Airlines Eliminate Change Fees, But it’s Nothing New

This week, four major U.S. airlines announced they’d eliminated change fees on all but their cheapest fares. It is a welcome development that caught travelers and industry watchers off guard.

Stunning! Remarkable!

Wait a minute, what? The airline industry is doing nothing groundbreaking. In fact, hotel companies and car rental agencies have been doing the same thing for years. The new policy matches the travel industry as a whole. It completes a transition started when airlines first introduced a cheaper Basic Economy product.

Explaining Basic Economy Fares

Basic Economy is the lowest fare available. All of the country’s major airlines (except Southwest) have adopted basic economy fares. Each has its unique quirks, but they share one key trait:

• Basic Economy fares are non-refundable, and in most instances, cannot be changed.

There are plenty of other restrictions, of course, but planes do not have a separate basic economy section. Passengers still sit in the main cabin with other economy customers. They enjoy (or suffer, depending on your perspective) the same onboard product as those paying a higher fare.

In short, if you do not care where you sit, the difference between basic and standard economy fares is… the ability to make ticket changes.

Basic vs. Standard Economy

Until this week, your economy class choices were as follows:

• Full-fare refundable tickets.
• Reduced fare economy tickets with hefty change fees, often $200.
• Basic economy tickets that could not be changed

We’ll ignore the refundable tickets for a moment, because most leisure (and even business) travelers are buying cheaper tickets.

Neither of the remaining choices are appealing. If plans change, you’ll eat the ticket cost with a basic economy fare. You can’t move the flights, so you just have to buy another ticket.

So you’d buy the standard economy ticket instead, right? After all, you’d then have more flexibility to change things up if necessary.

Well, not really! Not before change fees were dropped.

Change fees were very expensive, often as much as the ticket itself. The high cost of changes led most customers to treat their tickets as non-changeable anyway, unless absolutely necessary. In fact, if your plans changed, you might have saved money just buying a new basic economy ticket.

Hotels, Car Rentals Lead the Way

The airline industry is faced with a structural disaster this year. And with it, a chance to try new ideas. So they’re trying something new. Well, something new to them. The hotel and car rental industries have already been doing this for years.

Hotels and car rentals typically offer customers two main booking options:

• Pay in advance — lower cost, non-refundable, non-changeable
• Pay later — slightly higher cost, easily canceled

See where we’re going here? When reserving hotels and car rentals, my standard choice is to make a booking with free cancellation. I’ll pay a bit more for that privilege, but I’m not out any money should my plans change. Not only that, I keep my options open in case a lower price becomes available.

These customer-friendly policies also benefit the hotel and rental car companies. They give customers a more flexible, but more expensive option, and gain incremental revenue from higher-priced bookings.

Getting Fare Segmentation Right

By eliminating change fees, the airline industry is getting closer to what it intended with Basic Economy fares. The idea behind Basic Economy was an appeal to budget-conscious travelers, those who might otherwise fly ultra low-cost carriers like Frontier and Spirit. But the airlines needed to do it in such a way as to not interfere with their core business.

It might have worked, to a point. Frequent Flyer elite members really like their free upgrades, and I have never purchased a “Saver” (their basic economy) fare on Alaska Airlines for that reason alone. When elites purchase the cheapest fare, they don’t get on the upgrade list. But for most air travelers, the benefits of regular economy tickets rarely outweighed their additional cost.

That changes this week, now that airlines have eliminated change fees for all but basic economy fares. The flexibility to change plans without a fee adds significant value to a standard economy ticket. It offers true fare segmentation, as well as recognizable value. Customers on a budget can buy basic economy and hope their plans don’t change. Customers who prefer flexibility can pay a bit more for the privilege.

The Impact on Pricing

As the airline industry gets used to a world without change fees on most tickets, it will adjust its pricing accordingly. The industry’s sophisticated yield management tools will help them find the price consumers are willing to pay for the flexibility that more airlines now offer.

It’s possible that the price disparity between Basic Economy tickets and standard economy tickets will increase slightly. Probably not much, but a bit. Again, we can look to the hotel and car rental industries. The price disparity between refundable and non-refundable bookings is usually not high. But with more demand for standard economy and less for basic economy, yield management systems should take pricing in that direction.

Final Thoughts

As the airline industry eliminates most change fees, they are actually catching up to the hotel and car rental industries. For years, those industries have offered non-changeable rates for less than standard prices.

The airline industry attempted the same with its basic economy fares — offering a lower, non-refundable rate that customers could not change. The difference, of course, is that hotels don’t usually make customers pay a change fee to modify a reservation. Neither do car rental companies.

Until now, airlines tried to have it both ways with their standard economy fares — a more expensive fare (compared to basic economy) and a pricey change fee. It turns out you can’t have both, at least in a bad economy. The end result was a more expensive economy product that, to many customers, was hardly different from cheaper basic economy fares.

By eliminating change fees, the airline industry has taken an important next step toward differentiating between these two fare classes. Now, nearly all customers should recognize a tangible benefit (read: flexibility) to booking the more expensive standard economy fare. The most price-sensitive travelers may still book Basic Economy, but at least they’ll recognize two distinctly different value propositions. Plenty of travelers will pay extra for that flexibility, as well, helping bolster the industry’s bottom line in a tough economy.

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