Domestic change fees disappeared so quickly and with such little resistance — except you, JetBlue — that I haven’t been able to stop thinking about this. The industry built change fees up to absurd heights over the last three decades, yet they fell in less than a week, at least with Alaska, American, Delta, Hawaiian, and United. There are undoubtedly several factors that went into the decision, and today I’m going to explore one of them. Let’s talk about Southwest Airlines — an airline that has never had change fees — and its impact.
When I was working for America West a couple decades ago, we were trying to figure out the right away to compete with the ever-growing Southwest threat. At one point, we decided to get rid of our change fees in key short-haul business markets like Phoenix – LA. I think I still have the pin with $0 on it somewhere in the garage.
This plan did not last for long. America West didn’t see the needle move enough to bother keeping the change, and so everything went back to normal. There were several issues with this test — including the very limited scope — but time and time again, airlines have resisted actually dropping change fees to match Southwest… until now.
What exactly has changed? I’d argue there are two things that have altered the landscape. One thing that we all know and hate — COVID-19 — changed the industry overnight. The other — Southwest’s size and influence — has changed slowly but surely year by year. And that’s where I’ll start.
Southwest Has Dramatically Increased Overlap with the Big Three
Once again, I turned to my old friend Cirium to help me decipher the data. We all know that Southwest has grown over the years, but there is an important nuance in this growth. Let’s start with a look at seat share within the lower 48 states over time.
For this look, I included all predecessor airlines. So American includes America West and US Airways, United includes Continental, Delta includes Northwest, and Southwest includes AirTran.
Back in 2004, Southwest had about 15 percent of the seats flying in the domestic US market. Soon after, Delta went bankrupt and cut capacity significantly. That meant Southwest’s share continued to grow. You can see more shifting around the Great Recession, but you can also see both American and United declining after their mergers. By the end of 2019, Southwest had increased its seat share to above 20 percent. , right in the same range as American and Delta.
Now, this might not look like a huge gain, but the key is understanding where the gains were made. Southwest moved into major metro areas quickly. It took over AirTran and got its place in Atlanta. It moved into LaGuardia, Newark, and Washington/National when the feds forced slot divestitures from the others. So, it’s really the overlap with each legacy airline that matters.
To look at this, I had to make some decisions. To get true overlap, you have to decide which airports can act as substitutes for the others. If I didn’t combine airports in, say, Chicago, Dallas, and Houston, then overlap would look artificially low. In the end, I settled on these as co-terminals:
- Chicago – Midway, O’Hare
- Dallas – DFW, Love Field
- Houston – Hobby, Intercontinental
- Los Angeles – LAX, Burbank, Long Beach, Ontario, Orange County
- Miami – MIA, Fort Lauderdale, West Palm Beach
- New York – JFK, LaGuardia, Newark
- San Francisco – SFO, Oakland, San Jose
- Washington, DC – Baltimore, Dulles, National
You can feel free to quibble with these all you like, but I decided these were true secondary airports to serve large markets. I didn’t include places like Manchester, Providence, or Islip, because those felt like poorer substitutes that never really caught on. Just look at Southwest’s network now and you’ll see those have shrunk dramatically because of their inadequacies.
I then put together head-to-head match-ups. United was the first to roll out the change fee cut, but American was working on it before United announced. That means these two both came to simliar conclusions, so that’s where I put my energy. Let’s start with American.
This may be a little confusing, so let me explain. The little gray columns are the percent of domestic routes American flies nonstop that Southwest also flies nonstop. Since American has more of a hub-and-spoke system, you would expect this to have less overlap on the route basis. Still, it nearly doubled between 2004 and 2019.
The red columns are the percent of domestic flights that American operates in markets where Southwest also flies nonstop. What this tells us is that Southwest overlaps with American in bigger markets where more flights exist. That’s not a surprise. Notice how much the gap widens between 2004 and 2019. Nearly half of American’s flights operate in markets where Southwest has nonstops.
Lastly, we have government data showing what percent of passengers that flew American within the lower 48 could have flown Southwest. This doesn’t take into account times or seasonality, but it does include connecting traffic. That’s why it’s so important from a base competitive standpoint.
In 2004, about half of American’s passengers could have opted to fly Southwest. By 2019, however, that number had soared to 80 percent. A mere 20 percent of American’s domestic passengers didn’t have a Southwest option, and those are going to primarily be in small to small-medium markets like, say, Harrisburg or Fresno, or something like that. There aren’t many mid-size or larger markets where Southwest doesn’t fly.
When I turned to United, the overlap was even greater.
Southwest has become a major network competitor that can compete for the vast majority of the legacy airline customers. From a business perspective, that had to push pressure on the legacy airlines to be more competitive with fees.
The Right Opportunity Presented Itself
The problem, of course, is finding a way to scrounge up the $2 billion in domestic change/cancel fees that the industry collected in 2019 from some other source. I don’t care how big your couch is… you aren’t going to find that much loose change. Then COVID-19 hit, and the pandemic created the perfect cover.
Overnight, airlines had no choice but to roll out change fee waivers to let people shift their plans. That meant change fee revenue dropped to zero as did, well, ok, pretty much all revenue dropped to zero, or close to it.
With no change fees in the market, airlines could do little tests to see if those who were traveling behaved any differently with change fees out of the market. There were people who had essential travel needs that kept flying, and of course, we saw people start flocking toward leisure destinations in June. So United and American could look to see if they were able to shift share. Unfortunately, that data isn’t out yet publicly, so we’ll have to wait. But I assume the airlines could start to make some justification for removing change fees based on what they were seeing.
Ultimately, however, the lack of change fee revenue made it an easier sell. Wall Street couldn’t destroy them for getting rid of a fee that wasn’t bringing in any money. Simply the expectation that changeability would hold an important role in travel decisions for the near to medium-term future meant that it was a justifiable move. And now, the deed has been done.
United said that it would have no fee “forever,” calling it a “permanent” move. I have trouble believing that. When attitudes start to change, and people begin to forget the horrors of the pandemic, behavior will shift too. Some airline will try to bring back change fees, and then we’ll see if it sticks this time around. If it does, I imagine it will be at a much lower level that won’t cause such high levels of anger. But we’re far from that day actually arriving.