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The future of airline fees: What you’re likely to pay more for

What’s the next big thing on the fee front for airlines?

May 21, 2015

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​David Cush, CEO of San Francisco-based Virgin America, thinks it should be a change in baggage fees. Speaking at an airline conference in Phoenix earlier this month, he said the way major airlines charge for bags is backward and doesn't make sense economically.

"A bag charge is the same on a short haul (flight) as a long haul,'' he said. "We give the most valuable space in the airplane other than a seat away for free, which is the overhead, but we charge people for the least valuable place in the airplane, the belly.''

Spirit Airlines, Allegiant Air and Frontier charge for carry-on bags and Allegiant's bag fees vary by route (producing the industry's longest fee chart), but no major airlines have copied those policies.

"Who takes that first leap?'' Cush said. "That'll be interesting to watch.''

Cush and other executives at the annual Phoenix International Aviation Symposium put on by Phoenix Sky Harbor International Airport had plenty to say about fees during the two-day conference at the Phoenician.

They prefer the terms "ancillary revenue" and "unbundling the product," of course. Whatever you call the additional charges, they aren't going away, even as the industry reports record profits thanks to sharply lower fuel prices, strong demand for travel and higher airfares. One United Airlines executive said they are in the third inning of a nine-inning game when it comes to fee revenue.

One bit of good news for travelers: Executives don't anticipate any major new fees cropping up.

"I think we've gone most of the way on the product itself,'' Cush said. "The number of additional things that can be unbundled, I think that's a small number.''

The not-so-good news: Cush and other executives say the key to boosting revenue is to charge more for existing services and products, such as bag fees. They aren't talking across-the-board increases as much as varying prices by flight, as they do with ticket prices.

That is already occurring to a degree with seat-selection fees. Check a major airline's online seat map and you'll find a variety of prices for seats deemed preferred, either because they have more legroom or simply because they are at the front of the plane. Within these sections, aisle seats cost more than middle seats.

Scott Wilson, vice president of e-commerce and merchandising for United Airlines, said he thinks there's room to do more. There's more demand for United's Economy Plus seats on an 8 a.m. flight packed with business travelers, for example, than on a flight two hours later with a different mix of passengers.

"We might have to price accordingly,'' he said.

Southwest Airlines famously doesn't assign seats and thus has no seat-selection fees. But senior vice president Andrew Watterson said its priority boarding options, including Early Bird Check In for $12.50 one way, are a rough equivalent. And very popular with travelers, according to Watterson.

"I think it's something that in our view customers are willing to pay for,'' he said. "They don't feel displeased by that.''

Might major airlines start charging a fee to simply reserve a seat in advance, as Spirit and Allegiant do? (Travelers who don't pay are assigned leftover seats at check-in.) Three out of four conference attendees said yes in an informal poll.

American Airlines President Scott Kirby, former president of US Airways before the airlines' 2013 merger, said there's a lot to be learned from airlines like Spirit, which offer bargain fares and fees for everything from printing a boarding pass at the airport to water and soft drinks during the flight. They also pack more seats into a plane and have the industry's highest profit margins.

"This idea that Spirit is carrying a different set of customers than us is just wrong,'' he said.

American, which will start phasing out the US Airways brand this summer, is going to experiment, like Delta has, with some Spirit-like options in the coach cabin. Travelers would find more ticket choices than they do now, including a bare-bones fare that comes with few perks. Delta calls it "Basic Economy'' and offers it on select routes. Passengers buying the lowest fare get no advance seat assignment, board last and can't change their ticket, even by paying a fee.

"At the end of the day, it'll be driven by customer choice,'' Kirby said. "There's lots of models out there and customers are voting every day when they choose airlines.''

Other travel nuggets from the conference:

- Airline travelers have been slow to book tickets on mobile apps, mainly using them for day-of-travel help like checking in. The industry is far behind hotels and other businesses on this front, United's Wilson said.

"It's been surprising and a little bit disappointing,'' he said.

He attributes it to the volume of business-travel bookings made through corporate travel agencies and the complexity of flight shopping.

"People still like the larger (computer) screen environment to comparison shop,'' he said.

Forget about booking through Twitter, Facebook and other social media

"I think social commerce, by and large, certainly for the airline industry, is bunk,'' he said.

- Don't expect Southwest Airlines to jump into the high-end travel business, by shuttling top frequent fliers to their gates in luxury cars as some of its competitors do or investing in lie-flat seats in first class.

"The broad swatch of humanity travels in regular economy,'' Watterson said. "So that's the bulk of the business and doing that well, we believe, is where the money is.''

- Traveling abroad? Expect major European carriers to switch to the U.S. model of charging to check a bag within two years and charging for seat assignments in the next three years, said Lufthansa Group Chief Strategy Officer Sadiq Gilliani.

"We're a bit behind,'' he said.

- Don't look for Virgin America to start flying out of Sky Harbor anytime soon. Cush said Phoenix remains on the airline's radar, but so do Denver and other Western cities it doesn't serve from its hubs in San Francisco and Los Angeles. One thing not moving Phoenix to the front of the line: Sky Harbor is a major hub for two airlines, American/US Airways and Southwest.

Bottom line on adding Phoenix to its route map: "It's just a matter of when,'' Cush said. "Nothing's imminent.''

- Airlines plan to invest heavily in automation because travelers want self-service at the airport, unlike 20 years ago when check-in kiosks were criticized as dehumanizing the travel experience.

"Now the demand is, 'Can you give me more self-service so I can actually manage my own flow through the airport, onto the plane?' " United's Wilson said.

United has introduced self bag tagging and boarding in Boston and travelers love it.

"Now we have to look at whether we want to deploy those throughout our network,'' he said.