Ancillary revenues: GAO report and Subcommittee hearings promise more regulations

With ancillary fees, airlines are essentially doing the same thing Congress does when it wants to raise taxes but can't; it slaps a user fee on government services it can't afford to pay for out of the general fund. The irony of outlawing something that is legislative common practice was not lost on House Transportation and Infrastructure Committee Chair James Oberstar, although he clearly did not see it as the pot calling the kettle black. "It looks to me like the airlines are learning from units of government," he said. "If you call it a fee, it is not a tax but it is still a back door price increase. Now you have fees for meals, pillows, blankets, checked luggage, headphones and some for carry-on luggage. Then you have premium services, early boarding, early access to overhead space."

But there was an element of sound practical advice: "If airlines don't exercise restraint, there is going to be a continuing outcry from the traveling public and Congress. You'll end up with some kind of regulation you don't like. That's not a threat. That's history."

What was missing during the hearing was any suggestion that fees be abolished, or highlighting of the fact that surveys have shown that passengers, who universally tell pollsters fees are among their top pet peeves, actually like the fact they can pick and choose from a menu of fees just so long as the tickets are cheap. That is what made the attacks on Mr Baldanza so interesting. Spirit Airlines is the only airline visibly to lower its fare to compensate for higher fees.

Apples and disclosures...

Essentially, Congress wants consumers to be able to compare prices - apples to apples - including all optional fees between airlines. This despite the fact, consumers are rarely able to make such comparisons on other consumer products without going from store to store. In addition, Southwest Senior Vice President Marketing and Revenue Management Dave Ridley and Mr Baldanza both favored full, pre-purchase disclosure. They were the only airlines invited to be on the panel.

"Southwest believes the federal government should focus on ensuring the full and proper disclosure of any and all fees to consumers; making sure that airfares are advertised fairly and honestly," Ridley testified. "Increasing consumer protections through robust disclosure requirements provides the best customer service. Only an informed consumer can make apples-to-apples fare comparisons, which allows them to shop for a flight that best meets their needs and preferences."

Politics as usual - and more regulations in the pipeline

Besides being yet another venue in which to attack airlines, the hearings otherwise provided few surprises. However, judging from the rhetoric of the subcommittee, the Department of Transportation and the GAO, it is almost certain that new regulations are in the offing to increase transparency of fees during the booking process; possibly as part of the forever-pending FAA reauthorisation legislation or the finalization of the rulemaking that is now underway at DOT.

Fee amendments have been proposed in the Senate reauthorisation bill designed to require full disclosure. But Sabre Travel Industry Group Vice President Marketing Kyle Moore wants the language made stronger, to require the information be shared in a timely way through all intermediaries, such as GDSs. "We believe that the solution is transparency - full disclosure of information about airline add-on services and fees to consumers when they need it: when those consumers are comparing prices for the full cost of travel prior to purchase."

Indeed, most of the reforms suggested during the hearing are already in the works. Mr Moore however pointed to an issue ignored in both the proposed legislation and the DOT's consumer rules: "It is the absence of any requirement that each airline provide travel agents the needed baggage and other add-on fee information in a usable, reliable and efficient manner," he said. "Assuming an average round-trip ticket price of $300 for US domestic travel, that extra fee is significant for most consumers - representing a price increase of roughly 40% over the 'published' fare. It is beyond debate that, in most circumstances, an airline charging such a premium on the fare itself would expect notable losses of market share to other airlines with competitive schedules. Moreover, some of the competitors of these large carriers charge lower fees for two items of checked baggage such as AirTran and JetBlue, or no such fees at all, as is the case with Southwest."

The rulemaking, currently in the comment period, questions whether the comparison pricing rule should be expanded to include fees and other optional services as well as the taxes and other government fees now required to be disclosed. Congress at the very least wants all mandatory fees - such as fuel and peak surcharges - figured into the price, but it is likely to remain unsatisfied with anything less than full, pre-purchase disclosure. New consumer rules will likely cost airlines USD3 billion

If it moves, tax it; painful potential new imposts

And (cost) injury could be added to that (revenue) insult. It is possible that Congress will propose legislation to make fees liable for the 7.5% tax that fills the Aviation Trust Fund. This could be the really painful outcome. The US Internal Revenue Service has ruled they currently do not qualify for such taxation. GAO Director of Aviation Issues, Gerald Dillingham explained that federal regulations exclude from the excise tax, fees for transportation of baggage as well as fees for non-transportation services because they are not "paid as a condition to receiving air transportation" or are "not reasonably necessary to the air transportation itself." The IRS concluded that fees for checked baggage, headsets for use with in-flight entertainment systems, food and alcoholic beverages in flight, and ticket changes are not subject to the excise tax.

Airline-imposed fees and surcharges on domestic air transportation subject to the 7.5% Excise Tax according to IRS

Source: GAO analysis of applicable statutes, regulations, and guidance.
Note: IRS determinations of the applicability of the 7.5 percent excise tax depend on the facts and circumstances of the imposition of the fee and, accordingly, may vary from airline to airline for similar services.
a 26 C.F.R. § 49.4261-7(c). See also Priv. Ltr. Rul. 118216-09.

At a time when every penny of extra government income counts, Congress is hardly likely to overlook the USD7.8 billion the industry made in fees last year. Subcommittee Chair Jerry Costello kept rationalising such a repeatedly, noting that fees were rising even as aviation trust fund revenues were falling.

Taxing fees would come at a time when airlines are already heavily taxed - to the tune of USD18 billion annually. It also comes as governments - clearly including this committee - is eyeing travellers to make up for budget shortfalls, with taxes and fees imposed on them at an all time high. Taxes are imposed on every phase of the travel process including car rentals and hotels - which can be as high as 25%, such as that for Boston-Logan car rentals, according to Forbes.

However, Mr Dillingham said he would not necessarily suggest making fees the catalyst for taxation just because a bad economy has reduced trust fund revenues. That was not part of the GAO recommendations, although the report did remind the committee that such an action would require amendment of the Internal Revenue Code, which is, of course, easier said than done. The last amendment on the subject was in 1962, said Dillingham.

Mr Dillingham did note, however, that, based on the USD2.5 billion in checked bag fees collected last year, USD186 million would have been added to the trust fund coffers if they were taxed. That is less than 2% of total USD11 billion in revenue that the Trust Fund received during fiscal year 2009.

"However, this percentage is likely to grow because baggage fees have increased and some airlines have introduced additional service fees," he said. "For example, in the first quarter of calendar year 2010, airlines reported a 33% increase in revenues from baggage fees compared to the same quarter in 2009."

Mr Baldanza suggested taxing fees would mean higher fares which would "dampen the public's ability to afford travel, and thereby result in lower overall tax revenue" to the trust fund. However, Mr Dillingham argued there was no indication that fee transparency would decrease travel.

The industry is already subject to regressive taxes

However, Southwest's Mr Ridley provided better reasons not to tax fees: "We don't believe the fee should be taxed not only because it does not impose any additional burden on the infrastructure, but because we pay income tax. We pay hundreds of millions of dollars in taxes and that is a lot of money and that is on top of the billions already paid in government imposed fees and taxes on passengers. Our position is we already pay too much in taxes." Chairman Costello disagreed.

Distribution path to agency accounts of passenger-paid government-imposed taxes and fees collected by airlines

Source: GAO

Mr Baldanza cited the example that on a 300 mile trip with a USD180 roundtrip fare, the customer could pay a total of USD35.40 in taxes, or approximately 20% of the fare including the federal excise tax. "Since Spirit has the lowest fares in the industry its lower income passengers are already effectively paying the highest taxes as a percentage of the total fare," he said. "This is the unfortunate and regressive result of the current tax structure. We emphasize in this connection that fuel, which has constituted from 35%-40% of Spirit's total operating costs, is already taxed, which given current fuel prices, is equal to approximately 2%. Since the cost of fuel is included in the base air fare, there is already clearly some double taxation of air fares. Our average fare is under $85, and our passengers pay over $11 in Federal Excise tax, or 13%, on this amount for just the ticket tax and the fuel tax.

"At a time when the industry has serious financial issues and the Secretary of Transportation has set up a Commission to determine how to strengthen the industry for the benefit of employees, consumers and shareholders, it would be counterproductive to impose yet another tax burden," he continued. "And we emphasize that given the ultra low fares Spirit offers - fares that enable many to fly for the first time - any additional tax burden will disproportionately hurt the lowest income consumers - the very Americans most hurt by the depressed economy."

GAO Recommendation: report all optional fees to DoT

Any new legislation and/or rulemaking is also likely to call for airlines to report to DOT all optional fees, just as they are now required to report baggage fees which was also a major recommendation in the GAO report.

Currently, ancillary revenues cannot be totalled because of the different ways airlines account for them and the fact they are not required to report all ancillary fees. Revenue from seating assignments and on-board sales of food, drink, pillows, blankets, entertainment, or any other ancillary items are reported as Transport Related Revenue and cannot be identified separately, noted Dillingham.

Select fees imposed by US passenger airlines and example locations where offered for purchase

Source: GAO

The Dillingham Report noted that ancillary revenues have grown from less than 1% of operating revenues in 2007 to more than 4% in 2009, when airlines took in USD7.8 billion in ancillary revenues, up 18.3% from the year-earlier period. "That figure is probably low," he said, "because airlines aren't required to report other sources of fee revenue, such as charges for buying a ticket over the phone, early boarding and providing in-flight Internet connections. Although small compared with total airline operating revenues, fee revenues are growing."

However, Mr Dillingham was also quick to point out that the industry collectively posted operating losses of USD5.5 billion in 2008, but reported operating profits of approximately USD1.2 billion in 2009, largely because of ancillary revenues. Since 2000, airlines have collectively lost USD58 billion and more than 186 airline bankruptcies have been filed in the past 30 years.

US airlines' ancillary fee revenue (USD mill)

Source: BTS, Form 41; Schedule P1.2.

Ironically, the axe may fall just as ancillary revenues are declining

What made the GAO statistics revealing double digit increases in fees for 2009 so interesting, was a similar report from the Department of Transportation indicating first quarter revenue from fees was actually down. While baggage fees were indeed up in the first quarter as Mr Dillingham suggests, reservation change fee collections were down more than 5%, miscellaneous operating revenue was down more than 24% and total ancillary revenue was down about 1%. Furthermore, ancillary revenue as a percentage of total operating revenue declined 0.3%.

US airlines' ancillary revenue* (USD mill) ranked by 1Q2010

Source: Bureau of Transportation Statistics, Form 41; Schedule P1.2.
* Ancillary revenue includes baggage fees, reservation change fees and miscellaneous operating revenue, including pet transportation, sale of frequent flyer award miles to airline business partners and standby passenger fees. Revenue from seating assignments and on-board sales of food, drink, pillows, blankets, entertainment, or any other ancillary items are reported as Transport Related Revenue and cannot be identified separately.
** Delta Air Lines, after completing its merger with Northwest Airlines, reported combined numbers for the first time in the first quarter of 2010. For previous Northwest reports, see Financial Press Releases *** 28 carriers reported baggage fee, reservation change fee or miscellaneous operating revenue in 1Q2010 Note: For other carriers and additional historic data, see Passenger Baggage Fees, Reservation Cancellation
Fees or Miscellaneous Operating Revenues
Note: Percent changes based on numbers prior to rounding.
Note: Detail may not add to total

Witnesses tried to put the fees into context with other consumer goods. Mr Baldanza noted that while apples-to-apples price comparison would be desired, that is not something consumers have when they go into Home Depot to buy a refrigerator. Others have suggested that customers are also given add-on fees for everything from hair cuts to car washes yet are not subject to heavy-handed government regulations. Consumer advocates point out however, these choices are clearly more transparent that what the passenger now encounters on a website or online travel agency.

Southwest quantifies market shift - "close to USD1 billion"

Southwest took the opportunity for a little self promotion. Mr Ridley claims the carrier's (non) fee policy has resulted in a domestic market share shift worth close to USD1 billion since the introduction of this campaign. "As a result, our customers, employees and shareholders have been the beneficiaries of this decision," he said. "When you book a ticket on Southwest, you will not pay a fee to check your first or second bag, or to carry on a bag for that matter. You will notpay a fee to check your bags curbside. You will not pay up to $150 to change your reservation. You will not pay a fee to sit in a window or aisle or exit row seat. You will not pay a fee to make your reservation over the phone. And you will not pay a fuel or 'peak travel' surcharge fee either.

"And, as always, snacks, sodas, smiles and the occasional bad joke are all complimentary at Southwest Airlines."

DoT rulemaking: pricing based on preferences

DOT's rulemaking also calls for comment on allowing passengers to price tickets based on their preferences regarding fees. One committee member suggested that Sabre and other GDSs should just cull airline websites daily and post the fee results on its site. Good luck with that, but Business Travel Coalition Chair Kevin Mitchell and Sabre's Mr Moore explained permutations for the worldwide airlines would be too vast to afford such simplicity.

"The Airline Tariff Publishing Company (ATPCO)," Mitchell said, "has identified 100 ancillary fees and if you do the possible combinations on just one airline there are 10,000 combinations. If you are comparing against nine other airlines, that equals 100,000 combinations and for the world's airlines that is orders and orders and orders of magnitude that the industry has never faced before."

Travel industry witnesses suggested airlines liked the fee confusion they've created because it drives more revenues. "In fact, we are concerned that airlines have a disincentive to provide the data, as that data would make the prices of their products seem higher," said Moore. "Every airline would of course prefer to appear lower-priced than its competitors for the longest possible time. Thus, powerful economic motivation exists for airlines not to provide the add-on price information to the GDSs."

But Messrs Baldanza and Moore reminded the committee that airlines are reluctant to be the first to provide such transparency because it would put them at a competitive disadvantage. Even Spirit might be disadvantaged if it provided the transparency government was seeking and its competitors did not. Indeed, their fares may look lower because they excluded the cost of optional fees. Moore indicated it would require all of them doing it at the same time which will likely require government action.

The Business Coalition sees nasty motives

"There are five reasons airlines are resisting," Mitchell told the subcommittee. "The first airline to jump into system and show all-in fares 30% higher than competitors is going to lose. In addition, there is great profitability in complexity. The earlier a passenger knows of the options, they may make difference choices. By withholding info from GDSs and travel agents, the common view is, airlines are really trying to do is force agencies to pay for content which shifts costs on to backs of consumers. They want us to move to their airline.com where we wouldn't have comparison shopping and have higher fares. Finally, there is the tax avoidance issue."

Messrs Moore, Dillingham and DOT General Counsel Robert Rivken agreed that airlines would not incur a large burden in making fee information available. Mr Moore explained that current computer reservation systems used by travel agents and ticketing services are capable of providing clear information on fees that allows consumers to compare total trip prices.

...but GDSs could provide more transparency

GAO agreed. "Customers using online travel agencies and traditional or corporate travel agents, which together sell 60% of all airline tickets, cannot readily obtain and compare information on complete trip prices," it said. "Because information on some of these fees for optional services may be available only through airline websites and not through the global distribution systems used by passengers who purchase tickets through online travel agencies or by travel agents, passengers may have difficulty calculating the total price of a trip and comparing prices among airlines. Making complete, clear, and uniform information on airline fees available through travel agents and airline websites would enable passengers to make fully informed choices about travel options."

The GAO Report recounted only three of the many programmes that have been announced. "The DOT, consumer groups, GDSs, airlines themselves, and industry stakeholders are working to make fees more transparent for consumers," it said. "For example, the Institute of Travel and Meetings recently announced the formation of a group to set standards and policies for airlines regarding product unbundling. An airline consulting firm recently proposed a 'passenger bill of rights' on a-la-carte fees to provide passengers with greater transparency. In June, the International Air Transport Association (IATA) announced a new database called Automated Carrier Baggage Rules (ACBR) that will contain airlines' varying rules on baggage. IATA hopes the ACBR will enable airlines, travel agents, and passengers to better understand what baggage rules apply to any given itinerary, given that baggage rules have become 'increasingly complex and confusing.'"

ATPCO testing a fee publication system, ATPCO OC

The GAO indicated that ATPCO is testing a system where airlines would be able to file their optional-services data. However, Mr Dillingham indicated "airlines are not likely to disclose them unless compelled to do so."

Mr Moore explained the proposed system. "Essential industry standards for enabling efficient communication of add-on fees to GDSs have been developed recently," he said. "These standards are now provided through an information clearinghouse established by the airlines, Airline Tariff Publishing Company (ATPCO), through a newly-launched product called ATPCO OC - also referred to as ATPCO Optional Services and Branded Fares. Importantly, ATPCO OC establishes over 100 unique fields that can be used by airlines to identify and file their fees and services for any particular ancillary fee they choose to assess. The GDSs are now completing the system modifications required to display the data to their subscribers in ways that will effect the needed disclosures. More than 20 airlines have tested the system successfully, and the GDSs will begin adding that data to their 'live' travel agency displays in coming weeks and months.

"In other words," he said, "through ATPCO OC, there is a process and technologies in place right now for full disclosure of add-on fees that will work across all channels which provide information on airfares to consumers. But it will not work unless content is supplied by the airlines in a comprehensive and timely way. Without the provision of that content, these advanced and consumer-friendly information solutions will be all dressed up, but have nowhere to go. Unfortunately, to date, while approximately 86% of US point-of-sale bookings are covered by those airlines that have 'test-filed' ancillary data via ATPCO, no airlines - to my knowledge - have definitively and publicly indicated that they will continue to provide the necessary information via ATPCO for long-term use within the industry."

He concluded, "In a nutshell, while airlines have been energetically engaged in various efforts to dissect the air transportation product and assess these new fees, the industry has been slow and apparently reluctant to develop vehicles for effectively and timely communicating to the agencies information on add-on services and fees."

Mr Moore went so far as to charge that airlines are engaging in deceptive practices. "Since consumer behaviour has demonstrated irrefutably that even a few dollars are critical in making an air travel buying decision, any airline pricing regime that fails to ensure travel agencies are equipped with this key information about charges for add-ons generates substantial risk of broad consumer confusion, if not functional deception. Failing to adequately, or at all, disclose a $60 fee each way could mislead consumers into picking a flight they would not otherwise choose when there was an alternative flight with zero baggage fees. The larger the amount assessed the more compelling the need for full and fair disclosure."

More industry solutions: Open AXIS allows connectivity (and more sales)

The hearings came just as the industry was announcing its own solution to the transparency problem in the guise of a new program - Open AXIS (Airline XML Integration Standard), announced the day before the hearing. The program is being created by six North American legacies - Air Canada, American, Continental, Delta, United and US Airways -and ATPCO. Membership remains open to other carriers.

Apart from responding to oversight pressures, there are good commercial reasons for being pro-active. Airlines need the technology to allow them to cross sell other services to increase their ancillary revenue even further. It is also a looming area of discontent for global alliance members, as seamless connections may be jeopardised as alliance members adopt different standards.

"The Open AXIS Group was formed out of the industry's requirement for more standard connectivity between airlines and third-party distributors in support of merchandised content," said Air Canada Senior Director of Distribution Graham Wareham, on Tuesday. "With the growth of optional services and airline merchandising gaining global airline interest, the creation of the Open AXIS Group becomes more timely than ever."

The group's standard XML schema supports the full range of airline transactions, from straightforward booking and PNR management transactions, to more complex transactions involved with multiple passenger management, ticketing, exchange, refunds, voids and the various merchandising-related transactions including optional services, bundling and EMD management, said the group.

It is charged with creating a standard for distributing ancillary revenue services based on a programme already in use by Farelogix. It is expecting members to add on to its current schema to develop a more robust system, according to Executive Director Jim Young.

Politicking at its worst? Mr Baldanza becomes the scapegoat

The unusually aggressive display against Mr Baldanza, in a venue otherwise often known for its courtesy, made the hearing more than curious. Mr Baldanza was continually cut off by both Representatives Peter DeFazio and Laura Richardson, who asked the chief of the country's cheapest airline questions, only to interrupt his answers. Ms Richardson went so far as to admonish Mr Baldanza not to shout at her as he allegedly did to Mr DeFazio. In fact, Mr Baldanza was only trying to answer Mr DeFazio's questions when it was Mr DeFazio who shouted over his answers, just as Ms Richardson did a few minutes later.

Mr DeFazio even mis-characterised Spirit's position on full disclosure, saying the airline objected to it when, in fact, Mr Baldanza had stated several times during the hearing and spent a third of his testimony on the fact that he favoured the practice. "We don't object," he said. "In fact, we've spent a lot of money changing our website to fully disclose any fees before the purchase."

Ms Richardson then stepped up the heat, to criticise Spirit for the widespread industry practice of putting the information on the website, saying it was not sufficient. "In the community I represent, not everyone has a computer," she complained.

Mr Baldanza had a tough day. He was even subsequently reported in the evening's media as saying baggage was not essential to travel, in a good example of being quoted out of context. What he had actually said was: "Carrying more than one bag is not necessary for all travellers and we believe it is unfair to charge those customers for extra services they do not use-indeed, it is the basis for Spirit's policy. Spirit's decision to unbundle services not essential to the transportation of passengers, has enabled more passengers to fly at lower cost. The carry-on fee for most passengers is $20 - $30. Spirit reduced its base fares to offset these charges. Spirit also lowered its checked bag charge to encourage passengers to check their bags. The imposition of the carry-on fee has not affected Spirit bookings, because the total cost to customers for travel on Spirit remains far lower than on other airlines. Overall, bag fees have led to customers packing less and reduced total baggage on flights. This has lowered operating costs and resulted in even fewer lost or damaged bags."

Spirit Airlines makes the case for unbundling

Mr Baldanza explained the primary reason for the carry-on fee was to stem the amount of luggage on board. "Carry-on bags have become a nightmare for passenger boarding and deplaning," he said. "They create a safety risk for both passengers and flight attendants and lead to costly flight delays." GAO's Mr Dillingham agreed, noting some flight attendants have called it a safety issue.

Still, Mr Baldanza, who describes his airline as "ultra low cost," (ultra LCC) couldn't win. His next point was considered disingenuous by committee and press alike. "Spirit's business model to provide maximum choice to passengers to purchase the specific services they want, while keeping fares as low as possible, is unique among U.S. airlines," he said. "Indeed, given our low fares, it has allowed many to travel who otherwise simply could not afford to do so." That is undoubtedly true. But juxtaposed with the carrier's various fees and coupled with Congressional ire from Mr DeFazio and Ms Richardson, the dangers of the argument are obvious.

21% of Spirit's revenues come from ancillary fees, according to the 2009 DOT report, cited in the hearing's statement of purpose. It also noted the industry average was 6.5%. Even Allegiant is at 10% but Mr Baldanza defended the practice, quoting the fact Spirit's fares were lower than other carriers.

"This comparison is highly misleading," he argued. "Spirit's percentage of ancillary revenue to total revenue is higher than for other carriers simply because our fares are the lowest. For example, if Spirit had the same average fare as American Airlines, its ancillary fees would be only 14.2% of total revenue. If its fares were the same as United, Spirit's ancillary fees would be 11.8%. Like Continental - 12.3% and like Delta - 15%."

Spirit Airlines' examples of ancillary percentages

Source: Spirit Airlines

Mr Baldanza said too much has been made of this. "Over 70% of Spirit revenue comes from ticket sales and is subject to the aviation excise tax," he continued. "Of the 25% of revenue that could be labeled ancillary, approximately 60% is itinerary related. Within this itinerary-related amount, about 50% is from baggage fees and 10% from seat-selection fees. The remaining 40% of ancillary revenue comes from subscriptions to our $9 Fare Club, credit card fees, commissions on hotel, car rentals and flight insurance, change fees, on-board food, unaccompanied minor charges, and pet transport."

"In total," he noted, "only about 15% of Spirit total revenue is from ancillary fees selected by passengers in connection with their travel."

Mr Baldanza reiterated his was the only airline to lower fares after imposing fees. "Some other carriers later added similar fees, but only in reaction to higher fuel prices and not with the corresponding drop in the base fare."

In this respect, Spirit positions itself as being the ultimate in commoditisation, as portrayed in the airline's graphic, below.

Spirit Airlines positioning: "committed to delivering consistent profitability"

Source: Spirit Airlines

Clearly not apologetic for operating a profitable airline, he noted that Spirit is keeping other airlines' fares in check, noting that during the airline's recent strike, other carriers raised their fares. "Spirit's impact was clearly demonstrated when its pilots went on strike last month and other carriers, including low-fare carriers, immediately raised prices," he said. "For example, JetBlue raised its roundtrip fare in the Fort Lauderdale-San Juan, Puerto Rico market from under $200 to over $600. Over the next five years we will add 35 new aircraft to meet the growing demand for our unique Ultra LCC service."

Representatives did not display the same discourtesy toward Southwest's Ridley so it became apparent that Mr De Fazio and Ms Richardson had made a predetermined decision to target Mr Baldanza.

Perhaps they see Southwest's philosophy more consumer friendly or Ridley's continuous repetition of the airline's nickel and dime mantra that unlike most airlines that nickel and dime their passengers "Southwest's philosophy does not charge passengers for things they have historically received for free." Ridley did stress, however, that any decision to impose fees should be a business decision left up to the individual airlines.

"Southwest made the conscious decision to limit our customers' fee exposure to what we view as unreasonable and annoying fees," he said, adding it was the company's choice. "Other airlines have chosen a different business model and should have every right to do so." (Southwest's decision was also made that much easier because of the shortcomings of its elderly reservations system that make charging for ancillaries very difficult.)

The nightmare: refunding government taxes

One unexpected nugget emerging from the GAO's Report on ancillary fees related to refunds due passengers who ultimately do not take their flight. This is becoming more of an issue as cancellations rise in the wake of the DOT's new 3-hour tarmac rule. The report simultaneously highlights the morass of disparate taxes and the complexity of processing them for the airline "tax collectors".

GAO's Gerald Dillingham reported that the refundability of government taxes and fees is not always clear and communication of refund eligibility to the airlines and consumers is lacking, varying depending upon the specific tax or fee: "According to IRS, aviation excise taxes on unused nonrefundable tickets are not refundable; however, to the extent that a portion of the ticketed fare is refunded, the collected tax attributable to that portion of the fare may be refunded to the consumer," he reported.

"In contrast, consumers with unused nonrefundable tickets are entitled to a full refund of the September 11 Security Fee, in accordance with Department of Homeland Security (DHS) Transportation Security Administration (TSA) guidance.

"According to Customs and Border Patrol (CBP), its applicable statutes and regulations authorize the refund of its customs and immigration inspection fees on unused nonrefundable tickets; however, CBP has not issued policy or guidance that clarifies this interpretation or whether airlines can or must refund fees if requested by consumers.

"The US Department of Agriculture's (USDA) applicable statutes and regulations regarding its inspection fee are silent on whether the fee is refundable on unused nonrefundable tickets, according to the agency."

The GAO Report alleged airlines have failed to notify passengers that they are eligible for refunds of security fees. "Consumers with unused nonrefundable tickets with expired or lost value are entitled to a full refund of the September 11th Security Fee, but few consumers request a refund because airlines are not required to inform consumers of this," Mr Dillingham pointed out. However, he did not refer to refunds due for the airlines' optional or other government-imposed fees.

Government-imposed taxes and fees and amounts paid by passengers and legal basis for their refundability on unused nonrefundable tickets

Source: GAO analysis.
a 26 U.S.C. §§ 4261(a), 4262(a).
b 26 U.S.C. §§ 4261(a), 4262.
c Rev. Rul. 89-109.
d 26 U.S.C. § 4261(b). A domestic flight segment consists of one take-off and one landing.
e Officials with IRS stated that the reasoning of Rev. Rul. 89-109 is applicable here.
f 26 U.S.C. § 4261(c). Section 4261(c)(3) provides a modified international arrival/departure tax rate of
$8.10 for domestic flights beginning or ending in Alaska or Hawaii.
g Officials with IRS stated that the reasoning of Rev. Rul. 89-109 is applicable here.
h 49 U.S.C. § 44940, 49 C.F.R. part 1510.
i 49 C.F.R. § 1510.5.

As Congress considers adding a further layer to this astonishingly bureaucratic array of taxes, fees and potential refunds, some consideration might well be given to rationalising or consolidating the ones already in place.

Is the future in rebundling into packages?

The subcommittee forecast the next chapter even as it warned of more regulation: "Industry analysts suggest that the next chapter of the story on ancillary fees will involve 'rebundling' the fees into packages of options that the passenger can purchase in advance," it said. "There has also been discussion as to whether airlines will make the fees easier to refund when services are not actually delivered, and whether 'elite' frequent flyers will be subjected to fewer ancillary fees."

And then, the hammer fall: "What is clear is that ancillary fees have generated revenue for the airline industry and will likely be the subject of regulation and continuing scrutiny."

GAO's Recommendations for information disclosure; foreign airlines also to be targetted

The Report also offered "several recommendations to the Secretary of Transportation to improve the disclosure of information on airline-imposed fees and government-imposed fees for consumers and to improve airlines' reporting of fee revenues to DOT:

• "Require that U.S. passenger airlines and foreign airlines that fly within or to or from the United States disclose optional airline-imposed fees and policies that the agency deems important to passengers to know and further require that this information be consistently disclosed across all distribution channels used by the airline.
• "Require that U.S. passenger airlines and foreign airlines that fly within or to or from the United States disclose to consumers applicable government-imposed fees on nonrefundable tickets that may be eligible for refunds as these determinations are made by relevant agencies.
• "Require U.S. passenger airlines to report to DOT all revenues from optional fees paid by passengers related to their trip in a separate account, exclusive of revenues from baggage fees and reservation change and cancellation fees.
• "To DHS, we recommend that the department issue guidance to airlines regarding the refundability of its customs and immigration inspection fees. To USDA, we recommend that the department determine whether its inspection fee is refundable and convey this to airlines."