Commercial Aviation: Information on Airline Fees for Optional Services
Published: 2017-09-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 2008, U.S passenger airlines have increasingly charged fees for optional services that were previously included in the price of a ticket, such as checked baggage or seat selection. Consumer advocates have raised questions about the transparency of these fees and their associated rules. In April 2011, DOT issued a final rule requiring, among other things, that certain U.S. and foreign airlines disclose information about optional service fees on their websites.
GAO was asked to review issues related to optional service fees in the U.S. aviation industry. This report describes: (1) how selected U.S. airlines have modified their offering and pricing of optional services since 2010, (2) the factors that selected U.S. airlines consider when determining whether and how much to charge for optional services, and (3) actions DOT has taken since 2010 to improve the transparency of optional service fees and views of selected aviation stakeholders about these actions.
GAO reviewed 2010 and 2017 airline data on optional services fees charged by the 11 largest U.S. passenger airlines; analyzed airline financial data from 2010 to 2016 reported to DOT; reviewed economic studies examining the effects of bag fees on fares; and reviewed applicable laws. GAO requested interviews with representatives of all the 11 selected U.S. airlines; 10 agreed to be interviewed and one airline declined. GAO also interviewed DOT officials, consumer advocates, and other aviation industry stakeholders. DOT reviewed a draft of this report and provided technical comments that GAO incorporated as appropriate.
section_title: What GAO Found
paragraphs: Since 2010, selected U.S. airlines have introduced a variety of new fees for optional services and increased some existing fees. For example, each of the 11 U.S. airlines that GAO examined introduced fees for “preferred” seating, which may include additional legroom or a seat closer to the front of the economy cabin. Some of these airlines have also introduced new fees for other optional services, such as fees for carry-on baggage and priority boarding. Since 2010, many of the selected airlines have also increased existing fees for some optional services, including fees for checked baggage and for changing or cancelling a reservation. From 2010 to 2016, U.S. airlines' revenues from these two fees—the only optional service fees for which revenues are separately reported to the Department of Transportation (DOT)—increased from $6.3 billion in 2010 to $7.1 billion in 2016 (in constant 2016 dollars).
Airline officials cited competition from other airlines and customer demand, among other things, as factors they consider when deciding whether and how much to charge for optional services. According to officials from 9 of the 10 selected airlines GAO interviewed, the process of “unbundling” allows passengers to customize their flight by paying for only the services that they value. Airline officials said that charging fees for optional services allows the airlines to offer lower base airfares to customers. For customers traveling with bags, however, GAO's review of airline-related economic literature showed that on average customers who paid for at least one checked bag paid more in total for the airfare and bag fees than they did when airfares included checked baggage. Officials from the 10 airlines said they also consider customer demand and willingness to pay when setting prices for optional services, and officials from 8 of these airlines noted that competitors' prices for similar services are another factor used in determining the amount of fees.
Since 2010, DOT has taken or has proposed a range of actions to improve the transparency of airlines' fees for optional services. These actions include: (1) monitoring and enforcing airlines' compliance with existing transparency regulations; (2) collecting, reviewing, and responding to consumers' complaints; (3) collecting additional data on revenue generated from fees; and (4) educating airlines and consumers about existing regulations and consumer rights related to optional service fees. Consumer and industry stakeholders, such as online travel agents' representatives, told GAO that DOT's regulations requiring certain airlines to disclose optional service fees on their websites have improved consumer transparency. However, these stakeholders also told GAO that there are additional transparency challenges, such as when consumers search for and book flights through online travel agents. Because optional services are not always available for purchase and because fees for such services are not always disclosed through online travel agents, these stakeholders argue that consumers are not always able to determine the full cost of their travel and compare costs across airlines before they purchase their tickets. While transparency challenges still exist, DOT has ongoing regulatory proceedings, some in response to prior GAO recommendations that may resolve some of these issues.

section_title: Letter
paragraphs: Since 2008, U.S. passenger airlines have increasingly “unbundled”  optional services, charging fees for a variety of services that were  previously included in the price of the ticket. For example, optional service  fees can include charges for such things as checked bags, early  boarding, seat selection, meals, or other amenities. In addition to these  services that were previously included in the ticket price, the airline  industry has long charged fees for other optional services, such as  unaccompanied minors, or changing or canceling a reservation. Optional  service fees are an important source of revenue for airlines. According to  the Department of Transportation’s (DOT) Bureau of Transportation  Statistics (BTS), from 2010 to 2016, U.S. airlines generated more than  $44 billion in revenues from baggage fees, reservation-change fees and  cancellation fees alone. Over the same period, the number of passengers  traveling on U.S. airlines increased by 14 percent.
With airlines’ increased practice of charging fees for optional services,  consumer advocacy groups have raised concerns about the lack of  transparency regarding optional service fees and the full price of airline  tickets. In July 2010, we reported that information about airlines’ optional  service fees and their associated rules are not fully disclosed to  consumers, making it difficult for consumers to compare the total cost of  flights across different airlines. We made four recommendations to DOT  to improve the transparency of information on airline-imposed fees,  including that DOT require airlines to disclose certain airline-imposed  optional service fees, and disclose applicable government-imposed fees  that may be eligible for refunds on unused nonrefundable tickets. DOT  has implemented both of these recommendations but has not yet  implemented our recommendations to require airlines to disclose  baggage fees and policies along with fare information across all sales  channels used by the airline, and to separately report to DOT the  revenues from all optional service fees paid by passengers. However,  DOT has initiated several rulemakings that may address these open  recommendations.
You asked us to review issues related to optional service fees in the U.S.  aviation industry. This report describes: (1) how selected U.S. airlines  have modified their offering and pricing of optional services since 2010;  (2) the factors that selected U.S. airlines consider when determining  whether and how much to charge for optional services; and (3) the  actions DOT has taken since 2010 to improve the transparency of  optional service fees and views of selected aviation stakeholders about  these actions.
To determine how U.S. airlines have modified their offering and pricing of  optional services, we selected the 11 largest U.S. passenger airlines (in  terms of reported revenue and number of passengers) that fly under their  own brand. These airlines transported over 80 percent of U.S. domestic  passengers in 2016. We obtained 2010 and 2017 airline data and  analyzed how these fees have changed since 2010. Specifically, we took  screen captures of airlines’ webpages listing optional services and fees  on March 31 and April 1, 2017. We then compared this information to the  2010 optional services and fee information that we collected as part of our  2010 review of airline fees. We requested interviews with representatives  of all the 11 selected U.S. airlines; 10 airlines agreed to be interviewed  and one airline declined. We interviewed these airline officials about their  optional service fees and bundled fare products introduced since 2010  and obtained related documentation. We obtained 2010 through 2016  data from BTS on airlines’ revenues from baggage and reservation  change and cancellation fees and analyzed how this revenue has  changed since 2010. We determined that these data were sufficiently  reliable to report on airlines’ revenues from baggage and reservation- change fees since 2010 by reviewing quality control documentation and  interviewing BTS officials. We also reviewed available economics  literature on the extent to which baggage fees, introduced by U.S. airlines  around 2008, affected ticket prices.
To determine the main factors that airlines consider when determining  whether and how much to charge for optional services, we asked  representatives from the 10 airlines that agreed to be interviewed about  the factors their airline considers when deciding to charge separately for  an optional service. To determine what actions DOT has taken since  2010 to improve the transparency of optional service fees, we reviewed  DOT regulations and proposed rules, along with DOT policies, directives,  guidance, and other documentation related to monitoring, investigating,  and enforcing airline compliance with optional service fee regulations. We  interviewed DOT officials and selected aviation stakeholders—including  three airline trade associations, four consumer groups, and six other  industry stakeholders—about DOT’s actions. We interviewed BTS  officials about their guidance and process for collecting optional service  revenue data from airlines. We also discussed DOT’s actions and BTS’s  data collection with officials from the 10 selected airlines that agreed to be  interviewed. In addition, we examined the “contract-of-carriage”  documents from all 11 selected U.S. airlines.
Last, we obtained documents and interviewed officials from four selected  foreign governments (the European Union, Canada, the United Kingdom,  and Malaysia) that have taken actions to improve consumer transparency  related to airline fees; information from these interviews is presented in  appendix I. All information regarding foreign laws, regulations, and cases  is based on responses by the applicable foreign officials to interview  questions. More detailed information on our scope and methodology is  presented in appendix II, including a list of the selected aviation  stakeholders we interviewed and specific information about how we  selected the stakeholders, airlines, and foreign governments for our  review.
We conducted this performance audit from November 2016 to September  2017 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: In recent years, airlines have increasingly charged fees for optional  services. Since the U.S. airline industry was deregulated in 1978, the  industry’s earnings have been volatile. In calendar years 2008 and 2009,  the U.S. passenger airline industry incurred nearly $4.4 billion in  operating losses, due largely to high jet fuel prices—airlines’ biggest  operating expense in 2008—combined with a severe economic downturn  that reduced passenger traffic. In response to these and other economic  challenges, airlines began in 2008 to “unbundle” optional services from  the base ticket price, thereby charging separate fees for services that  were previously included in the ticket price. Revenues from fees for  optional services continue to grow. In fiscal year 2016, airlines reported  $200 billion in revenue, about $7.1 billion of it from the two optional  services fees for which revenues are separately reported to DOT—$4.2  billion in baggage fee revenue and $2.9 billion from fees for changing  reservations.
The passenger airline industry is primarily composed of network (or  “legacy”), low-cost, and regional airlines. Network airlines were in  operation before the Airline Deregulation Act of 1978 and support large,  complex hub-and-spoke operations with thousands of employees and  hundreds of aircraft. These airlines provide service at various fare levels  to a wide variety of domestic and international destinations. Low-cost  airlines generally entered the market after deregulation and tend to  operate less costly “point-to-point” service using fewer types of aircraft.  Regional airlines generally employ much smaller aircraft (up to 100 seats)  and provide service under “code-sharing” arrangements with larger  network airlines for which they are paid on a cost-plus or fee-for- departure basis to provide network capacity. Both network and low-cost  airlines charge fees for a variety of optional services. Regional airlines  may also charge optional fees, such as baggage fees; however, those  fees are generally determined by the network airline in the code-sharing  partner agreement. While charges for some services—such as  unaccompanied minors, reservation changes or cancellations, and  oversized or overweight baggage—have existed in the airline industry for  many years, other services, such as wireless internet access and on- demand entertainment access, are new. See figure 1 for examples of  optional service fees.
Some optional services can be purchased in advance when booking  airline tickets. For example, customers can purchase optional services  when booking tickets directly from the airline (i.e., from the airline’s  website, by calling the airline’s call center, or from the airline’s ticket  counter at the airport). Customers who purchase tickets from third parties,  such as online travel agents (e.g., Priceline or Expedia) and traditional or  corporate travel agents, may also have the option to purchase some  optional services when booking tickets, but this option varies depending  on the airline and third party. Customers may also obtain some  information about flight schedules, fares, and some optional services from  metasearch companies (e.g., Google or Kayak); however, the information  on optional services available through these websites varies. Generally,  online travel agencies, traditional or corporate travel agents, and  metasearch companies obtain airfare and optional service fee information  from global distribution systems, which are companies that package  airline information so that travel agents can query and “book” (i.e.,  reserve and purchase) flights for airline customers.
DOT has authority to investigate whether a U.S. air carrier, foreign air  carrier, or ticket agent has been, or is engaged, in an unfair or deceptive  practice or an unfair method of competition in air transportation or the  sale of air transportation. Upon finding that a U.S. air carrier, foreign air  carrier, or ticket agent is engaged in such a practice or method, DOT has  the authority to order the regulated entity to stop the practice or method.  Under this authority, in April 2011, DOT issued “Consumer Rule 2” which  included several provisions related to increasing the transparency of  airfares and optional service fees for consumers. This rule—which  became completely in effect in January 2012—requires, among other  things, that certain U.S. and foreign air carriers disclose information about  their optional service fees on their websites and refund passengers’  baggage fees if their bags are lost. The transparency regulations that  went into effect after the issuance of Consumer Rule 2 are summarized in  table 1.
DOT’s Office of Aviation Enforcement and Proceedings (OAEP), and its  Aviation Consumer Protection Division (ACPD), monitor and enforce  airline compliance with economic regulations, such as advertising  requirements related to the disclosure of airline fares and optional service  fees, among others. Consumers may file air-transportation-related  complaints with DOT. Consumers may also file air-transportation-related  complaints with airlines, and airlines are required to acknowledge and  respond to each complaint. Additionally, DOT may require airlines to file  reports and keep records. DOT is authorized to inspect regulated  entities’ records and collect transportation information from regulated  entities. DOT may assess civil penalties against airlines for violating the  statute prohibiting unfair and deceptive practices and unfair methods of  competition, and any regulations promulgated under that authority.
section_title: Selected Airlines Have Continued to Introduce New Fees for Optional Services since 2010, while Increasing the Price of Some Existing Fees
paragraphs: Since 2010, U.S. airlines have introduced a variety of new optional- service fees and bundled products and increased the price of some  existing fees. Some fees for optional services, like first and second  checked bag fees on network airlines, have not changed considerably  since 2010. However, some airlines increased other fees, such as fees  for overweight and oversized bags and reservation changes and  cancellations. According to DOT data, from 2010 to 2016, airline  revenues from baggage fees and reservation-change and cancellation  fees increased as did the number of passengers.
subsections: section_title: U.S. Airlines Have Introduced New Fees and Products for Optional Services since 2010
paragraphs: Several U.S. airlines have introduced new fees since 2010 for services  that used to be included in the ticket price, notably “preferred” seats within  the economy cabin. For example, several network airlines—including  Alaska, American, and Delta—created fees for upgrading to preferred  seats, which are more desirable seats in the economy cabin of the  aircraft, such as those located in an exit row, toward the front of the  aircraft or with additional legroom. Preferred seats may also include  priority boarding or food and beverages, depending on the airline. The  characteristics of preferred seats differ among airlines, even when the  products’ names sound similar. For example, both American and  Hawaiian have a product called Preferred Seating, but American’s  product refers to standard legroom in more favorable locations, whereas  Hawaiian’s product refers to more legroom and priority boarding, among  other things. In addition, some airlines offer more than one type of  preferred seat. For example, in addition to its Preferred Seating product,  American also offers a product called Main Cabin Extra, which includes  additional legroom and priority boarding. As of July 2010, Frontier,  JetBlue, and Spirit had already instituted fees for preferred seats, and  Allegiant started offering preferred seats to its passengers in 2014.  Southwest, however, does not have any assigned seating and therefore  does not sell preferred seating. Instead, Southwest allows some  customers to pay for early boarding, which increases the customer’s  ability to select a desired seat. Table 2 shows airlines’ different  approaches to charging fees for preferred seating.
The pricing of preferred seats is not always apparent to customers on  airlines’ websites, unless the customer selects or begins to book a  specific flight. For example, some airlines, like Spirit and United, specify  the range of prices, which may vary based on the route. Other airlines,  like Alaska and Frontier, provide the minimum possible price but do not  specify the maximum a customer might pay for the preferred seat. One of  the selected airlines in our review, Delta, did not have preferred-seating  prices available to customers browsing the website. All of the selected  airlines provide detailed pricing on preferred seats if the customer selects  or begins to book a specific flight.
From 2010 to 2017, U.S. airlines introduced other new fees such as fees  for carry-on bags, beverages, wireless internet access, and priority  boarding. For example, three low-cost airlines implemented new fees for  carry-on bags. Spirit introduced a fee for bringing a large bag into the  cabin in 2010, as did Allegiant in 2012 and Frontier in 2013. None of the  network airlines currently charge for carry-on bags. Allegiant and Frontier  also began to charge customers for non-alcoholic beverages in 2012 and  2013, respectively, while Spirit already charged for these products. Since  2010, some U.S. airlines began charging for services that were not  previously available. For example, Southwest first offered and charged for  wireless internet access in 2011, and JetBlue began charging for  expedited security screening and early boarding in 2011.
While some customers are electing to pay extra for optional services,  others are purchasing tickets that are priced lower and include optional  service restrictions. For example, since 2015, American, Delta, and  United have introduced Basic Economy fares. Passengers choosing to  purchase Basic Economy tickets are assigned seats after checking in,  meaning that they might not be seated with the rest of their travel group;  board the aircraft last; cannot upgrade seats or class of service; and  cannot change their flights. In addition, American and United Basic  Economy passengers may not stow belongings in overhead  compartments and are limited to one carry-on bag that fits under the seat  in front of them.
In yet another purchasing option, since 2010 several U.S. airlines have  introduced packages of optional services that are sold together as a  bundle instead of individually and can be purchased on top of or along  with the base fare. The contents of these bundles vary greatly among  airlines. For example, Frontier has two packages that include carry-on  and checked bags, seat selection, and priority boarding; one of the  packages also allows customers to change or cancel their tickets for full  refunds. Other airlines’ bundles include the base ticket as well as other  optional services, such as JetBlue’s “Blue Plus” that adds one checked  bag to the basic fare. On some airlines, bundled packages also overlap  with preferred seating; for example, on Hawaiian, an Extra Comfort seat  provides a seat with additional legroom, priority boarding and security  screening, entertainment pack, and the use of a pillow and a blanket.  Figure 2 illustrates different ways that airline passengers can elect to  purchase optional services, depending on the airline.
section_title: Network Airlines Have Generally Not Increased Baggage Fees, but Some Fees for Other Optional Services Have Increased since 2010
paragraphs: From 2010 to 2017, fees for first and second checked bags on U.S.  network airlines generally remained unchanged, while low-cost airlines  generally increased these fees (see table 3). Among the five network  airlines in our selection, only Alaska increased its first bag fee—from $20  to $25, which is the same price charged by other network airlines. Delta  and Hawaiian did not increase their fee for first and second checked  bags; however, they eliminated a $3 discount that was previously  available for paying bag fees online in advance of a flight. Among low- cost U.S. airlines with which we spoke, Allegiant, Frontier, and Spirit each  increased the fee range for the first and second checked bags from 2010  to 2017. These three airlines charge varying baggage fees based on  when the passenger pays the fee; specifically, paying a bag fee online  and in advance of the flight is less expensive than paying the bag fee at  the airport on the day of travel. Southwest does not charge for a first or  second checked bag, opting to use “bags fly free” as part of its marketing  strategy.
Fees for other optional services—namely, fees for overweight and  oversized bags, reservation changes and cancellations, and  unaccompanied minors—generally increased from 2010 to 2017 on both  network and low-cost U.S. airlines, as shown in table 3. Notably, roughly  half of the airlines in our selection increased the overweight bag and  unaccompanied minor fees, while a majority of the airlines in our selection  increased reservation change or cancellation fees. Specifically, from 2010  to 2017, 7 of the 11 selected airlines increased their fees for checking  overweight bags. In 2010, overweight bag fees ranged from $50 to $175,  and in 2017, they ranged from $30 to $200. In addition, 6 of the selected  airlines increased oversized bag fees, while the rest of the selected  airlines either narrowed the cost of checking an oversized bag (e.g., Delta  charged from $175 to $300 in 2010, but later switched to a flat $200 fee)  or did not change the fees. In 2010, oversized bag fees ranged from  $35 to $300, and in 2017, they ranged from $75 to $200. Six of the 10  selected airlines that charged reservation change and cancellation fees  increased those fees from 2010 to 2017. (Southwest does not charge a  reservation change or cancellation fee.) In 2010, the selected airlines  charged from $50 to $150 to change or cancel a domestic reservation; in  2017, this fee ranged from $50 to $200. Five of the 11 airlines increased  unaccompanied minor fees.
section_title: Total Revenue from Fees Increased as the Number of Passengers Also Increased
paragraphs: According to airline financial data submitted to BTS, U.S. airline revenues  from baggage fees and reservation change and cancellation fees—the  only fees for which revenues are separately reported—increased from a  total of $6.3 billion in 2010 to $7.1 billion in 2016 in constant 2016 dollars.  Specifically, revenues from baggage fees rose from $3.7 billion in 2010 to  $4.2 billion in 2016 in constant 2016 dollars, an increase of nearly 12  percent. Similarly, revenues from reservation change and cancellation  fees increased from $2.5 billion in 2010 to $2.9 billion in 2016 in constant  2016 dollars, an increase of more than 14 percent. Combined revenue  from bag and reservation change and cancellation fees made up 3.3  percent of airlines’ operating revenues in 2010 and 3.5 percent of  operating revenues in 2016.
While revenue from baggage and reservation change and cancellation  fees has increased, so has the number of passengers traveling on U.S.  airlines. From 2010 to 2016, the number of passenger enplanements and  the revenue from these optional services increased at similar rates. As  discussed earlier, total enplanements on U.S. airlines increased by about  14 percent, from about 721 million in 2010 to 825 million in 2016. It is  worth noting that, unlike the revenues from domestic airfares, revenues  from most optional service fees are not subject to the excise tax that  helps fund the Airport and Airway Trust Fund, which partially supports the  Federal Aviation Administration and the operation of the air traffic control  system. This issue was discussed in depth in our 2010 report and  remains relevant as the amount of airline revenue generated by optional  service fees increases.
section_title: Selected Airlines Consider Competition and Customer Demand Among other Factors When Making Decisions About Optional Services
subsections: section_title: Airlines Said That They Charge Separately for Optional Services to Compete with Other Airlines and Respond to Customer Demand
paragraphs: Airline officials said that airlines charge separately for optional services to  better compete with other airlines. Officials from 9 of the 10 airlines with  whom we spoke said that selling optional services separately from the  base fare allows airlines to reduce the base ticket price. One airline  official explained that customers make purchasing decisions based  primarily on the base ticket price—the cost of flying from one point to  another. According to this airline official, lowering the base fare therefore  helps an airline compete with other airlines. Some airline officials cited  other ways in which unbundling can lower ticket prices. For example, one  airline official said that baggage fees have prompted customers to travel  with fewer bags or no bags. As a result, the plane weighs less, which  reduces fuel costs and, in turn, can allow the airline to reduce the base  ticket price. Four other airline officials said that the lower base fares  resulting from unbundling optional services have made flying more  affordable to more people, thereby increasing the number of people who  decide to travel by air.
Officials from two airlines said that airfares have decreased over time,  and an official from Airlines for America (A4A)—the U.S. airline trade  association—cited BTS data during a May 2017 congressional hearing to  show that consumers are paying less for airfare than they had previously;  however, these data have some limitations. Data compiled by BTS  indicate that the average domestic airfare decreased from $370 in 2010  to $349 in 2016 in constant 2016 dollars, a decrease of 5.6 percent. But,  the fares include only base fares plus applicable government taxes and  do not include all optional service fees. As a result, they do not represent  the total amount that some customers may be paying to travel. In  addition, according to DOT officials, DOT does not weight one-way tickets  differently than round-trip tickets when calculating the average fares. DOT  officials told us that customers are more likely to purchase one-way  tickets now than they were 10 years ago because airlines no longer  charge a premium for one-way tickets. As a result, a higher share of one- way tickets would result in lower average fares. Lastly, it is difficult to  determine all the factors that could have caused this decrease in airfare,  as several economy-wide changes, including those in energy prices,  affect fares.
However, some studies have examined the effect bag fees may have had  on ticket prices. To examine this issue, we conducted an economic  literature search for any published, peer-reviewed studies that examined  the introduction of bag fees by U.S. airlines and the effect on fare prices.  The three studies that met our criteria (as described in appendix II) found  that although the introduction of bag fees may have led to a decrease in  average fares, the total price paid by customers who checked a bag may  not have decreased on average. Specifically, these studies found that  charging separately for bags reduced fares by less than the new bag fee  itself. As a result, customers who paid for checked bags paid more on  average for the combined airfare and bag fee than when the airfare and  bag fee were bundled together. Conversely, passengers who did not  check bags paid less overall. The results of these three studies are  summarized below.
The authors of a 2012 study measured the impact of baggage fees on  airline fares using DOT data from 2006 to 2009. They noted that  airlines introduced bag fees to generate additional revenues without  increasing fares, which would adversely affect demand. They found  that for an airline charging a bag fee, a one-dollar increase in those  fees resulted in a $0.24 decrease in fares, which means that a  passenger checking one bag, would pay $0.76 more on these airlines.  According to the authors, these results imply that airlines with bag  fees lower fares to appear more competitive and then make up the  lost revenue when passengers pay to check bags.
In a 2015 study, the authors analyzed DOT quarterly data from 2008  to 2009 and found that adoption of a bag fee resulted in about a 3  percent reduction in average airfares. Analyzing non-stop flights and  those with connections separately, they found that a bag fee led to a  2.7 percent and a 2.4 percent average-fare reduction for non-stop and  connecting flights, respectively. The authors pointed out that, since  these declines translated into an amount that was less than the bag  fee, on average the combined total of the fare and bag fee  increased. However, according to the authors, the decline could be  greater than the bag fee for some passengers because the decline in  average fare varies with route characteristics.
In another 2015 study, the authors studied a sample of U.S. domestic  routes over the period 2007–2010, which covers the period when bag  fees were first introduced (in 2008) and when many carriers increased  bag fees (in 2010). To analyze the effect of bag fees on passenger  demand and fares, the authors focused on a set of domestic airport- to-airport routes where passengers could choose between airlines  that charged fees for checked baggage and Southwest, which allowed  passengers one or two “free” checked bags. The authors found that a  one-dollar increase in bag fees led to an $0.11 reduction in fares and  a loss of 0.6 passengers. On the other hand, they found that a one- dollar fare increase resulted in a loss of seven passengers. Thus, they  determined that bag fees allowed airlines to increase their revenues  with a much lower reduction in passenger demand than a fare  increase. Finally, their evidence suggests that there is an overall  increase in total fares for passengers checking bags.
Airline officials also said they charge separately for optional services to  meet the needs of their customers. According to officials from 9 of the 10  selected airlines we interviewed, unbundling allows passengers to  customize their flights by paying for only the services that they value—a  benefit that one official cited as the overriding impetus for unbundling.  That official described unbundling as an effort to make the airline’s entire  product line of services available to customers and provide passengers  with the ability to tailor their travel experience. Similarly, another airline  official explained that they aim to cater to a broad range of customers and  unbundling allows passengers to decide on the price and service level  that is right for them.
section_title: Airlines Cited Many Factors That Affect How They Price Optional Services
paragraphs: Airline officials from the 10 U.S. airlines that we interviewed cited various  factors that contribute to their decisions about how to price optional  services.
Customer demand and willingness to pay: Officials from all 10  airlines that we interviewed said that customer demand and the price  that customers are willing to pay for an optional service are important  factors in pricing an optional service. Customers’ willingness to pay  varies. Hence, when the price rises, some consumers who are not  willing to pay a higher price stop purchasing, resulting in some loss of  demand. Higher prices may thus result in higher or lower revenue  depending on the extent to which the demand is reduced. For  example, one airline official described how the airline would consider  increasing the price for a preferred seat if the demand were high  enough, indicating that there may be some customers willing to pay  more for a preferred seat. An official from a different airline said that it  conducts market testing to determine what optional services  customers are interested in, and it may test products at different  prices to determine the optimal price.
Competitors’ prices for similar services: Officials from 8 of the 10  airlines that we interviewed said that they consider competitors’  pricing for similar services when they set fees for optional services, to  ensure that their own product is priced competitively. One airline  official said that because commercial aviation is a highly competitive  industry, the official’s company closely monitors the market and  makes adjustments to the price of services, as needed. Industry  stakeholders with whom we spoke, as well as consumer advocates,  believed that competition is a key factor in how airlines set fees for  optional services.
Customer service and satisfaction: Officials from 5 of the 10  airlines we interviewed said that customer service and satisfaction are  factors in how they set prices. Officials from one airline stated that  they try to keep optional service fees relatively low to prevent  passengers from feeling overcharged. In at least one case, an airline  official told us that this airline sets the price of one type of fee to  prevent too many people from purchasing the service. For example,  this airline official told us they set the price for wireless internet access  high enough so that relatively few passengers will pay for it because  too many users can affect the speed and quality of the service.  Officials from 6 airlines said that they conduct customer surveys and  adjust the price of optional services based on survey feedback.
Cost: Officials from 3 of the 10 airlines that we interviewed said that  the airlines’ cost to deliver a service is a major factor in how they  charge for that service. One of these officials said that this airline  conducts a business case analysis when developing a new product to  ensure that the revenues from the new optional service exceed its  cost. Officials from 3 additional airlines cited cost as a minor factor.  Officials from 2 of these airlines said they incorporate cost into  optional service pricing only for products for which cost is relatively  easy to measure, such as food and beverages. Conversely, officials  from 4 airlines did not cite cost as a factor in pricing optional services.
Even airline officials who said that cost factors into their pricing  decisions highlighted the complexity of calculating the precise cost of  delivering many services. For example, one airline official explained  that calculating the cost of cancelling a reservation requires  consideration of the cost of the reservation system, corporate  overhead, and possibly opportunity costs if the seat could not be re- sold. Another official from the same airline said that they closely track  costs but do not necessarily have the ability to assign a specific cost  to the provision of an optional service. This comment was echoed by  several airline officials who said that calculating the cost of checking  baggage, for example, requires consideration of a multitude of factors,  including labor, ground infrastructure, and fuel costs.
In addition, one airline official said that the airline does not always  incur costs when offering some optional services, for example  allowing a passenger to select a seat in a preferred location, such as  a window seat or toward the front of a cabin, but the airline will sell the  service because customers value it enough to pay for it. Industry  stakeholders echoed the view that the cost of delivering optional  services plays a minimal role in airlines’ pricing decision of optional  services. One industry stakeholder we spoke with agreed and stated  that the competitors’ prices and what customers are willing to pay are  more important factors in how airlines set prices for optional services  than the cost of delivering a product; this stakeholder said that the  pricing of optional services is ultimately based on what will deliver the  most revenue to the airline.
section_title: DOT Has Made Progress in Increasing Transparency of Optional Service Fees, but Consumer and Industry Groups Raised Some Challenges
subsections: section_title: DOT Has Monitored and Enforced Compliance with Transparency Regulations, Collected Consumer Complaints, and Provided Guidance and Information to Airlines and Consumers
paragraphs: DOT has taken a range of actions to improve transparency of U.S. airline  fees for optional services since 2010, as described below.
subsections: section_title: Monitoring and Enforcing Compliance with Transparency Regulations
paragraphs: DOT conducts different compliance inspections of U.S. airlines to monitor  compliance with its regulations on a variety of consumer traveler issues,  including issues related to transparency of optional service fees.
Since 2012, DOT has completed 19 compliance inspections of U.S.  and foreign airlines according to documentation the department  provided to us. DOT inspections are conducted on an ongoing basis,  and according to DOT officials, have included repeated inspections of  certain U.S. airlines that account for a significant percentage of U.S.  enplanements. As part of these inspections, DOT inspectors review  records onsite at airlines’ headquarters as well as information on  airlines’ websites. As part of the website review, DOT verifies, among  other things, that the website provides adequate information about  optional service fees, that consumers are provided an opportunity to  knowingly and voluntarily “opt-in” to purchase optional services, and  that the airline posts its current contract of carriage on its website in  an easily accessible form per DOT regulations.
DOT also conducts additional targeted inspections to specifically  assess airlines’ compliance with DOT’s consumer transparency  regulations. For example, according to DOT documentation and  officials, in 2012 DOT inspected 113 websites of U.S airlines, foreign  airlines, and ticket agents (websites that were marketed to U.S.  consumers) to monitor compliance with specific provisions of the 2011  Consumer Rule 2. DOT found that most of the websites generally  complied with Consumer Rule 2 provisions; however, 10 airlines and  1 ticket agent faced enforcement actions for violations.
According to DOT officials, the department documents any violations  identified during inspections and contacts the airline to correct the  violation. If the violation is long-standing and severe, DOT may take  enforcement action, including imposing civil penalties.
In other instances, airlines may receive a warning that enforcement action  may be taken in the future if the violations are not corrected. According to  DOT officials, in 2016, DOT issued 22 consent orders against airlines  related to aviation consumer rule violations and assessed $5,955,000 in  civil penalties.
section_title: Collecting, Reviewing, and Responding to Consumer Complaints
paragraphs: DOT also analyzes and investigates passenger complaints about optional  service fees that it receives via its website, mail, and telephone hotline.  In 2014, DOT established a separate complaint category for optional  service fees and began tracking the number of these complaints. DOT  receives fewer complaints related to optional service fees than other  topics, according to DOT officials. For example, DOT officials told us that  they received in 2016, a total of 17,904 complaints of which 862—about 5  percent—were regarding airline fees for optional services. According to  DOT officials, the two largest complaint categories that DOT receives are  regarding flight problems (e.g., delayed flights) and baggage problems  (e.g., lost or damaged bags). We requested and reviewed a selection of  2016 complaints related to optional service fees and found that  complaints included concerns that fees for changing or cancelling  reservations, transporting bags, and selecting seats were too high or that  information about these fees was not transparent or fully disclosed to the  customer.
DOT analyzes passenger complaint data to identify trends and investigate  possible violations of DOT regulations. According to DOT officials, under  DOT’s process for handling complaints, when a complaint is received, a  DOT official will review and categorize the information by type of  complaint. DOT reviews the complaint to see whether a regulation applies  and, regardless whether it does, forwards all complaints to the applicable  airline for the airline to respond to the consumer. Airlines are required to  acknowledge each complaint within 30 days of receipt and provide a  substantive written response to each complainant within 60 days of  receipt. After receiving and reviewing the complaint, if DOT determines  the airline is in fact violating a regulation, DOT will ask for a copy of the  airline’s correspondence with the complainant. According to DOT officials,  airlines generally respond to these requests in a timely fashion. A  consumer complaint regarding compliance issues with an existing  regulation can trigger an investigation in which DOT looks for egregious  or repeated violations; a pattern of violations can lead to enforcement  action. For example, in 2016, DOT issued a consent order against  VivaAerobus, a foreign airline, after DOT found that the airline was not  disclosing baggage and other optional service fees in accordance with  regulations. The airline was fined $150,000 in civil penalties.
section_title: Collecting Data on Revenue Generated from Fees
paragraphs: DOT requires that U.S. airlines report revenues from optional service fees  to BTS, which helps increase transparency regarding the amount of  revenues generated from these fees. Currently, U.S. airlines are required  to report this revenue in one of four separate accounts: baggage fees,  reservation change and cancellation fees, other transport-related fees,  and miscellaneous fees. Because revenues from baggage fees and  reservation change and cancellation fees have their own accounts, the  revenues from these particular fees can be tracked. However, according  to DOT documentation, revenues from other optional service fees are  reported either in the transport-related or miscellaneous fees accounts,  which include revenue from optional services as well as from other  sources. For example, according to DOT guidance, the transport-related  revenue category includes not only revenue from all onboard sales (such  as, food, drink, entertainment, and wireless internet access) but also  revenue from fuel or airplane parts sold to other airlines. Similarly,  according to DOT’s guidance, the miscellaneous category includes, for  example, revenue for transporting unaccompanied minors and pets, as  well as revenue from sales of miles to airlines, credit card companies,  hotels, rental cars, or other business partners that are frequent flyer  partners. From 2010 to 2016, revenue for the transport-related account  increased by 10 percent, from $36.5 billion to $40.1 billion in constant  2016 dollars. At the same time, revenue from the miscellaneous account  increased by 87 percent, from $3.3 billion to $6.2 billion in constant 2016  dollars; this 87 percent increase was the largest increase of all four  accounts. Over the same years, U.S. airlines’ total operating revenues  increased from $192.3 billion to $200.4 billion in constant 2016 dollars.  Because the DOT data do not separate the revenue reported from  optional service fees from the other types of revenues that are reported in  the transport-related and miscellaneous fees accounts, we could not  determine how much of the total revenue reported in these accounts  should be attributed to optional service fees.
In 2010, we reported on this issue and stated that without complete data it  is difficult for policy makers and regulators to determine total revenues  from optional service fees and the fees’ effect on the industry. We  concluded that without collecting revenue from optional service fees in a  separate account, it was difficult to determine the amount of total optional  service fee revenues that airlines collect. We recommended that DOT  require airlines to report all optional service fees paid by passengers  related to their trip into a separate category, exclusive of baggage fees  and reservation change and cancellation fees (for which separate  categories already exist). Citing our recommendation, DOT initiated a  rulemaking in 2011 that proposed requiring airlines to report optional  service fee revenues in 23 separate categories. However, the final rule  has not yet been published and DOT has not taken any recent action on  this rulemaking. According to DOT officials, DOT rulemakings are  currently being evaluated in accordance with Executive Orders 13771  and 13777; thus, the schedules for many ongoing rulemakings are still  to be determined.
In our 2010 review we also found differences in how airlines report some  optional services fee revenues. More specifically, in 2010, we found that  airlines were reporting revenues from the same optional service fees into  different accounts. Based on responses from our selected airlines, this  issue persists. For example, we found that some airlines accounted for  revenues from unaccompanied minor fees as transport-related revenue  while others reported them as miscellaneous operating revenue, and two  airlines reported fees for unaccompanied minors as revenue from  reservation cancellation fees. We also found differences in how airlines  reported revenue from preferred seating, upgraded seats, seat selection,  and priority security screening. In some cases, we found airlines reported  fees inaccurately despite guidance, and in others, it was not clear from  DOT’s guidance how certain fees should be categorized. DOT’s guidance  has not been updated since 2009, and according to officials, there are no  current plans to do so. As previously discussed, since 2010 airlines have  introduced a number of new fees and products for optional services, and  determining how to report revenue from these fees into the existing four  accounts may not be clear. However, even if DOT were to revise its  guidance and provide more detailed information on how to categorize  different fees, it would still not be possible to understand how much  revenue is generated just from optional service fees because airlines  would still be required to report this information in accounts that include  revenue from other non-fee sources. Implementation of our 2010  recommendation that DOT require airlines to report all optional service  fees, exclusive of baggage fees and reservation-change and cancellation  fees, into a separate category would provide airlines with a clearer  understanding of how to report revenue from specific optional service  fees and provide the missing data on how much revenue is generated  from optional service fees.
section_title: Educating Airlines and Consumers
paragraphs: DOT has taken several actions to educate airlines and consumers about  existing regulations and consumer rights related to optional service fees,  for example:  In 2011, after the issuance of Consumer Rule 2, DOT conducted  informational sessions with the airlines about the requirements of the  new regulations. Additionally, DOT developed and issued guidance  that provided answers to frequently asked questions regarding the  new regulations.
DOT provides consumers with information about their rights related to  optional services through various publications available on its website.  For example, DOT publishes “Fly Rights: A Consumer Guide to Air  Travel” which provides information on a range of topics including  airline fees, general refund policies, and information about DOT  regulations.
DOT has a webpage, “Air Travel Tips,” where it publishes a collection  of tips and information to help airline passengers. These airline tips  cover a wide range of topics, including information on how to file a  complaint, DOT’s 24-hour refund policy, and airline fees.
DOT also publishes a monthly “Air Travel Consumer Report.” This  report provides consumers with information on a range of topics, such  as information about aviation consumer complaints filed with DOT.  According to DOT officials, these monthly consumer reports present  information in which customers are most interested.
section_title: Consumer and Industry Groups Recognized DOT’s Progress Related to Increasing Transparency of Optional Service Fees but Identified Other Transparency Challenges
paragraphs: Representatives from consumer advocacy organizations and industry  groups representing global distribution system (GDS) companies, the  online travel agent industry, and metasearch companies told us that  DOT’s 2011 regulations have had a positive impact such as increased  transparency regarding optional service fees. In particular, three  consumer groups told us that the Full Fare Price Advertising regulation  has resulted in more transparent pricing of airfares across the industry  and has reduced instances of misleading airfare advertising. Three  consumer and two industry groups also told us that DOT’s regulation  requiring airlines to disclose all optional service fee information on their  websites has been a positive step for the industry and has increased  consumers’ understanding of how they may be charged for different  services. While consumer groups recognized DOT’s progress in this area,  they also reported a range of issues, discussed below, that persist related  to the transparency of fees for optional services. Industry officials shared  similar views. DOT has initiated several rulemakings in this area that  might address these issues, but these rulemakings are still ongoing.
subsections: section_title: Indirect Distribution Channels Do Not Always Have Optional Service Fee Information or Purchase Options
paragraphs: While consumers are often able to obtain information about optional  services and then purchase them directly from an airline’s website,  information about these services and the ability to purchase these  services is not always available from indirect sources, such as online  travel agents. According to various estimates, about 50 percent of airline  ticket sales occur through indirect sources. All four consumer advocacy  groups that we spoke with told us that not being able to obtain information  about optional services and purchase optional services from indirect  sources at the time of booking decreases consumers’ ability to determine  the full cost of their travel. A representative from one consumer advocacy  group stated that having optional service fee information displayed  alongside the airfare on online travel sites is important because it allows  consumers to better compare different fares at the onset of their  purchasing process. Two industry officials we spoke with agreed that not  being able to purchase optional services through third parties decreases  consumer transparency. One of these officials said that some basic  optional services—seat selection in particular—are important to  consumers, who prefer to be able to purchase these services when they  purchase their tickets.
In our interviews with airlines, officials from 8 of the 10 airlines we spoke  with said that they make information about optional services, such as  baggage fees, available to third parties, but that the level of information  available about these fees varies across online travel agents. In addition,  officials from 3 of the 10 airlines that we interviewed told us that they  make optional services available for purchase through indirect channels.  According to these officials, the type of optional services available for  purchase differs by airline and by distribution channel. Officials from the  remaining 6 airlines told us that they sell products primarily through direct  channels (i.e., their own websites or customer service) because (1) they  have more control over how those products are marketed to consumers  and (2) the third-party websites have technical limitations in how they can  display and sell optional service products. For example, one airline official  stated that his airline can better differentiate its products from other  airline’s products on its own website than on an online travel agency or  metasearch company site. In addition, officials from the International Air  Transport Association (IATA) told us that the industry as a whole is taking  steps to develop standards and capabilities for optional services to be  more widely available for purchase through GDSs and online travel  agencies.
In 2010, we recommended that DOT require airlines to disclose baggage  fees and policies along with fare information across all sales channels  used by the airline. In 2017, DOT issued a Supplemental Notice of  Proposed Rulemaking and a Request for Information related to how  information about optional service fees would be distributed to ticket  agents, including GDSs, online travel agents, and metasearch  companies, that may address our recommendation. However, in March  2017, DOT indefinitely suspended the public comment period for the  proposed rule and information request to allow the President’s appointees  the opportunity to review and consider the actions. In addition, this rule  and information request may address some of the issues raised by  consumer and industry groups that we interviewed, but not all. For  example, while the Supplemental Notice of Proposed Rulemaking  proposes requiring covered carriers to provide baggage fee information to  all ticket agents that distribute fare and schedule information, it does not  require that the information be made transactable (i.e., to require that  airlines permit online travel agencies to sell these optional services). In  addition, the proposed rulemaking would only require that information  about baggage fees be made available, not other types of optional  service fees. The Request for Information asks for comments from  interested parties on whether airline restrictions on the distribution or  display of airline flight information harm consumers and constitute an  unfair and deceptive business practice or an unfair method of  competition, among other questions. As previously mentioned, according  to DOT officials, this rulemaking and request for information are currently  being evaluated in accordance with Executive Orders 13771 and 13777,  and the schedules for many ongoing rulemakings are still to be  determined.
section_title: The Variety of New Optional Services and Products Has Made it Difficult for Consumers to Compare Prices
paragraphs: Representatives from the four consumer groups and three industry  groups we spoke with also noted that as a result of the variety of new  optional service fees, bundled products, and fares that airlines now offer,  it has become increasingly difficult for consumers to compare airfare  ticket prices, fees, and associated rules, and understand what is included  in their purchases. As previously discussed, airlines have increased the  number of fees for optional services and have begun introducing different  optional service bundles and fares. Representatives from two consumer  groups whom we interviewed said that even though airlines are required  to have a “static page” on their website listing all optional service fees,  these lists can be lengthy and can include several different fees with  different associated rules that the consumer would need to interpret and  understand. One consumer group representative stated that for  consumers, comparing fares and optional service fees across multiple  airlines can be challenging and time-intensive. Representatives from four  consumer groups also noted that with the emergence of different fare  products, there is greater potential that consumers might not fully  understand what they are purchasing and what is included in the fare.  According to one consumer advocate, when a single airline is offering  three different economy products, consumers may not understand how  these products differ, and this lack of clarity is even more acute on third- party websites.
According to DOT officials, they contact airline officials for additional  information when airlines introduce new products that DOT believes will  significantly affect consumers. DOT’s goal is to ensure that relevant  information about conditions and restrictions of new products is  accurately disclosed to consumers in a timely manner. For example, as  discussed earlier in this report, since 2015, American, Delta, and United  have introduced new Basic Economy fares. The key features of these  fares are restrictions related to among other things, advanced seat  selection, and, in the case of American and United, personal carry-on  bags. According to DOT officials, they have monitored Delta’s introduction  of Basic Economy and contacted American and United to get information  about the airline’s plans to inform consumers about these fares and  restrictions. DOT officials told us that going forward, they intend to  monitor complaints related to Basic Economy fares to determine if  consumers are experiencing any issues associated with these tickets.
section_title: Contract-of-Carriage Documents Are Generally Lengthy and Difficult to Understand
paragraphs: While airlines are required to provide customers with a contract-of- carriage document, which generally includes information about an  airline’s optional service fees and policies, consumer advocates have  raised concerns that these documents are often lengthy and difficult to  understand. Each airline has its own contract of carriage, which is the  legally binding contract between the airline and its passengers. These  documents are important because they provide useful information to  consumers about the individual airline’s contract terms, policies, and rules  related to different services such as check-in deadlines, responsibility for  delayed flights, and optional service refund policies—all of which can vary  across airlines. Any term or condition of this contract is legally binding  on the airline and the passenger and may be enforced in court. However,  according to three consumer advocates we spoke with these documents  are often lengthy and can be filled with legal jargon, making the  documents difficult to understand. We reviewed contracts of carriage for  the 11 selected airlines and found that they ranged from approximately 17  to 74 pages, with an approximate average length of 40 pages. In  addition, we tested the 11 contract-of-carriage documents with an  automated grade-level readability test and found they require a reading  level of someone with a college graduate degree. According to DOT  officials, the DOT Advisory Committee for Aviation Consumer Protection  had recommended that DOT take steps to require airlines to simplify  language in their contract-of-carriage documents. DOT officials stated  that the department opted to not take specific action in this area because  it did not want to get involved in contracts between airlines and  passengers. However, the DOT Advisory Committee for Aviation  Consumer Protection subsequently recommended in 2012 that DOT work  with the airlines to survey how they define certain terms frequently used  in their contracts of carriage and customer service plans. The department  worked with A4A to develop such a document, which DOT then placed on  its web site to assist consumers with understanding the terms and  conditions of their travel. We reviewed this document and found that it  provides an explanation of frequently used terminology in the airline  industry and provides links to information about DOT’s consumer  protection regulations, such as regulations related to baggage fee and  code-share disclosures, and denied-boarding compensation  requirements. According to a representative from A4A, airlines have  committed to reviewing their contracts of carriage to see if they can be  simplified to improve transparency.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOT for review and comment. DOT  officials provided technical comments that we incorporated as  appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Department of Transportation, and other  interested parties. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or dillinghamg@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Information from Selected Countries on Increasing the Transparency of Airline Optional Service Fees
paragraphs: Other countries have taken similar actions to the United States to  increase consumer transparency of airline optional service fees.  Specifically, the European Union (EU), Canada, Malaysia, and the United  Kingdom (UK) have all enacted laws that include provisions related to  increasing the transparency of airline optional service fees. For example,  in 2008, the EU enacted Regulation (EC) No 1008/2008 on Common  Rules for the Operation of Air Services in the Community, which  established, among other things, specific requirements related to  disclosing information about airline optional service fees. The law  requires that airlines display the final price of a ticket, inclusive of all  applicable taxes, charges, surcharges and fees unavoidable and  foreseeable at the time of publication. The law also requires that the final  price is disclosed at all times during the booking process and that the  applicable conditions are published. In addition, airlines must disclose  optional service fees in a clear, transparent, and unambiguous way at the  start of the booking process, such as through a separate link on the  airline’s website, and airlines must ensure that optional services are only  offered on an “opt-in” basis. As shown in table 4, other countries have  implemented similar laws. In addition, in 2017, Canada introduced  consumer protection legislation related to air transportation that would  require, among other things, that the Canadian Transportation Agency  promulgate regulations establishing air passenger rights.
There are some differences between the U.S. and foreign laws. For  example, Part V, Division III of Canada’s Air Transportation Regulations  requires advertisements of air services to specify all optional services  offered, as well as their price or range of prices, including applicable  taxes and fees charged by government or public authority. In addition, the  regulations prohibit information being provided in an advertisement in a  manner that would interfere with the ability of anyone to readily determine  the price for the air service, including for any optional incidental service.  The Canadian law does not otherwise impose specific requirements as to  how this information is to be made available to consumers. According to  officials from Canadian Transportation Agency, airlines can decide how  they want to communicate this information to the consumer. Also,  according to officials from the European Commission, a 2014 European  Court of Justice decision determined that airlines cannot charge for  bringing hand bags or carry-on luggage into the plane’s cabin. According  to officials, the court’s rationale for the decision was that airlines do not  provide the passenger any services regarding carry-ons, as passengers  carry their own bags.
Officials from the regulatory bodies that we interviewed said that they  monitor airline compliance with consumer transparency laws through  various methods. For example, according to a European Commission  official, the European Commission and the authorities of EU member  states (countries) monitor airline compliance with consumer transparency  laws and have carried out several reviews to determine the level of  compliance with Regulation (EC) No 1008/2008 in different EU countries.  According to documentation provided by the European Commission, in  2013, the European Commission, in conjunction with national authorities,  initiated reviews of 552 websites and found that 382 websites were not  compliant with the EU consumer transparency law. One problem they  found was that optional services, including fees for baggage, insurance,  and priority boarding, were not being offered on an “opt-in” basis. In  addition, the European Commission conducted a “fitness check” of  aviation regulations in 2013 to determine whether the airline consumer  transparency laws and other consumer protection laws, were meeting  their objective and whether any changes to these laws were needed.  According to documentation provided by the European Commission, the  review found that the laws were meeting their objectives, but that EU  member states faced some challenges with enforcing these laws and  could benefit from further coordination and sharing of best practices in  this area. According to an official from the European Commission, it has  also recently begun an evaluation of Regulation (EC) No 1008/2008 to  determine whether there are any areas of the law that could be improved.
Similarly, officials from the UK and Canada have taken actions to assess  compliance with existing consumer transparency laws. Officials from the  United Kingdom’s Civil Aviation Authority (UK CAA) told us that in 2010  and 2011 they reviewed the websites of the top 20 airlines flying from the  UK and two smaller UK airlines to assess compliance with Regulation  (EC) No 1008/2008. According to UK CAA officials, at that time, they  discovered that most airlines were not in compliance and all the airlines  had to make some changes to their websites. Issues included failing to  include unavoidable taxes, fees and charges in the headline price, pre- selecting optional extras and not separately disclosing information about  optional service fees. UK CAA officials notified airlines that were not in  compliance and provided them with information on the steps that the  airlines needed to take to ensure that their advertisements met the  requirements of the law. According to UK CAA officials, most of the  airlines agreed to amend their websites; however, there were three  airlines where the UK CAA had to take enforcement action to achieve  compliance. According to UK CAA officials, compliance with the EU law  has improved since 2010, and most airlines now have a link posted early  in the booking process to baggage fees and other optional service fees.  The UK CAA has also completed reviews of travel agents’ websites to  assess compliance with Regulation (EC) No 1008/2008, according to UK  CAA officials. Canadian officials told us that the Canadian Transportation  Agency monitors and enforces airline compliance with consumer  transparency laws. To do so, they conduct periodic carrier inspections to  assess compliance with Canada’s Air Transportation Regulations and  conduct targeted investigations when needed. The Canadian  Transportation Agency also reviews international tariffs to determine  whether they set out all the information required by regulation and to  assess whether airline policies with regard to optional service fees are  clear, reasonable and not unduly discriminatory, according to Canadian  officials. Malaysian officials that we spoke with stated that they are in the  process of developing processes for monitoring and enforcing compliance  with Malaysia’s consumer protection code.
Officials from some of the regulatory bodies whom we interviewed said  that they have taken other actions to educate airline consumers about  consumer transparency laws related to optional service fees. For  example, the UK CAA posts information on its website about existing  optional service fees for the 20 largest airlines that travel to and from the  UK, and the document is updated twice a year. According to UK CAA  officials, they make this information available on their website to inform  UK consumers about these fees and help consumers compare different  optional service fees across different airlines. Similarly, the Malaysian  Aviation Commission has a “Know Your Rights, Before You Fly”  webpage, where, according to Malaysian officials, they post information  for consumers, including their rights related to airline optional service  fees.
section_title: Appendix II: Objectives, Scope, and Methodology
paragraphs: Our objectives for this report were to describe: (1) how selected U.S.  airlines have modified their offering and pricing of optional services since  2010, (2) the factors that selected U.S. airlines consider when  determining whether and how much to charge for optional services, and  (3) the actions the Department of Transportation (DOT) has taken since  2010 to improve the transparency of optional service fees and views of  selected aviation stakeholders about these actions. We also described  the actions taken by selected regions or countries to improve consumer  transparency related to airline optional service fees and presented this  information in appendix I.
To identify the ways in which selected U.S. airlines modified their offering  and pricing of optional services since 2010, we first selected U.S.  passenger airlines to examine. We used data from DOT’s Bureau of  Transportation Statistics (BTS) on passenger enplanements and airline  operating revenues. For the passenger data, we used the T-100  database, which includes traffic data for U.S. airlines traveling to and from  the United States. These data represent a 100 percent census of all  traffic. For the financial data, we used Form 41 quarterly financial filings to  BTS, specifically Schedule P-1.2. We relied on the most recent available  BTS data at the time we developed our airline selection. To assess the  reliability of the BTS enplanements and operating revenue data, we  reviewed documentation about the quality control procedures applied by  BTS; analyzed the summary data for obvious errors; and interviewed BTS  officials about how the data are collected, validated, stored, and  protected. We determined that the data were sufficiently reliable for the  purposes of identifying airlines to include in our selection for this audit  work. We selected U.S. passenger airlines that: (1) reported annual  operating revenues of at least $20 million in calendar year 2015, (2) had 1  million or more domestic passengers in calendar year 2015, (3) had at  least 1,000 scheduled passengers in the third quarter of 2016, and (4)  operate under their own brand. This selection process resulted in a list of  12 U.S. passenger airlines: Alaska Airlines, Allegiant Air, American  Airlines, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, JetBlue  Airways, Sun Country Airlines, Southwest Airlines, Spirit Airlines, United  Airlines, and Virgin America. Collectively, the selected airlines transported  81.15 percent of U.S. domestic passengers in 2016 and accounted for  99.88 percent of baggage fees and 99.98 percent of rebooking and  cancellation fees charged by all U.S. airlines in 2016. During the course  of our review, Alaska Air Group, which owns Alaska Airlines, purchased  Virgin America. As a result, we eliminated Virgin America from our  selection of airlines mid-way through our review and report on 11 selected  airlines.
We identified the types of optional services offered by the 11 selected  airlines by reviewing webpages on airlines’ websites, which are required  to prominently display optional services and fees. We accessed the  airlines websites and took screen captures of the webpages with optional  service fee information on March 31 and April 1, 2017, so that our  analyses of the website content would be as comparable as possible. We  also returned to airlines’ websites at later points to collect additional  information. We compared the optional service fee information that we  gathered from our review of airlines’ websites to optional service fee  information that we collected as part of our 2010 review of airline fees to  assess how these fees had changed since 2010.
We corroborated information obtained from our review of airline’s  websites through interviews with officials from 10 of the 11 selected  airlines. We requested interviews with representatives from all 11  selected airlines but one airline declined to be interviewed. As a result  we interviewed officials from 10 of the 11 selected airlines. In  interviewing the airline officials, we used a semi-structured interview  instrument, which contained questions pertaining to the types of optional  service fees and bundled fare products that airlines have introduced since  2010, the factors that airlines consider when setting fees, and airlines’  views on advantages and disadvantages to consumers of unbundling  optional services. During our interviews, we also asked airlines if they  would be willing to share cost information on optional services with us,  and all 10 airlines declined to provide us with such proprietary  information; or said that they do not collect specific cost information on  optional services; or said that they collect cost information only in limited  circumstances, such as food and beverage costs, which would not have  been useful for this report. In addition to answering our interview  questions, we asked the 10 airlines to provide information on when they  first began charging for specific optional services, how much those fees  were at the time that they were first introduced, and how revenue from  those fees are categorized and reported to BTS. Nine of the 10 airlines  that we interviewed provided this information. One of the responsive  airlines did not provide a complete response, but the overall responses  were sufficiently detailed to address our objective.
In addition to obtaining fee information, we analyzed airline financial  information reported to BTS by airlines from calendar year 2010 through  calendar year 2016—the most recent available—to analyze how revenue  generated from optional service fees had changed from 2010 to 2016. We  analyzed revenue data from baggage fees and reservation-change and  cancellation fees, which are the two types of optional service-fee  revenues that airlines are required to report to BTS in separate accounts.  All other optional service-fee revenue is reported in accounts that include  other airline revenue sources. We assessed the reliability of the BTS’s  operating revenue data as discussed above and determined that they  were reliable for the purpose of reporting overall trends in revenue from  baggage and reservation-change and cancellation fees for 2010 through  2016.
To identify the factors that airlines consider when setting optional service  fees, we interviewed officials from the 10 selected U.S. airlines that  agreed to speak with us about the factors airlines consider when deciding  whether to separate optional service fees from the base fare price and  determining how much to charge for a given optional service. We also  interviewed selected aviation stakeholders that included three airline  trade associations; four consumer groups; three global distribution  systems (GDS) companies; a travel trade association representing GDSs,  online travel agents, and metasearch companies; and two other industry  stakeholders to obtain their views on factors that airlines consider when  setting fees (see table 5). We selected the three airline trade associations  that represent different airlines (i.e., domestic airlines, international  airlines, and regional airlines). We selected four consumer group  associations that represent a range of types of airline consumers (i.e.,  business travelers and leisure travelers) and that recently published  articles on consumer transparency issues related to optional service fees.  With regard to the GDSs, we selected the three largest GDS companies  in the United States. To obtain the perspective of companies that provide  information or sell airline tickets through indirect distribution methods, we  also selected the travel trade association which represents GDSs, online  travel agents, and metasearch companies. Finally, we selected two  industry stakeholders because they have observed how the airline  industry has changed since 2010 and cover the breadth of the airline  industry.
We also conducted an economic literature search for studies that have  examined the effect of baggage fees on base ticket prices. The literature  search was performed in March 2017, using keyword and controlled- vocabulary searches in bibliographic databases including Transportation  Research International Documentation, Academic OneFile, Scopus, and  WorldCat. The terms included, but were not limited to, keywords such as  “airline” or “air carrier,” “baggage fees” or “ancillary fees,” “unbundling” or  “de-bundling,” combined with “impact” or “affect” or “effect” and “ticket  price” or “base fare” or “airline pricing.” We limited our search to studies  published after 2010 because baggage fees were first introduced in 2008.  The literature search generated 11 initial results. We vetted this initial list  by examining the abstracts for those that addressed our objectives and by  determining which studies had appeared in peer-reviewed journals. We  identified 5 studies that met these criteria. After performing a secondary  review of these studies to assess the soundness of the studies’  methodologies and to confirm the relevance to our objectives, we  excluded 2 of these studies. This resulted in the following 3 studies being  included in our report.
Henrickson, Kevin E. and John Scott, 2012, “Baggage Fees and  Changes in Airline Ticket Prices,” in James Peoples (ed.), Pricing  Behavior and Non-Price Characteristics in the Airline Industry  (Advances in Airline Economics, Volume 3) Emerald Group Publishing  Limited, 177–192.
Brueckner, Jan K., Darin N. Lee, Pierre M. Picard, and Ethan Singer,  2015, “Product Unbundling in the Travel Industry: The Economics of  Airline Bag Fees,” Journal of Economics & Management Strategy 24  (3): 457.
Scotti, D. and M. Dresner, 2015, “The Impact of Baggage Fees on  Passenger Demand on US Air Routes,” Transport Policy 43: 4–10.
We also conducted several literature searches using online resources to  identify reports, studies, articles, or other publications that discussed the  use of optional service fees in the airline industry.
To determine what actions DOT has taken since 2010 to improve the  transparency of optional service fees, we reviewed DOT regulations  promulgated since 2010, such as regulations that establish requirements  on the disclosure of optional service fees, the refunding policies of  optional service fees, and post-purchase price increase limitations on  baggage fees. In addition, we identified four DOT proposed rules and  one request for information related to transparency of optional service  fees and followed up with DOT regarding the status of these ongoing  rulemakings and request for information. We also reviewed DOT  guidance, directives, policies, and other documentation clarifying the requirements of various regulations and describing the roles and  responsibilities of DOT’s Office of Aviation Enforcement and Proceedings  (OAEP) and Aviation Consumer Protection Division (ACPD) related to  monitoring, investigating, and enforcing airline compliance with  regulations related to airline optional service fees. To understand how  OAEP and ACPD monitor compliance with existing optional service fee  regulations and respond to consumer complaints about optional service  fees, we interviewed officials from OAEP and ACPD about existing  regulations; the policies, compliance, and enforcement activities  undertaken by these offices; and the process for responding to  complaints. In addition, we also interviewed officials from BTS about their  guidance and process for collecting optional service fee revenue data  from airlines. As described above, we asked officials from the 10 airlines  that agreed to be interviewed about how they report revenue from certain  optional service fees to DOT’s BTS. We summarized this information and  identified fees that airlines commonly reported in different categories. To  understand how different stakeholders view actions DOT has taken to  improve transparency of optional service fees, we interviewed  stakeholders described in table 5. In addition, during our interviews with  officials from the 10 selected U.S. airlines that agreed to speak with us,  we obtained their views on DOT’s actions and obtained information about  how their airlines comply with DOT regulations related to optional service  fees. We also conducted an analysis of the contracts of carriage for all  the 11 airlines in our selection. This helped us to corroborate information  we obtained from our interviews with airline officials about their optional  service refund policies. These contracts of carriage were all accessed  and downloaded on March 14, 2017, so that our analyses of the contract- of-carriage content would be as comparable as possible. To assess the  readability of the contracts of carriage, we converted the files to Microsoft  Word documents and ran the Flesch-Kincaid Grade-Level test, which is  included in the Microsoft Word software.
Finally, we reviewed documents and interviewed officials from four  selected foreign governments—the European Union, Canada, the United  Kingdom, and Malaysia—that have taken actions to improve consumer  transparency related to airline optional service fees. Specifically, we  interviewed officials from the European Commission, Canadian  Transportation Agency, United Kingdom Civil Aviation Authority, and the  Malaysian Aviation Commission. We based our selection of foreign  governments on various factors including whether the region or country  has implemented or is considering implementing laws related to  increasing consumer transparency of airline’s optional service fees, and  recommendations from our interviews with DOT and industry officials and  stakeholders. We interviewed officials about existing laws related to  consumer transparency of optional service fees, how these laws are  monitored and enforced, and the effects of these laws on the airline  industry and airline consumers. In addition, we used these interviews to  corroborate information obtained from our document reviews.
We conducted this performance audit from November 2016 to September  2017 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Faye Morrison (Assistant  Director), Maria Mercado (Analyst in Charge), Namita Bhatia-Sabharwal,  Lacey Coppage, Leia Dickerson, Michele Fejfar, Hannah Laufe, Malika  Rice, Amy Rosewarne, and Eric Warren made key contributions to this  report.