Analysis: The hidden cost of flying

BOOK A BRITISH AIRWAYS FLIGHT from Heathrow to New York JFK for the middle of November and roughly 10 per cent of a typical base business class fare – before all taxes, fees and other charges – will be attributed to something called a ‘carrier imposed charge’. The airline’s explanation on its website says that the charge is “based on flight duration and covers all passengers…”.

But there is now no mention that the charge (which varies according to the length of the flight – for example, the charge from the UK to the US east coast is £319) might “reflect fluctuating oil prices”. This was the caveat given (and until relatively recently was still on BA’s website) when it was first introduced in the mid-2000s, at time when the oil price (and hence jet fuel) had escalated alarmingly. BA, however, has now become rather reticent to talk about fuel surcharges and declined to provide Buying Business Travel with further details of what is included in its ‘carrier imposed charge’.

BA’s arch rival, Virgin Atlantic, remains slightly less coy, justifying its own ‘carrier imposed’ surcharge (again, £319 on a transatlantic east-coast flight) simply as: “We may be able to fly in the sky, but there is no escaping the cost of fuel and other charges.”

All very true. But fuel and other costs of flying, such as airlines paying airport owners to use their runways and terminals, are simply the costs of doing business that many travellers would perhaps expect to see included in the base fare. In any case, fuel surcharges seem a one-way deal: there has been no suggestion from the airlines of reducing them when prices fall, as has been happening in recent months.

But the airlines are now coming under pressure to cut them. In October, Paul Wait, CEO of the Guild of Travel Management Companies (GTMC), called for the elimination of Air Passenger Duty (APD), although he accepted that “a cut in fuel surcharges by airlines, however, is a viable alternative to making air travel a more affordable and a viable way to incentivise businesses to travel further and grow faster”.

Transparency and complexity

But there are other, less obvious reasons why the corporate market should be concerned about the transparency and complexity connected to the hidden costs of flying. “As fuel surcharges are charged by airlines in the taxes line rather than on the fare, the focus during negotiations is almost invariably on the fare price, with taxes seen as an assumed cost and, therefore, non-negotiable,” points out HRG director Paul Dear.

Most airline ‘taxes’, moreover, are not as compulsory as they seem. APD is the only true tax on departing UK passengers (top-rate at present in premium cabins is £194 on long-haul journeys, dropping to £142 from next April), and no VAT is charged on flights. But this does not stop airlines adding such extra fees as a ‘passenger service charge’ to help cover the
charges levied on them by commercially owned airport operators, such as Heathrow or Gatwick.

Welcome to the wacky world of the 21st century aviation industry, where recent years have seen nearly everything that used to be included in the price of a ticket now charged separately by airlines. Everything from transporting your luggage to securing better seats on the plane is now considered fair game for domestic and international carriers as they ‘unbundle’ the cost of flying.

And it has proved a lucrative move for the airline world. According to a new report from US aviation consultancy Idea Works, the ancillary revenues earned by 59 airlines from around the world (using data from published accounts) surged to a record US$31.5 billion last year.

Not surprisingly, this has transformed the economics of global airlines: a collective net loss of US$26 billion in 2008 is set to turn into a profit of US$18 billion this year, according to estimates by IATA.

While US airlines have been the most aggressive in charging for hold baggage and other products, European ‘full-service’ carriers are starting to catch up. While BA, for example, launched hand luggage-only fares for most UK and European flights last year, it now charges up to £65 for hold baggage if the passenger later changes their mind at the airport. On international flights, the fee for an extra checked bag rises to £140 when paid at the airport.

Ancillary revenues

BA, in fact, earned a total of £325 million in ancillary revenues last year, according to Idea Works using the airline’s latest accounts. Although the bulk of this (£190 million) came from its BA Holidays operation, the consultancy says that £45 million also resulted from paid-for hold baggage and £40 million from travellers paying to choose their seat allocation. A further
£50 million came from travellers upgrading their cabin choice.

Virgin Atlantic was said to have earned ancillary revenues last year of about £130 million, with 80 per cent of this produced by its Flying Club frequent flyer programme. Only some £13 million is believed to have come from baggage fees.

Worrying issues

While airlines are clearly benefiting from ancillary revenues, the ‘elephant in the room’ for corporate travellers is the potentially adverse impact on the way travel is managed. The worrying issues for travel buyers and their travel management companies (TMCs) centre around transparency, data collection and expense reconciliation.

“The process of booking a flight has become more complex as the tools and solutions used by companies struggle to keep up to enable transparent fares to be presented,” points out Antony Elliott, vice-president for sales in the EMEA region at Chambers Travel, who believes this is a “big concern for the corporate buyer and their travellers, not only in cost but also in lost time”.

He adds that the lack of transparency generated by “hidden costs such as check-in fees and charges for additional luggage” often confuse corporate travellers, who then “revert to solutions outside of the managed programme”.

Extra costs

One key problem is that it is hard for corporate buyers to get to grips with just how much extra is being spent on unbundled fares. “While extra costs in terms of taxes are itemised on the flight booking, we often have to add charges for bags or seats later,” explains Paul East, chief operating officer for Wings Travel Management. “This means raising additional invoices, which is inconvenient for corporates.”

The problem is often with collecting the additional data. “Data is still sporadic in markets around the world,” says HRG’s Dear, who points out that when a booking including fare and additional baggage is made through a low-cost airline, the fare is usually charged to the credit card when the booking is made, while the bag is charged on the date of the flight.

“This makes connectivity difficult, especially on a central account or lodge card, which may have 80 flights booked but data for 60 bags only,” he adds. “Corporates are now focusing on a better understanding of the total cost of a trip and are increasingly aware of the additional costs that can arise – but they need better data in order to challenge and negotiate successfully.”

At technology communications company Citrix, global category manager Jef Robinson says he is well aware of the changes brought about by airline unbundling and is “amending policy where necessary to ensure continuity for our people travelling on business”.

He adds: “Right now, it is difficult to specifically identify additional expenses as part of total cost, but this is something we are addressing by enhanced reporting and consideration of more advanced management tools.”

Growing pressure

But there is some good news for travel buyers and managers. Pressure is growing – particularly in the US – for airlines to make ancillary products and services available through the global distribution systems (GDSs) and third-party agents used by TMCs and others when making corporate bookings. This would, it is argued, provide greater transparency on fees being charged by different airlines, as well as enabling the fees to be booked and paid for at the same time (empowering so-called ‘transactability’).

A number of non-US airlines already allow ancillaries to be sold via GDSs – including Air France-KLM, Etihad, SAS and Qantas – while the US Department of Transportation is currently trying to decide on how far US carriers should go in selling via third parties. A decision is now expected sometime in 2015 after a recent consultation among 700 or so airlines, travel suppliers and consumer groups revealed sharp differences of opinion.

And there could also be progress from IATA’s New Distribution Capability (NDC) programme, currently being tested, which would enable third-party agents to sell ancillaries at the same time as air fares.

Perhaps there also needs to be a greater focus by corporate travel departments on some of the basics as well, including establishing which unbundled extras used by their employees when travelling are reimbursable – and which are not.

Airports join the building bonanza

AIRLINES ARE NOT ALONE in the aviation world in trying to earn extra revenue from travellers: airports are doing their best to emulate their success.

Dropping off or picking up a colleague or friend at an airport, for example, used to be a simple courtesy provided by operators and costing nothing. Now, according to the Civil Aviation Authority (CAA), the majority of the 31 UK airports it monitors impose some sort of small fee for dropping off or picking up a passenger, as part of a whole new raft of fees and charges. And a dozen of these airports now also charge – typically between 25p and 50p each – for the plastic bags in which to place liquids when passing through security.

Such nickel-and-diming, moreover, is becoming a truly global phenomena. Venezuela’s Maiquetia International Airport in Caracas, for example, last summer imposed a £12-per-person departure tax on all passengers to cover the cost of a new air purification system, unsurprisingly leading to it being dubbed a ‘breathing tax’.

Keeping up with additional fees and charges is no easy feat for travellers and regulators alike. The CAA helpfully publishes a quarterly online update of charges levied by most UK airports and the domestic and international airlines using them, yet it warns that its information can quickly become out of date.

There are also less obvious hidden costs of flying. A recent Skyscanner survey of 1,500 European travellers, for example, found that virtually all (96 per cent) believed unlimited wifi at airports should be offered for free. Sadly, only London City and Birmingham airports met this aspiration in the UK (some 24 did in the rest of Europe), while Heathrow, for example, provides only 45 minutes free before charging £3 for one hour and £5 for two.

Subscribe to the BBT Newsletter

Join the Buying Business Travel newsletter for the latest business travel news.

Thank you for signing up!