Ancillary fees are the gold rush of the decade. They have been a major contributor to the return of financial health to many airlines. In September 2012, Delta reported a third quarter profit of US$1.05 Billion. While US$440 Million of that amount was due to gains on fuel hedges, ancillary fee revenue was undoubtedly a big part of the balance. The Amadeus Worldwide Estimate of Ancillary Revenue projects that US domestic airline ancillary revenue will reach nearly US$12.4 billion in 2012. Exact figures remain uncertain because airline reporting of ancillary fee revenue is opaque. For that and other reasons they are under attack.
The US Department of Transportation is moving to make reporting more transparent. A notice of proposed rulemaking setting guidelines for enhanced reporting was issued in July 2011 with public hearings held in May 2012. The final rule is expected within 24 months.
While improved fee reporting benefits statisticians and industry watchers (and possibly tax collectors), what helps the passengers? Similar opacity is being attacked in the consumer arena as well. The US DOT has its “Airline Advertising Rule” to ensure that airfare pricing, particularly add-on taxes and fees, are clearly displayed for purchase. In February 2012 the DOT issued additional guidance stating that mandatory government-imposed taxes and fees and carrier-imposed fees are required to be separately listed. DOT concluded that some airlines’ lumping together of carrier-imposed fees and fuel surcharges with government taxes and fees was deceptive.
In May 2012, Spirit Airlines lost a challenge to DOT rules requiring, among other things, that the most prominent figure displayed in print advertisements and on websites be the total price, including taxes. DOT found that Spirit’s fare advertisements did not comply with the rule because the stated fares did not include or disclose taxes and fees until the ticket was purchased. DOT said the final price to be paid had to be clearly displayed.
Consumers are attacking ancillary fees in court. Delta and American have been sued for, among other things, failing to refund baggage fees when a passenger’s luggage is lost or destroyed. Most recently, Spirit Airlines is defending a class action suit under US federal racketeering laws for alleged deceptive practices in how it charges ancillary fees, particularly its “passenger usage fee” or PUF. Spirit’s PUF, which ranges as of this writing between $8.99 and $16.99 per customer each way, is charged automatically for every Spirit booking unless made at an airport. The PUF, while disclosed, is alleged to have been bundled in with other government imposed taxes and fees, “in an effort to conceal the true nature of this charge from customers.“
The complaint alleges that Spirit’s airfares are, “little more than a down payment on air travel…Spirit…unbundles certain fees, including…the PUF, which is assessed for no other purpose than to increase Spirit’s bottom line…Spirit misleads consumers to believe that the PUF is an official government tax or fee when, in reality, the fee is nothing more than additional airfare because Spirit does not provide any bona fide service in exchange for the PUF.”
This suit is not just an attack on the ancillary fee model, but on Spirit’s business practices as well. While it could be argued that fuel surcharges, baggage fees and advance seat assignment fees are charges for something, this complaint alleges that the PUF is essentially something for nothing and should thus be included in the advertised base fare.
The complaint notes that Spirit has been the subject of various DOT violations in connection with the Airline Advertising Rules, one in 2008 concerning Spirit’s alleged failure to properly disclose the PUF. In each case, Spirit and the DOT entered into consent orders where Spirit paid a settlement without admitting liability.
While DOT has examined how Spirit has disclosed the PUF, it has never required that it stop charging it or include it in the base fare. The DOT has focused solely on proper disclosure whether on the internet or in other advertising. This is partly the basis of Spirit’s recently filed motion to dismiss the suit. Indeed, Spirit alleges, “the Department approved Spirit’s disclosure of the PUF on its website.”
Since passage of the Airline Deregulation Act, the regulation of airfare advertising has rested solely with the DOT. Spirit alleges that the plaintiffs’ RICO claim is a veiled attempt to create a civil cause of action in order to circumvent the ADA, the effect of which would regulate airfare advertising which properly rests with the DOT. Spirit also alleges that the ADA preempts the plaintiffs’ civil claim under RICO and the claim cannot therefore proceed.
Spirit has arguably been at the cutting edge when it comes to fare advertising and the charging of ancillary fees in the US. Unfortunately, the DOT has been following and not leading with well-established and clearly stated guidelines, seemingly playing catch-up to the airlines leading the charge in a new pricing world. Because of this tension, ancillary fees are under attack. In the final analysis, the determination of whether they are a legitimate business model, an unfair money grab or something in between will impact the financial health of the industry. Stay tuned.
- 14 CFR §399.84
- “Enhancing Airline Passenger Protections”, final rule issued April 2011, implementing, among other things, policies concerning air transportation price advertising practices, requiring carriers to notify consumers of optional fees related to air transportation and of increases in baggage fees and prohibiting post-purchase price increases.
- Bryan Ray, et al. v. Spirit Airlines, Inc., U.S. District Court, Southern District of Florida, Case No. 12-61528-CIV-SCOLA.