Airlines make a tidy sum by not flying passengers

04-03-2005

Have America's airlines created a new revenue stream?

This column was prompted by a letter from a reader who wrote regarding a disagreement he'd had with US Airways over cancellation fees assessed on a nonrefundable ticket he bought and subsequently canceled well before the scheduled departure date.

Although they won't refund money, most airlines these days permit passengers to re-apply the value of most nonrefundable tickets to a future flight if the original reservation is canceled or changed before the departure date. Passengers generally have one year to use that credit toward the cost of another nonrefundable ticket on a future flight, less a cancellation/change fee, which in the case of US Airways is $100 per ticket for domestic flights and $200 for international departures.

Lowy had purchased the $209 ticket on April 15, 2004, and canceled it several weeks later. Early last month, well within the one-year limit, he bought another ticket, expecting to have $109 credit to use. Instead, he discovered the airline had assessed fees totalling $175, leaving him just $34 credit.

He was informed that the travel dates of the second trip were not less than one year after his original ticket had been issued, a corollary stipulation in the airline's cancellation policy. So, in essence, he was being charged an extra $75 to have his original ticket reissued, just so it could be canceled and its remaining value applied to the new ticket.

After protesting the decision, Lowy received a $75 travel voucher from US Airways, which he can apply to a ticket purchase. That's some satisfaction, although since the voucher can be redeemed only at the airport, it's something of an inconvenience.

Is it just a coincidence or does the carrier's refund policy seem designed to hang onto as much of the nonrefundable fare as possible?

Of course, airlines are legally entitled to withhold any credit when a passenger cancels a nonrefundable ticket. But that's not much of a sale incentive. And while it may be easy to understand why airlines won't make actual refunds, if they're going to promote the fact that they do offer "store credit," why make it so complicated and confiscatory?

I think the answer is simple.

As someone who also had to cancel a recent flight booked online, incurring a change fee that was half the cost of my original ticket, I did some investigating. Along with these cancellation/change fees, airlines typically assess a variety of other charges and penalties for passengers who have to alter their original reservations. There's a $25 fee for passengers who want to stand by for an earlier flight on the same day they're scheduled to travel.

Other booking eventualities result in passengers forfeiting money paid for transportation they never actually get, including lost tickets and unused return flight coupons. And let's not even get into the areas of denied boarding compensation and frequent-flier miles.

In the good old days, fees associated with these transactions were much lower, even though the airlines' cost of processing them was much higher since everything had to be handled by an airline reservationist or travel agent and required paper receipts and mailing expenses. Today, many of these transactions are computer-driven -- untouched by human hands. Yet the charges for them have tripled.

It seems clear that, like banks and credit card companies, the airlines have discovered that significant cash can be retained by simply penalizing customers for failing to follow the rules -- in many cases, rules that are arbitrary and obscure.

Revenue accumulated by fees, penalties and forfeitures is not traditionally a line item in many carriers' annual report, so industry observers have tended to play down its importance.

But an item buried on Page 68 of US Airways' recent Form 10-K filing to Federal Bankruptcy Court might indicate there's more of this soft money than we might think.

Airlines traditionally log funds collected for passenger ticket sales as liabilities, which generate revenue only once they are relieved, either by providing transportation service, making a refund to the passenger, or the expiration of their ticket. For accounting purposes, amounts associated with these unrelieved liabilities are booked based on estimates and adjusted after the fact. The airlines say these adjustments have "historically not been material."

Yet the form then notes that "during the fourth quarter of a 2003, a $34 million favorable adjustment was made to Passenger transportation revenue to reflect an increase in expired tickets."

Not material? As US Airways scratches to find the equity that would allow it to exit from its second bankruptcy, $34 million a quarter could buy a significant chunk of the company.

While passenger fees, charges and forfeitures probably don't account for all of that "adjustment," it does seem the airlines have figured out they can make a tidy sum by not transporting customers.

The airlines are free to set their own ticket policies, but so far as Edward Lowy is concerned, they're not winning any points for passenger goodwill.

[Back to Articles Main]