The Obama Administration’s National Economic Council is calling on the public and private sectors to work together to mitigate or eliminate the growing use of hidden fees across a number of industries, including the nation’s airline and hotel industries.
In a 16-page report titled, “The Competition Initiative And Hidden Fees,” the council details how various government entities have responded to an executive order issued by President Obama in 2016, directing Federal departments and agencies “to use their existing authorities to identify and address impediments to competition.” It also offers suggestions of further actions that might be taken by other sectors, including by federal and state lawmakers, consumers and consumer advocates.
While the report addresses practices in industries ranging from the hearing aid and contact lens markets to the cable and broadband industry, among others, the report’s take on fees levied by travel and leisure providers was of particular interest. Specifically, à la carte fees charged by airlines and resort fees charged by many hotels were named as potentially detrimental to the industries’ customers and the economy as a whole.
“Mandatory ‘resort fees’ that are now added to many hotel bills effectively form part of the base price of the hotel room and account for a growing amount of revenue,” the report noted. “According to one consumer watchdog, last year resort fees accounted for $2.04 billion – or 16.6 percent – of revenue for the hotel industry, and they are growing at a far faster rate than inflation.”
Such fees are seldom optional and may provide little in the way of actual value, as my wife and I experienced during a stay at San Diego’s vaunted Hotel del Coronado.
Airlines’ so-called ancillary revenue was also identified as a problem area.
As previously reported, ancillary revenue from sources “including de facto mandatory baggage and change fees, climbed to an estimated $22.5 billion in 2015,” the report says. The amount of ancillary revenue taken in by the nation’s airlines has climbed steadily since first American Airlines (NASDAQ:AAL) then United Airlines (NYSE:UAL) began charging for checked baggage in 2008. Almost all other U.S. airlines quickly followed suit, though many now offer a free checked bag to their top-tier frequent fliers, holders of their affinity credit cards, or others in select groups.
Why hidden fees are a problem
While many air travelers find the practice of à la carte fees and hidden charges annoying in the extreme, there are also compelling economic arguments against those practices.
“Both empirical studies and theoretical models suggest that mandatory hidden fees cause, or even trick, people into buying things they would not otherwise,” the report notes. “In other words, people are more likely to buy something that appears to cost $80 with $20 added later, than something that is priced at $100 up front.”
Airline fees merit independent consideration, based on both their volume and their regulation, the report says, noting that, “Like many businesses, many airlines charge fees that area both mandatory and optional, and some that are in a gray zone between the two.” The report names change fees and baggage fees as examples of “gray zone” charges, noting that they “[M]ay be optional in theoretical sense, yet in practice unavoidable for many passengers.” For that reason, the U.S. Department of Transportation (DOT) is currently examining whether change and baggage fees should be included or disclosed by the airlines in their advertised prices.
The report further notes that fees and taxes can add up to as much as half the ticket price. Wall Street Journal reporter Scott McCartney wrote an article detailing his experience on Spirit Airlines (NASDAQ:SAVE) and how ancillary fees, along with standard government fees and taxes, exceeded that estimate and inflated his “$209 fare” to a total cost of more than $484. At the time, TheTravelPro opined that a cynical observer might conclude that the "basic" or "seat-only fares" are a come-on. Based on the report, it appears the government agrees.
What can be done
As the report acknowledges, market forces alone have not been effective in discouraging companies from relying on hidden fees. It suggests several alternatives, including fee regulation or caps, and mandatory “all-in” pricing, which it calls preferable from both a consumer protection and competition standpoint.
Challenges include the inherent inflexibility of mandated caps on fees, which are by nature insensitive to changing conditions. Conversely, a mandate that fees be reasonable, “[P]reserves more flexibility but also requires an ongoing governmental process to determine what constitutes a reasonable fee,” the report acknowledged.
The preferable potential solution identified in the report is a mandatory “all-in” pricing rule to require full disclosure of what the price will be after the addition of any fees. The report notes that current disclosure rules that allow firms to advertise a service as costing “$69 plus fees” do not give consumers the data to make an “apples-to-apples” comparison across different vendors. An all-in pricing rule could be mandated by legislatures as well as federal and state agencies, the report says.
Despite the challenges, changes must be made or the consumer will continue to pay the price, the report states.
“Transparent and accurate pricing is the foundation of an effective and efficient American economy, allowing consumers to make smart choices and to reward the providers of better goods and services,” the report notes. “But when pricing is unclear, it threatens the competitive process by which consumers make decisions.”
The report ends with a call for policymakers at all levels of federal and state government, the private sector and others to “[B]uild on the actions of the Administration and seek to mitigate or eliminate the growing use of ‘hidden fees’ across a number of industries.”
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