United Ditches Domestic Change Fees… Let the Games Begin

United

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.

Data in thousands, via BTS.gov

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.

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28 comments on “United Ditches Domestic Change Fees… Let the Games Begin

  1. I don’t believe that UA would leave $600M along the side of the road. Houdini Kirby will find another way to extract that from their customers.

    1. If the change fees are preventing customers from buying tickets in the first place, it’s not cash left along the side of the road.

  2. Hopefully United’s fares for Basic Economy will drop to reflect the ever increasing gap between it and standard economy. With Basic Economy you cannot bring a carry-on and cannot select your seat. Depending on the route, I might value seat selection from $15 to $75 and the carry-on at around $30 (the price to check a bag). Knowing that I won’t be able to reschedule a trip if there is a COVID spike would definitely push me to compare United’s full fare economy vs. another airline who has a waiver in place.

    Once the pandemic is over, I would consider Basic Economy, but only if the price is significantly lower.

  3. The real driver behind this is that WN is building up/rebuilding its hub/whatever you want to call it at DEN at a faster rate than UA. For Sept, UA is at about 50% of its flights from a year ago while WN is down low double digits. WN actually will offer more seats than UA for the first time although UA is offering more flights. The Mountain West hubs as a whole are doing well as DAL’s capacity restoration at SLC is comparable to WN at DEN. UA is trying to save its DEN hub but it is facing direct competition from WN at DEN and from DL at SLC for the region.

    As for what AA and DL do, DL’s CEO said they were looking at change fees back in January, just weeks before the crisis hit. As noted, change fees inhibited the selling of tickets in the covid environment due to passenger uncertainty so there is no risk now. UA jumped now and gets the credit; as the smallest of the big 3 domestically, they have the most to potentially gain by leading change.

    1. Tim, always appreciate your insights and analysis. I would push back on the idea that this domestic-wide move from UA is attributable to WN’s rebuild at DEN. While WN’s year on year numbers are certainly impressive, UA still offers more seats overall.

      WN operates the same number of seats and departures each day, while UA decreases departures on Tuesday and gauge on Wednesday. Looking at the September schedule with 9/13 through 9/19 as the representative week, UA has more departures and seats on every day of week save for the two midweek DOWs. UA has 11% fewer seats but 41% more departures on Tuesday, and 2% fewer seats but 59% more departures on Wednesday. Using Sunday as a peak DOW, UA has 66% more departures and 4% more seats. While DL has an impressive operation in SLC at the moment, they are still comparatively smaller by departures and seats in September than UA and WN at DEN. A similar review cannot be conducted for October as UA has yet to pull down its schedule for the month.

      I would argue that UA making this type of legacy-leading pro-consumer move cannot be attributed to WN’s build-up at one hub well-suited to the COVID travel environment — DEN is well-positioned to connect customers to pandemic-friendly travel experiences, such as national parks. Legacy carriers, UA included, have been considering a move away from change fees since pre-COVID times (as you noted with DL). Instead, I am sure the average fares and brand positioning commanded by WN and their change-fee-free regime have played into UA’s decision-making here. Regardless, it is exciting to see UA lead the way amongst legacies with this move.

      1. thanks for your reply and comment, S.
        Obviously none of us know exactly what motivated UA and I would agree that the benefit will not be just in DEN or competitive with WN. However, DL did talk about the possibility of eliminating change fees before covid and the outbreak has eliminated them anyway.
        As for DEN, WN was already the largest carrier in DEN by local O&D passengers (those originating or terminating in DEN) even though they have never had more seats. I am sure you can slice the data to find days where UA is higher but in total, WN is offering more seats. Obviously UA uses regional jets so they offer more flights; as I noted, they cover more of the world from DEN so have an advantage but when WN pushes its advantage in DEN further east, it becomes more problematic for UA.
        UA also has the lowest local market share in all of its hub metro areas of the big 4 on a collective basis, including WN. UA’s domestic network is highly competitive.
        Of course SLC is a smaller market; the point is that DL is restoring capacity faster than UA at DEN which means that DL is better competing for more of the flow traffic that flows over DEN or SLC.

        as for the comments below about UA’s financial strength, or lack thereof, one of the biggest threats to UA right now is that its 777 fleet – including its 777-300ERs – have very little operational value right now but are heavily pledged as collateral to UA’s loans. By the time international demand returns, the 777 will have little value and also be much less economical to operate against newer aircraft including UA’s 787s. AA is in a similar situation but just not at the same scale. Having billions of dollars of debt tied to currently worthless assets is not a good place for UA to be.

        1. Tim Dunn – ” By the time international demand returns, the 777 will have little value and also be much less economical to operate against newer aircraft including UA’s 787s. AA is in a similar situation but just not at the same scale. Having billions of dollars of debt tied to currently worthless assets is not a good place for UA to be.

          This shouldn’t be a shock to anyone as economist Richard Wolff has pointed time & again that there’s far too much debt floating about & not enough global assets to cover for it.

  4. This let me to beleive UA is in more financial trouble that they letting on. Technically, right now all carriers are doing no change fees because of the pendamic. UA needs cash in the door quickly and this is a way of doing it. However, this move will hurt the industry in the long run.

  5. “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.”

    Once you remove all the corporate doublespeak, you arrive at this bottom line that was so well said by Cranky. Airlines have a basic choice – leave money on the table & live to fly another day or risk further annoying what flyers you currently have who won’t come back unless it is necessary for them to do so.

  6. Will Basic Economy tickets also now allow free same-day Standby under this new policy?

    Haven’t been able to figure that out yet. I haven’t booked a full non-basic economy ticket on United in quite some time (this is all pre-pandemic, I’m not comfortable flying at the moment) the price difference was generally so large and most of my trips are very short weekend leasure trips that we’ve mastered doing with just our small backpacks, before COVID it felt like a luxury (when we were flying Southwest, American, or Delta) to take a trip with our regular carry-ons.

  7. I figured UA may have been being generous, but with keeping the difference if negative UA might be making more money than they would on the fee ay?

    TBH Early standby and free SDC is what I’d value, if my connection is early or I get to airport early and I can get on an early plane that is what I want.

    Helps a seat on airplane not go empty and you have better chance to sell later seat

  8. I think UA did well here. They will get credit deservedly for being the first airline to make this move. I would assume other non-ULCCs would be forced to make similar moves.

    It’s good to see airlines making moves trying to attract passengers.

    1. Agreed FC, but they are doing it from a position of weakness & not from a position of strength. When you think about it, it reeks of desperation & the big three will do anything to get you to put on the seatbelt. I recently saw a Delta commercial where they were bosting they’re new safety measures in cleaning, empty middle seats & other things. However it was so hollow that it was obvious they were gaslighting just like almost every other new ad as of late.

  9. This is a brilliant move by UA with pretty simple logic. There are a substantial number of small business travelers (i.e. not on a nice travel expense account) who endure the connections/hops on SWA so they can always change their tickets as needed. UA has significant SWA competition in every one of their hub cities except NYC. UA wants and now really needs those travelers, and this is essentially a giant travel loyalty reset event. Those travelers will now be severely tempted to jump ship from SWA to UA, especially since it is more likely to minimize their covid exposure with a nonstop instead of a connection or hop. I’m not totally sure AA and DL will match since they tend to have less SWA competition in their hub cities.

    1. I think that’s a great point. Definitely makes United more competitive with WN in markets like DEN, Houston, LAX and Chicago with that particular group of passengers. That group is also likely to be less interested in the free checked bags from WN, further equalizing the two.

      1. Yep! Thanks Bill. And great point on the checked bags – these types of travelers are unlikely to need them (and they could just get the UA Chase Visa with free checked bags in any case). I also think it helps with SFO/UA vs. OAK/WN and IAD/UA vs. BWI/WN.

  10. @cranky : “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. ”

    are you still pretending to an unbiased blogger, or just be WN’s unofficial spokesperson at this point when endorsements like this quote of yours ?

    How convenient of you to only mention half of the equation and neglect the part where UA customers had very usable same-day free change inventory available (not the AA type where they promise you SDC and you never see any other than Tues 11pm westbound flight that lands at 3), at a reasonable price to general customers and free to many of the elites ….. comparing to WN asking for “just the fare difference”, but since it’s day-of-departure, for all practical purposes, that’s same as buying up to full-fare Y.

    I can’t believe how many times I’ve enjoyed that benefit, sometimes for my own timing convenience, but once in a blue moon even to get myself ahead of forecasted weather that’s all but IRROPS guaranteed. I wonder what WN customers do when they have to decide whether to pony up another $500/pp one-way just to avoid some dark clouds.

  11. Cranky, AA just dumped their fees and made the change to keep full value even is the new ticket costs less than original.

  12. A very nice, colorful email: “A note from our CEO Scott Kirby,” speaking about “big change,” “for good,” “for free,” on most,” “flexibility,” but ending, as everything does from UA: “Miscellaneous: Other restrictions may apply.”

    Wouldn’t be nice if the airline had simply said: “No change fees! Thank you. We wish you a pleasant trip!”

    But it’s an airline, and to maintain its status as one, certain “customs of the trade” must be followed, I guess!

    In UA’s plans for layoffs, any legal departments closing up, or lawyers being let go?

  13. The real losers are the ultra low cost carriers that will see every carrier competing more aggressively for the few domestic leisure passengers that are out there for months. No one will choose a ULCC if they can get the same price on another carrier that offers more space and more service.

  14. Correction of sorts – United is the only airline that does not give you the residual credit. But if you have to change or cancel your flight on United, ask for an electronic Travel Certificate, not a credit. Then you can use that for any future trip and keep the residual as a travel certificate balance.

    So get the certificate and then buy a new ticket once the certificate is issued.

      1. Where is that stated? They don’t want you to use an ETC and I have found they always want to give a credit unless you ASK. They never advertise it.

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