United Airlines CEO Scott Kirby shared that in 1998 he was a Vice President at America West and a single conversation changed his view about change fees, and he’s wanted to eliminate them ever since. It took until August 2020 to do it and then American, Delta, Alaska and JetBlue all followed. His comments came recently at the J.P. Morgan Industrials Conference.
The interesting part of the story isn’t the golf game that game him the epiphany, it’s why it took 22 years for this change to happen.
Kirby told his story at the J.P. Morgan Industrials Conference about playing golf with a friend in Phoenix, and that friend flew Southwest. Kirby pressed him on why he’d eschew America West ‘with the better frequent flyer program’ and other benefits, and the friend said it was Southwest’s flexibility.
The man was a car dealer. He’d fly out to auctions every week. He might buy 6 or 10 cars, or no cars. If he made several purchases the paperwork took hours, if he didn’t buy any cars he’d be done and want to go home. And paying change fees to change his plans 52 weeks a year sent his weekly business to Southwest.
Of course what’s at issue in the story is same day changes. When Kirby was President of American Airlines in 2015, American imposed stricter rules on same day changes, requiring passengers to keep the same routing – eliminating the merger benefit to customers of increased number of hubs.
Kirby described getting rid of change fees (on non-basic economy tickets) as “a billion dollar decision” so “you almost have to become CEO” to make it. Change fees didn’t just collect a lot of money, it was money exempt from the 7.5% excise tax on domestic airline tickets, so unbundling changes from the ticket price was also tax arbitrage.
Why now, though, aside from becoming CEO? Surely he could have convinced Oscar Munoz or Doug Parker to eliminate change fees if he could show doing so would earn business to more than offset any losses?
- Airlines were going to have to keep waiving change fees for a long time anyway because of the pandemic. Customers are reluctant to lock themselves into things given the uncertainty of the last year.
- Delta planned to revamp change fees even before the pandemic
- Change fees were a way to segment business from leisure customers and prevent business travelers, willing to pay high fares, from buying cheaper tickets. Basic economy has replaced change fees, Saturday night stays and advance purchase requirements as the primary means of segmenting customers.
- For 2020, even, when this change was made the 7.5% domestic air travel taxes was suspended by the CARES Act.
Airlines weren’t going to collect change fees for some time anyway. They had outlived their usefulness segregating customers. And eliminating change fees for fares other than basic economy served to create greater differentiation between business (standard economy) and leisure (basic economy) fares. In other words, it was the lowest-cost time to make a change that would serve the car dealer without giving anything to the leisure passenger, since post-pandemic waivers lowest fare itineraries aren’t changeable at all for any fee.