July 14 - Testimony of Kevin P. Mitchell Concerning Airline Fees



Testimony of

Kevin P. Mitchell

Chairman

Business Travel Coalition

Concerning Airline Fees

Before the

Subcommittee on Aviation

Committee on Transportation and Infrastructure

U.S. House of Representatives

July 14, 2010


Mr. Chairman, Ranking Member Petri, and Members of the Subcommittee thank you for requesting that Business Travel Coalition (BTC) appear before you today to represent consumer and corporate managed travel interests on the subjects of airline product unbundling and ancillary fees. My testimony today is also on behalf of the 400,000 members of the International Airline Passengers Association (IAPA).

My testimony today represents the 21st time BTC has been asked to provide testimony in Congress on competition, security and passenger rights issues. By far, today’s hearing is the most important in terms of an issue’s potential for harmful impacts to competition and consumers. BTC is not against unbundling as a matter of principle, but rather, it is opposed to the absence of disclosure of all fees and charges such that consumers can fully benefit from comparative shopping.

III.INDUSTRY CONTEXT

By way of industry context, airline product unbundling and ancillary fees took off like a rocket in the U.S. during the past 24 months such that the whole industry was caught off guard without systems and processes to properly identify, manage and control these expenses. In particular, corporate travel managers are on the receiving end of this industry surprise.

Thus far, unbundling has caused significant new complexities and costs as well as obstacles for effectively managing corporate travel programs. Never has there been an opportunity for such serious bedlam in managed travel. Indeed, it’s hard to find a corporate travel manager who supports this new industry direction, as currently implemented.

BTC yesterday published the attached survey results of 188 business travel industry professionals concerning airline fees and unbundling. The top-line results underscore deep concerns and the need for government oversight.

Consider:

  • 100% of corporate travel managers indicated that unbundling and ancillary fees have caused serious problems for their managed travel programs.
  • 86% of travel managers believe that airlines, absent government regulation, will not make fair, adequate and readily accessible disclosure of their extra fees and charges so that travel managers and/or their TMCs can do comparison shopping of the all-in prices for air travel across carriers.
  • 95% of travel managers support the proposal that the U.S. DOT require airlines to make ancillary fee data available and easily accessible to the travel agency channel through any GDS in which that airline has agreed to participate.
  • 95% of travel managers do not support an airline distribution model wherein access to airfare andancillaryservicescontent is available only on airlines’ websites, or through direct connections to multiple airlines’ inventory systems.


I should hasten to point out that survey participants are business people who, as a general proposition, do not favor government intervention in a marketplace. Like BTC however, who testified four times since 1999 against passenger rights legislation, these industry experts lived through 10 years of airline stonewalling and broken promises and realized that the airlines were never going to take extended tarmac delays seriously until made to do so. Travel managers and travel agency executives do not want to wait 10 years, or even 1 more year to see if the airlines will properly disclose their ancillary fees in all channels in which they sell their products.

In addition to managed travel issues, there are significant consumer issues.

In the leisure and unmanaged travel segments, the unbundling concept will succeed or fail based upon millions of individual purchasing decisions as well as competitive responses. Some consumers will value the different choices; others will feel they are being “nickel and dimed.” Still others could become confused should all carriers eventually unbundle without uniform standards, adding great complexity at the industry level. As Procter & Gamble acknowledged in the 1990s, 27 varieties, of just its shampoo, on a supermarket shelf does not necessarily equate to consumer choice, but often consumer confusion.

What's more, with such across-the-board unbundling, consumers may not have the ability to evaluate all air travel options available. These unbundled elements of air travel will not necessarily be reflected in the fare shopping entries, and as such, this approach can inevitably impede a consumer's search for low fares. As one does not usually see these "extras" until well into the transaction, a large segment of consumers will not start over in the quest for low fares by looking at alternative airlines. Economists will say that anything that increases "consumer search costs" invariably raises prices paid.

Consumer and passenger advocates could argue that unbundling, which results in airline products looking less expensive in GDSs and website shopping inquiries than would likely be the case after the extras are piled on, results in higher prices because with search costs increased, more shoppers will just miss a de facto lower "all-in" fare that includes the extras. The game could be viewed as bait-and-switch; from an ostensibly lower fare to a actual higher fare. 

The Consumer Travel Alliance just published the attached analysis, which vividly shows how unsuspecting consumers can become entrapped by hidden fees upon arrival at the airport. The analysis focused on four popular flight itineraries taken by millions of travelers each year - New York-Los Angeles, Boston-Washington, Chicago-Miami, and Washington-Orlando – and included just two of the common fees now charged by airlines:checked baggage and extra legroom.

Consider:

· A typical traveler requesting extra legroom and checking a single bag would pay an average of one-quarter (26%) more than the base price of the ticket shown on the website.

· A traveler checking two bags would pay more than half the price of the ticket in additional fees that were hidden at the time of the transaction (54%).

· The amount of hidden fees charged to a typical traveler with a single bag ranged from 10% to 82% of the price of the base fare.

· The amount of hidden fees charged to a typical traveler with two bags ranged from 21% to 153% of the price of the base fare.

II. WHY ARE SOME AIRLINES APPARENTLY STONEWALLING AGAIN?

a. Major network airlines have a strong incentive to mislead consumers. They remain at a 30% to 35% cost disadvantage against low-cost carriers (LCCs), and as such, cannot offer the kind of across-the-board lower fares the LCCs do. There is a motivation present to officiate the true all-in price by hiding fees and especially resisting efforts to have fees and fares made available in a comparative display for travel agents via the global distribution systems (GDSs).

b. The Airline Tariff Publishing Company (ATPCO) has a data system tested by 27 airlines-including all the major U.S. airlines-and ready to go to facilitate the loading of ancillary fees in the GDSs and their comparative presentation on travel agents’ screens. Not a single major U.S. has signed on to use the new system because the first airline to do so will immediately be seen in the displays as having fares 35% to 50% higher fares than competitors. In an industry where a few dollars can make the difference for a consumer in choosing one airline over another, this would be the equivalent of competitive suicide.

c. Some airlines would like to force GDSs and travel agencies to pay for access to their unbundled services; an audacious play to shift the costs of merchandising and distributing their products and services onto the backs of consumers who are already paying for these business activities in the prices of their tickets.

III.FALSE ARGUMENTS

a. Some airlines argue that the cost of making ancillary fees widely available to consumers would be too costly. However, participation in ATPCO’s new system would cost just $3,000 per month, per airline. Surly, this is a false argument given the billions of dollars being collected for ancillary fees.

b. Other airlines argue that there are technical impediments to providing such data to consumers, but 27 airlines have successfully tested ATPCO’s new system.So one would naturally ask why as to the disclosure of fees airlines cannot do what the airline-owned ATPCO says 27 of them are doing and that ATPCO says six pricing systems, including the three GDSs, are receiving and testing?

c. Airlines say that the U.S. DOT’s proposed rulemaking is interference in the marketplace. The airlines have the data; the technology solution has been developed by ATPCO; and the $36,000 per year cost in insignificant. How can airlines then oppose DOT’s anticipated rule to require them to provide the fee data in an easily usable and accessible manner for travel agencies via the GDSs in which they participate? DOT is not endeavoring to regulate the marketplace, but to ensure adequate disclosure practices.

d. Airlines claim they have no obligation to provide fee data to travel agencies. However, agents are the legal agents of the airlines and as such how can airlines not provide all pricing information to them? If an airline has decided to agree with a GDS that agents using that system can sell the airline’s fares, then partial disclosure of the entire price for the services the travelers need or want by not providing the data on extra charges in an electronic and easily accessible way via that GDS is just not a defensible option. It is deceptive per se. Airlines are in effect trying to make only a part of the airfare visible; they are not providing the entire fare.

IV.CONSUMER PROTECTION’S NO MAN’S LAND!

a. The federal government should inclined to provide detailed consumer protections in commercial air transportation because unlike nearly all other industries consumers have no oversight protections from the FTC and no legal rights under state laws to seek redress for abysmal treatment because of federal preemption -- a doctrine the airlines created and fight hammer-and-tongs to defend and expand. Moreover, under federal law (49 USC Section 41712) consumers do not have a right to sue for bad service. In the currently open NPRM, DOT recognizes the uniquely vulnerable position of air travelers in this virtual no man’s land.

b. It is highly significant that the DOT economic analysis underpinning its NPRM found that while all four of the online travel agencies (OTAs) displayed the “entire price” of a ticket including government and airport charges for different travel options (currently available date in the GDSs), only one of eight airline websites did. This marked difference in approach to disclosure can perhaps be explained by the fact that OTAs and brick-and-mortar travel agencies have no inherent economic incentive to collect higher as opposed to lower prices for airline tickets. Most importantly, this finding by DOT underscores the needed, pro-consumer role that travel agencies and OTAs can play in spurring airlines themselves to make better disclosure of the entire price including ancillary fees on their websites. Of course, travel agencies and OTAs cannot carry out this salutary mission unless carriers are required to provide them via the GDSs on which they rely for fare information the airlines’ data specifying their extra fees and charges.

V.CONGRESS CAN MAKE A DIFFERENCE

The single most important step this Committee can take is to urge the DOT that in addition to requiring airlines to make ancillary fee data available and easily accessible on their websites, that they should be required to make the fee data available to the travel agency channel through any GDS in which that airline has agreed to participate.The DOT could benefit from this Committee’s long experience in dealing with airline consumer issues that seeming never get ed=ffectively addressed by the airline industry.

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