United, Delta, and American Airlines made similar announcements in quick succession this week: Change fees aren’t just temporarily suspended due to the pandemic; they’re going away for good on most kinds of tickets for domestic travel. Of course, the companies aren’t just doing this to be nice. A few things have changed about the airline business in recent years that make change fees less effective as part of a pricing strategy than they used to be. And abolishing change fees should make it easier for airlines to raise fares on fee-free tickets — while leaving you the option of buying a cheaper ticket that cannot be changed at any price.
A key aspect of airline business models is price discrimination: finding a way to identify customers who are willing to pay high fares and charge them more than customers who are willing to pay only low fares. That way, airlines can set their prices so that every passenger on a flight pays a fare that is at least high enough to cover the variable costs of transporting one passenger — such as the cost of drinks and cookies, and the incremental fuel cost to move the weight of the passenger and his or her luggage — while the fares paid by all the customers on the plane add up to enough to also cover the fixed costs of the flight, such as employee salaries, landing fees, the fuel needed to move the plane itself, and the depreciation of the aircraft. A price-discrimination strategy makes it possible to operate certain routes profitably that couldn’t be run at a profit if every customer were charged the same price.
Of course, one problem with price discrimination is that even customers who are willing to pay high fares would prefer to pay low ones. So airlines have to find ways to make rules so that low fares are available only to price-sensitive customers. It used to be that a key strategy for this was a Saturday-night-stay requirement: Business travelers usually don’t want to stay over Saturday night on their business trips, so offering lower fares for itineraries that include a Saturday-night stay is a way to reach leisure customers but not business ones. Another key strategy for price discrimination is fares that get higher as you get closer to the flight’s departure: Business travelers are more likely to finalize travel plans at the last minute, so discounts for booking early reach mostly leisure travelers, who may be more sensitive to price.
Of course, if you let people change and cancel their tickets without penalty, then business travelers may just go ahead and book flights early with the knowledge that they can change the ticket later if their plans change. So for a strategy of price discrimination based on time of booking to be successful, you need a fairly steep ticket-change fee so that buying strategy won’t work. That’s one reason airlines have imposed and increased change fees over the years, to the point where they are now typically $200.
But some things have changed now in the industry that have reduced the usefulness of change fees to airlines. First, full-fare airlines introduced a fare class called “basic economy,” which bundles a low price with a reduction in the privileges that come with an airline ticket. Generally, basic-economy passengers can’t pick a seat in advance, have to board the plane last, and can’t change their itineraries at all. On United, they usually also have to pay extra to bring a full-size carry-on suitcase aboard. A basic-economy offering allows full-service airlines to compete on price with deep-discount carriers like Spirit while offering the lowest price only to customers willing to experience a degrading flying experience similar to the one they would face on a budget airline.
As the most price-sensitive flyers have been shunted into this basic-economy box, the remaining leisure travelers who continue to buy full-featured economy (or “main cabin”) fares must therefore be relatively less price sensitive, making it possible for airlines to charge them somewhat higher fares in exchange for features like seat assignments. So from the airlines’ perspective, as they try to do price discrimination, this category of nonbasic leisure travelers isn’t as different from business travelers as the broader category of economy-class leisure travelers used to be.
And then the pandemic hit, virtually shutting down air travel in April. In the ensuing months, leisure travel has rebounded significantly, but airlines continue to report that the recovery of business travel has been extremely weak. So right now, there isn’t a lot of money to be made by segmenting business travelers into high-fare buckets. One of the big questions for the airline industry going forward is how much of the loss of business travel is permanent: Have companies learned that some of their business travel was never really necessary or could be adequately replaced with virtual meetings while saving time and money? If the answer to those questions is yes, businesses might be less inclined to send their employees on trips and more sensitive to airfare costs when they do consider sending them.
In the long run, this means there may be even less of a difference than before in the willingness to pay between business and nonbasic leisure travelers and therefore between travelers who are willing to book tickets well in advance and those who aren’t. With less reason to segment business travelers from non-basic-economy leisure travelers, airlines have less reason to impose change fees.
Of course, the other big reason to have change fees — they bring the airlines revenue when people change their itineraries — remains in place. But abolishing change fees gives the airlines a strong argument that main-cabin fares provide more value to the customer than basic-economy fares, which should make it possible for airlines to charge business and leisure customers more for main-cabin fares than they used to. In other words, while you may not be paying change fees for domestic travel in the future, you are likely to be paying higher fares than you would have paid under the old regime. And if you don’t want to pay those higher fares, you can always go with basic economy — but that means changing your plans will require you to throw out your ticket altogether and buy a new one.
