IN a move being watched by competitors, American Airlines is experimenting with a new pricing option that eliminates the potential penalty fee for changing flights for customers who pay a little extra for a basic coach ticket.
The initiative is arguably counterintuitive because domestic airlines have been piling up money in recent years from all sorts of fees — baggage fees and the change-penalty fees among them — on top of the base fares.
American’s new coach fare options are “another example of how we’re building toward a new, innovative and more modern airline,” said Rob Friedman, the vice president for marketing at the airline, which is about to emerge from bankruptcy court protection and is in talks with US Airways.
Oddly, while American moves to incorporate some stand-alone fees into some base fares, a process known as bundling a fare, Southwest Airlines seems to be going in the other direction. Southwest, which has long bragged about having simple fare structures that don’t include fees for things like changing tickets or checking bags, recently announced plans to increase its dependence on fees, a process known as unbundling.
It all adds up to more complexities on the chalkboard of airline fee and fare formulas.
The changes by American and Southwest suggest that domestic airlines in general are looking more closely at ways to experiment with revenue, especially from business travelers, as a new year begins with indications that demand is dropping.
In November, most airlines in the United States reported small declines in passenger demand and in load factors, the number of available seats filled by paying customers. Southwest, for example, reported that its revenue passenger-miles, a standard measure of demand, were off 3.3 percent compared with November 2011.
On Monday, the airline forecaster Michael Boyd, of the Boyd Group International, summed up his predictions for 2013 this way: “No traffic growth. Fewer flights. Less capacity.” Airlines, he added, will focus more “on revenue growth, not traffic volume.”
American’s new fare strategy encompasses two basic changes, both of which include some fees in coach fares. One is Choice Essential, which costs $68 extra for a round-trip domestic fare but eliminates the $150 penalty fee for ticket changes after purchase. It also drops the $25 fee for the first checked bag and gives the buyer “priority boarding.” (We’ll address the laughable scrum that airlines’ “priority boarding” has become in a future column.)
Another option, Choice Plus, costs $88 extra and adds penalty-free same-day standby change options, while also eliminating the change penalty. And it includes what American calls a free “premium beverage” (beer, wine, cocktail), and a 50 percent bonus on frequent-flier mileage awards, as well as priority boarding.
American’s lowest nonrefundable coach fare structure, which it now calls Choice, remains unchanged. That is, checked-bag fees and $150 penalty fees for making a reservations change remain in effect, while customers continue to have “the flexibility to purchase additional products à la carte,” as American put it.
The American penalty fee changes are aimed mostly at business travelers, the customers most likely to occasionally change plans after a ticket is purchased. Southwest’s recently announced fare and policy changes include a penalty fee on tickets that are not used and not canceled before flight time.
Southwest has long been valued by many business travelers for not charging a penalty fee to rebook a ticket, and that has not changed. Southwest said it was merely adding a “no-show fee” for customers using the cheapest fares who rebook “tickets that are not flown and not canceled by our passengers prior to a flight,” Robert E. Jordan, Southwest’s chief commercial officer, said at a recent meeting with airline stock market analysts.
But in describing initiatives that are certain to interest Southwest’s intensely loyal customer base once the details are announced early in 2013, Mr. Jordan also said, “We are increasing our ancillary fees” in general, without providing specifics. He said that Southwest hoped to raise an additional $100 million this year from new fees.
There is no indication that Southwest is considering revising its policies on basic rebooking or allowing the first two bags to be checked free. Still, an increasing reliance on fees will probably start to redefine the Southwest flying culture. For example, Mr. Jordan said, “we are testing a new revenue stream enabled by selling open and premium boarding positions, so that’s the A1 to A15 position, and selling those open positions at the gate.” Southwest also plans to increase its “EarlyBird” priority boarding fee to $12.50 from $10.
Airlines have come to depend mightily on revenue from fees. In 2011, domestic airlines raised $2.4 billion in change-penalty fees, up from $915.2 million in 2007, according to the Bureau of Transportation Statistics, an agency of the Transportation Department.
And there is even more money in fees for checked bags. In 2007, a year before most airlines other than Southwest began charging for most checked bags on coach fares, domestic carriers raised a mere $464.3 million from such charges. Last year, the total was $3.4 billion.
