Fee Regulation: Congress Should Give Up and Airlines Should Shut Up

Fall must nearly be here.  The air is crisp, leaves are changing colors, and Congress is trying to regulate airline fees.  It’s a time-honored tradition, and one so dependable that I was able to reuse the image below from a previous post.  Even some of those faces are the same.

As usual, I think this latest plan is a bad one, but I also wish American would stop throwing around threats about what will happen if this comes to fruition.  It’s not helping.

The plan this time (aka Fee Regulation Act #3,958) comes from the Senate.  The idea is to regulate the level of fees that can be charged by airlines.  Specifically, it’s in .

…the Secretary of Transportation shall prescribe regulations–
(1) prohibiting an air carrier from imposing fees described in subsection (b)(1) that are unreasonable or disproportional to the costs incurred by the air carrier; and
(2) establishing standards for assessing whether fees described in subsection (b) are reasonable and proportional to the costs incurred by the air carrier.

The fees in question are those for changes, cancellations, checked bags, seat selection, same day change or standby… and “any other fee.”  So, yeah, it’s broad.  Even though the Senate is telling the DOT to figure out how to do it, it’s not leaving much to chance.  The guidelines demonstrating exactly what needs to be considered in determining the costs involved are quite detailed.

This idea is, to put it bluntly, stupid.  In what industry are the players forced to price based upon costs?  You think your iPhone is sold as a reasonable mark-up over the cost of sweatshop labor in Asia?  No, it’s priced based on what the market will bear.  That’s the foundation of a free market.

There must be limits to this, of course.  That’s why we have rules around things like monopoly pricing power and gouging.  It’s hard to define that in the airline industry and previous cases have often resulted in no action, but an attempt to define and regulate that wouldn’t be objectionable.  That is absolutely not what’s happening in this proposal.

Why is this bad?  Well, let’s look at change fees, for example.  I find the standard $200 change fee obnoxiously high.  We can argue whether there’s collusion on that or not and whether it should be challenged.  But the proposal here would require airlines to charge change fees based solely on:

  • The net benefit to the airline after considering the ability to anticipate expected cancellations and changes, ability to fill a seat after someone changes off a flight, the difference in fare paid for a ticket sold to fill that seat vs the original value, and the likelihood that the changing passenger will fill another seat on another flight
  • The costs of processing the change electronically
  • Any related labor costs

This is completely ridiculous.  So the airline will have to build some sort of interactive model that updates in real-time to determine the valid change fee? Or do you just have to take a random average over time throughout the network and then apply that number across the board?  Neither solution makes sense.

Fortunately, this probably won’t happen.  Last I checked, the House version didn’t have this in it, and I assume it will quietly disappear if there’s ever a final bill.  Considering how bad Congress is at putting together any FAA re-authorization, it remains to be seen if we’ll see any bill pass at all.

But let’s pretend it does happen.  Then what?  Well, unless the airlines can magically make their models reflect the existing change fee as being valid, fees are going to have to go down.  Hooray, victory for consumers, right?  Of course not.

This can go a couple of ways.  Airlines need to make a healthy profit.  Fares are low on a historical level, but much of that is true because of all these optional fees that have sprung up in the last decade.  Change fees alone are big business.  In the first half of this year, alone.  American had the most with $450 million.

If these fees get cut in half, do you think American is going to just say “aw shucks, that’s a bummer”?  Of course it won’t.  American has decided to speak out about its plans.  if this were to happen.  That may sound like a valid threat, but to me it rings hollow.  When Doug used to talk about the 3-hour tarmac delay rule, he used to say that the airlines brought it upon themselves by having so many bad incidents.  This is the same situation.  If American opted to retaliate against bad legislation by banning changes, then it would find itself facing worse legislation due to its actions.  I wish American wouldn’t say stuff like this, because it just makes people angry at the airline.

What’s more likely is that fares would rise.  The airlines want to maintain healthy margins.  If fee revenue drops significantly, then they have to pick it up elsewhere.  With fees regulated across the board, the only place to gain is via increased fares.  It’s just moving the money around, but it will likely result in reduced service.  If fares have to go up, demand will go down.

This whole thing is a bad idea, but American isn’t helping things by speaking about it.  Just work the halls of Congress and let it die the quiet death it deserves.

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