I never thought I’d see the day come, but the floodgates are now open. United — the airline that was the first to raise domestic change fees to $200 back in 2013 — announced that it will permanently retire the domestic change fee on all tickets. This is undoubtedly a PR coup for the airline, but what does it mean for United’s competitive positioning? Is this actually good or bad? It’s not as clear cut as it might seem on the surface, and it may just be the beginning of bigger changes.
Let’s start with the details. United has been waiving change fees ever since the COVID-19 pandemic started, and that isn’t changing. That waiver has now been extended for all tickets issued through December 31. Starting in January, change fees will return on international tickets (unless the waiver extends again), but domestic tickets will no longer have change fees. There are some caveats here.
- No domestic tickets will have change fees, BUT Basic Economy tickets will go back to being non-changeable.
- Credits can be held for future travel, but the existing rules requiring travel to be completed within 1 year of the date the ticket is issued remains.
- While change fees will not apply, the applicable fare difference will be paid unless you are doing a confirmed same-day change (for elites only) or standby by for a same-day change (anyone). Starting January 1, there is no longer any cost to do either of those.
- And now, the big one. Previously, when you made a change, you had to pay the change fee, and then if the value of the new ticket was less than the original ticket, you could keep the residual for future travel. That will no longer be allowed. Specifically:
Let’s run through an example to make this last point more clear. Say I bought a ticket from LA to Chicago for $600 and I needed to make a change. The new flight costs only $300. Today, I would have to pay the $200 change fee, then I could apply the existing $600 ticket value to the new ticket. The leftover amount of $300 would be kept for a future credit to be used without a change fee. That’s $800 out of pocket to get $600 of travel value.
In the future, if I made that change there would be no change fee to pay, but I would not be able to keep the residual $300 for future travel. I’d just lose it. That’s a worse value of $600 out of pocket to get $300 of travel value.
In that case, I’d be better off just buying a new, separate ticket and using the existing credit for a future, more expensive flight. There’s a lot to think about here as a traveler, and I really hate the inability to keep a residual value. I’d have much preferred if United slashed its change fee to a more reasonable level ($25? $50?) and then let the residual rules continue as they are.
But this just addresses the issue from a consumer perspective. Where I find myself most fascinated is in what this means from a competitive and financial perspective.
United Forfeits Nothing in the Near Term
With no change fees on any tickets right now anyway, United has nothing to lose in the short term. Even before the pandemic, change fee revenue had been going down. Here’s a look at DOT data showing total reservation/cancel fees for the airline.
We don’t have any data beyond Q1 yet, but that precipitous drop in Q1 of this year is due to change fees going away in March as the pandemic began. Keep in mind that this number is total fees for the airline, so it’s both domestic and international. International change fees are higher than domestic, and those aren’t going away.
In 2019, United pulled in more than $600 million in change fee revenue, good for about 2 percent of total revenue. We know United won’t lose all of that, because international change fees stay — those, by the way, likely remain due to joint venture issues instead of any other reason — so ultimately it’s a smaller number than 2 percent that’s being forfeited. That sounds insignificant but it’s not. In an industry where margins live on the razor’s edge, that “small” number can make or break a year.
What United has to be betting here is that the elimination of the change fee will boost consumer confidence and convince people to start booking travel again, even further out into the future than they’re willing to do now. Making a bold statement like this is going to help United’s positioning, and it’s an admission that customer uncertainty isn’t going to disappear any time soon. We’re in a new world where this kind of move makes some sense… but there’s always a way out.
“Permanent” is a Loose Term
United has said this change is permanent; CEO Scott Kirby even used the word “forever.” But in this industry, “forever” isn’t necessarily a very long time. COVID is going to wreak havoc for at least a year if not more. The waivers could certainly continue to be rolled over for awhile, but this is better for consumer confidence. Let’s say we get a couple years down the line, and United sees demand has returned but it needs to bump revenues. Something tells me that “permanent” could be forgotten. It won’t come back at $200, but it could come back at $25 or $50. There is no contract set in stone saying this can never return. It’s always a possibility despite what’s being said now.
This is Actually Good for Southwest
Making this move gives customers more confidence in buying tickets on United, but that doesn’t happen in a vacuum. When customers are choosing between Southwest and United, this puts United on a more even playing field. Southwest, of course, has famously never had a change fee, and that is very well known. Some may speculate that this means United’s move is bad news for Southwest, but I don’t see it that way.
People think of Southwest as the low fare airline even though it isn’t. Having far less ancillary revenue from things like change fees means that it has to bake in more into the base fare to compensate. United is going to have to do the same thing, and that should result in higher United fares and a more favorable fare comparison for Southwest. This is good for customers, because it makes for a more “apples to apples” comparison. But it’s also good for Southwest in that it looks more favorable on the surface.
American and Delta Have a Decision to Make
With United having made the move, now American and Delta have to decide if they’ll follow. I don’t see that they have any choice. Sure, they could just keep rolling their waivers to match temporarily, but then they don’t get any PR bump. Then again, has United already stolen all the PR bump that exists for this? It might require American and Delta going further.
Could this be the beginning of the unraveling of the structure that’s slowly been put into place over the last decade? United is trying to keep Basic Economy going. In fact, this change gives people a bigger incentive to buy up. Instead of paying more to go from a non-changeable fare to one that’s changeable for $200 plus the fare difference, it now goes to being changeable for just the fare difference. That makes it worth paying more. But United has been trying to hold on to this world for some time, remaining the last airline to restrict carry-on baggage in Basic Economy. The other airlines have been more willing to blur the lines, and that makes Basic vulnerable.
If you’re American or Delta, you know you’re now competing even more fiercely with everyone else for scarce passengers. This move makes United more competitive with Southwest on one hand, but Basic Economy has the opposite effect on the other. American has already recently greatly scaled back Basic Economy in domestic markets. Just go do a fare search and you’ll see what I mean. So, might American or Delta pull the plug on Basic Economy altogether? There are arguments to be made on both sides, but there’s no question this would get another PR splash for the airline that first chooses to do it.
In the end, the airlines in the US always race toward the lowest common denominator. It feels like we’re in a time of desperation where airlines will have to shed restrictions and rethink their businesses. United has made the first big, permanent move, and others will have to respond. This could very well be the dam bursting. More change is coming.