Has the administration overstepped with the new airline ticket fee disclosures?
The USDOT’s attempt to control airline finances, effectively highlighting the gap between the different types of flyers and airline loyalty members, serves no one’s best interest.
Several airlines are suing the U.S. Department of Transportation for requiring that all fees associated with air travel be disclosed prior to tickets being purchased. Are such disclosures necessary? Is the government overstepping its authority in requiring such disclosures, as the airlines suggest?
To answer these questions, one need only look at the relationship that the Transportation Department has fostered with the airlines, and what the airlines are trying to protect.
Airlines serve a vital role in the U.S., contributing $1.25 trillion to the U.S. economy in 2022. They are private entities, yet must operate within the guidelines set by the federal government, namely, the Federal Aviation Administration and the Transportation Security Administration. The FAA is most concerned with air system safety, whereas the TSA is most concerned with air system security.
Airlines have a vested interest in both, since an unsafe or unsecure air system will dampen demand for air travel, with cataclysmic direct and indirect effects on the economy.
Airplane tickets are expensive, but the airlines have also found that ancillary fees for items such as checked baggage, preferred seating and onboard internet access are lucrative revenue sources. In 2022, the three legacy airlines (American, United and Delta) collected more than $26 billion in such fees. These fees can add over $100 on top of ticket prices, which some travelers may not be aware of when purchasing their ticket. The people most likely to be surprised by such fees are those who fly only rarely. Travelers who hold elite status in airline loyalty programs are typically exempt from many of these fees and would therefore be mostly unaffected.
The airlines' argument for resisting this change is that the government is overstepping its authority by imposing fee disclosures. Their point about confusing travelers has no merit — when purchasing an airplane ticket, travelers want to know what the price will be “out the door,” not the price of the ticket alone.
What the new disclosure requirement exposes is the multi-tiered system that the airlines have created for airplane tickets based on loyalty program status. Two people may have purchased an airplane ticket for $500. If one of them holds elite status in the airline loyalty program, he or she could sit in a preferred seat (perhaps even first class) and check baggage, all at no additional cost.
What the Transportation Department ruling tries to do is level the playing field between infrequent flyers and those who hold elite status in their loyalty program. By requiring fee disclosures, such up-front information shines a bright light on the full price some travelers are paying for their tickets.
The fact that elite members of airline loyalty programs are getting more value at lower cost is not wrong. These elite members earn their status by flying or, more commonly today, spending on airline affiliated credit cards.
This highlights how airlines have transformed their loyalty programs into highly valued financial assets. For example, the American Airlines AAdvantage loyalty program was used as collateral to secure loans from the CARES Act during the COVID-19 pandemic. Independent appraisers set its value at the time to be between $20 billion and $31 billion. By comparison, the airline itself has a market cap of around $10 billion. This suggests that airlines exist as financial entities, with flying the necessary loss leader to keep them afloat and relevant.
The outburst by the airlines is less about fee disclosures and more about the ruling shining a bright light on how the airline loyalty programs create two tiers of travelers and how the airlines reward loyalty. This may be why the three legacy airlines are part of the lawsuit, whereas Southwest, with its more modest loyalty program footprint, is not. Southwest earns most of its ancillary revenue through its loyalty program, not baggage fees, which it does not charge.
Secretary of Transportation Pete Buttigieg has said he was surprised by the airlines' pushback against the new fee disclosure requirement. This may be disingenuous on his part, or it could suggest just how out of touch his department is with the airlines. It also highlights why the government and the airlines need to foster a more cooperative, rather than antagonistic, relationship.
The Transportation Department's attempt to control airline finances, effectively highlighting the gap between the different types of flyers and airline loyalty members, serves no one’s best interest. Until a spirit of cooperation can be created, the biggest losers will be the passengers, who will always get caught in the ensuing crossfire.
Sheldon H. Jacobson, Ph.D., is a professor in computer science at the University of Illinois Urbana-Champaign.