to go back to the 1960s and ’70s—or get someone who remembers them to describe those halcyon days before deregulation. Airline fares were all set by the federal government, and thus were consistent across the board. That trip from Chicago to Kansas City cost the same no matter what airline you flew, when you booked your seat, or how many times you changed your mind and switched flights. No penalties, no advance purchase requirements, no change fees—no problem. Yes, airline fares were higher on average than they are today, in inflation-adjusted dollars. But taking off into the friendly skies could be extemporaneous, freewheeling, even an adventure.
Those were, in the view of the airlines, the bad old days.
The world changed in 1978, when the airlines were deregulated and air fares were allowed to be set by the marketplace. Today, shopping for fares is a Byzantine game, played according to rules that only the airlines fully understand. Thanks to sophisticated computer programs and "dynamic pricing," fares go up and down daily, sometimes hourly, according to supply and demand. Competition, along with the vagaries of the hub-and-spoke system, makes fares to some cities reasonable, others exorbitant. Advance planning is essential. Fees for changing your "nonrefundable" tickets have increased steadily: In April 2013, within two weeks of each other, all three legacy carriers—American, Delta, and United—raised them from $150 to $200 on domestic flights (plus any difference in fares at the time you rebook) and $300 or more on most international flights.
Consumer complaints are growing. FlyersRights.org, an airline consumer organization, petitioned the U.S. Department of Transportation in February to clamp down on these change fees as unreasonable. A DOT consumer protection advisory committee has scheduled a meeting on June 23 to discuss the issue. "Change fees no longer bear any resemblance to a reasonable approximation of the cost incurred by the airlines," the FlyersRights petition argues, "but exist merely as a tool to gouge consumers faced with the unpredictable nature of life."
Prospects for action are uncertain. Though the DOT has ordered some consumer-friendly changes in recent years (like the 24-hour grace period, which allows flyers to cancel or change their ticket without penalty within 24 hours of making their reservation), the agency has no regulatory power over domestic fares—only international travel. But flyers-rights advocates hope that highlighting the issue will force changes across the board. Meanwhile, the mounting complaints have focused attention on a bedrock of the airlines' entire fare system, a strategy that has become such an accepted part of the flying experience that it's easy to overlook what a marketing masterstroke it was: the nonrefundable fare.
Nonrefundable fares first became widely popular in the 1980s, when low-cost carriers like PeoplExpress and Texas International began undercutting the major airlines drastically on price. To compete, the big carriers came up with a new array of deeply discounted fares, but with a major restriction: The ticket was a final sale—no refunds. The airlines made concessions for passengers who had to cancel due to illness or other emergencies, and would allow changes to reservations for a relatively nominal fee (usually $50). But as the cost of fully refundable tickets soared (they now average more than three times as expensive as nonrefundable fares), what began as a featured discount has became the primary mode of air travel for all but the most well-heeled, and cost-oblivious, business flyers.
The impact on Americans' psyche and travel habits has been profound, if rarely noted. Locking in vacation plans weeks or months in advance has become essential. Want to spend an extra day sunning in Hawaii, or make a last-minute stop in Omaha to see Mom, or get back a day early for a business meeting? Forget it. The nonrefundable revolution has forced flyers to become rigid advance planners, made leisure travel a matter of strict scheduling, and drained the vacation experience of much of its spontaneity and fun.
It's certainly no fun to navigate an airline fare system that is maddeningly complex, abstruse, and often illogical. Various restrictions on nonrefundable fares have come and gone over the years, some to the flyers' advantage. "Supersaver" fares once required a three-week advance purchase and a Saturday-night stay. Those have gone away, and buying seats at the last minute can sometimes be quite reasonable (if you’re flexible or willing to make a stop). One-way fares used to be prohibitively expensive; now buying two one-way tickets can be as cheap, or even cheaper, than a round-trip fare.
Yet mostly the system is weighted in favor of the airlines, and they fight tooth and nail to protect it. Take the "hidden city" trick. When fares to some cities are especially high (usually hub cities, where one airline has a near-monopoly), savvy flyers often can find it cheaper to book a flight to another, more distant city, with a stopover at their intended destination—then simply get off the plane and blow off the second leg of the flight. United Airlines, claiming that this ploy fouls up its load calculations and violates its "contract of carriage" (a dense set of rules that customers must nominally agree to when making reservations online), filed suit in November against a small air-travel website, Skiplagged.com, demanding that it stop directing customers to the scheme. On May 4 a federal judge in Chicago dismissed the suit on procedural grounds, ruling that the Illinois court where it was filed did not have jurisdiction to hear it.
United has not said whether it will refile the suit elsewhere. But the airline, with less fanfare, is pursuing individual flyers who have taken advantage of hidden-city ticketing. One flyer, who has used hidden-city ticketing over the past several years, recently got a stern letter from the airline, confiscating his frequent-flyer miles and threatening a lawsuit unless he pays almost $30,000 in back fares. The longtime United customer (elite status, with all the trimmings) has refused to pay and has switched to American. He asked not to be identified because he is considering counterlitigation.
There's a poetic irony in the hidden-city brouhaha. The airlines have set up an elaborate system of fare rules and restrictions, and forced flyers to play by them. Yet when an anomaly in the system is discovered, the airlines cry foul—like a Vegas casino owner who throws out a blackjack player for beating the house odds by counting cards. "The airlines are being hoisted on their own petard," says Charles Leocha, chairman of the consumer group Travelers United. "They created the system, they make the prices—and then they tell you that you can't use the system and the prices."
The airlines might get more sympathy if they were struggling financially, as they did for so many years. But the U.S. carriers' operating profits have rebounded from recession lows to a healthy $14.6 billion last year. Load factors are up (flights now average better than 86 percent of capacity, compared with 69 percent in 2003), gas prices are down, and extra fees, on everything from checked bags to "priority boarding," are mounting. Meanwhile, after dropping historically in the years since deregulation, fares are creeping back up—from an average of $343 in 2009 to $391 last year. Factoring in the fees on amenities that once were part of the basic fare, the increase has certainly been even higher.
Change fees—which earned the airlines almost $3 billion last year, more than triple the amount in 2007—rankle flyers most because they seem so arbitrary. A passenger who pays for a checked bag, or a seat with extra legroom, knows that the money is at least compensating the airline for something: A bag adds weight to the plane and requires at least a sliver of a baggage handler's time; extra legroom presumably means fewer seats on the plane as a whole. It's harder to explain exactly what that $200 change fee is paying for.
The airlines argue that when customers change their reservations, it upsets load calculations and results in an "opportunity cost" for the airline. "When we sell any ticket, we take a seat out of inventory," says Rahsaan Johnson, a spokesman for United Airlines. "That's a seat we cannot sell to another customer." The airlines draw the analogy of a furniture shopper who buys a discounted love seat marked "Final Sale," then wants to exchange it a few weeks later for a full-size couch. The store might take it back as a courtesy, but a $200 return fee would be perfectly appropriate. Change fees are the same sort of courtesy to customers who buy a product clearly marketed and labeled as "nonrefundable."
Consumer advocates don't buy the explanation, pointing out that the airlines often do resell the seat—and frequently at a higher price. "They get the change fee, and they get to sell the seat twice," says Paul Hudson, president of FlyersRights. "It's really a windfall." Putting an exact value on the opportunity cost, moreover, is tricky. Asked to explain why change fees went up from $150 to $200 two years ago, one airline executive, who declined to be identified because he was discussing pricing strategies, said candidly, "It's set by the market." In other words, says Leocha, "They charge it because they can."
There are other problems with change fees. If the airlines incur an opportunity cost, surely that cost is different for a change made two days before the flight and one made two weeks in advance. (The airlines say that instituting a sliding scale for change fees would be too complicated.) If letting passengers change flights for free were such a financial burden, why is Southwest Airlines—the one major carrier that doesn't have change fees—one of the most profitable in the industry? And if the chief concern is empty seats, why do the airlines prohibit a flyer from transferring a nonrefundable ticket to someone else? (The airlines cite security and fraud concerns, but they actually have a more persuasive reason: Allowing transfers would likely encourage resale specialists to snap up cheap tickets and create a secondary market, a la online ticket sites like StubHub.)
The stiff change fees have also led more customers to try protecting themselves with travel insurance. These policies (offered by third parties, but for which the airlines get a commission) are pushed aggressively on airline websites as a way of ensuring "peace of mind" in case of unforeseen events. In fact, most of these policies offer little protection beyond what the airlines will typically provide in case of emergencies, like an illness or death in the family. (The airlines don't offer refunds, but in such cases they will usually give the flyer a credit for another flight within a year.) A 2013 report by the National Consumers League noted that the marketing of these policies "often relies on misleading language and dense policy descriptions" and are frequently "riddled with exclusions."
Many travel-insurance policies, for example, will cover cancellations due to an illness or a death in the family—but not if it's due to a "preexisting medical condition." One woman from Lee's Summit, Mo., in a complaint to the Department of Transportation, described having to cancel a trip to Cancun because of the death of her mother. She had bought travel insurance on Orbitz when she made the reservation, but the insurer, Access America (now doing business as Allianz Global Assistance), denied her claim because her mother suffered from high blood pressure. Dan Durazo, a spokesman for Allianz Global Assistance, points out that individual policies vary, that some do cover preexisting conditions, and that the policies also offer other benefits, such as 24/7 travel assistance and emergency medical care while traveling.
Nonrefundable fares are clearly here to stay. And far from becoming more lenient, the airlines seem to be toughening the restrictions. Not too many years ago, flyers who wanted to stand by for an earlier flight on their day of departure could do so at no cost. Now, unless you fork over $75, the airline will let that earlier flight to Los Angeles take off with an empty seat rather than allow you to fill it. Delta recently introduced a "basic economy fare" on some of its routes—even cheaper than the current lowest fare, but with no changes allowed at all, at any price. Delta has also cracked down on frequent-flyer trips (a former haven of unrestricted changes, now subject to change fees on most airlines): No changes are allowed within 72 hours of the flight's departure. If you need to rebook your flight, you have to do it with new miles.
And if imitation is the sincerest form of business, the nonrefundable strategy has been a rousing success. Many hotel chains now offer a nonrefundable option to customers reserving rooms online—a discounted rate in return for prepaying and agreeing to no cancellations or changes. Car rental companies, too, are starting to offer lower rates to customers who agree to pay and lock in their reservation in advance.
Yet in these cases, the nonrefundable rate is only marginally cheaper than the standard one, and thus the customer has a legitimate choice. Only the airlines have locked their customers into an unforgiving game: essentially forcing them to bet on whether their travel plans will change, while steadily ratcheting up the penalties for being wrong. In this casino, all the rules are stacked in favor of the house. And no card counters allowed.