Why do airlines bill in advance when hotels let you pay after your stay?
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Reader Questions are answered twice a week by TPG Senior Points & Miles Contributor Ethan Steinberg.
The ongoing coronavirus pandemic has turned a spotlight on the economics of the aviation industry, between the years of multibillion-dollar stock buybacks that are making government bailouts harder to swallow and the difficulty many travellers are facing in getting refunds for cancelled flights. TPG reader Marla wants to know why airlines collect your money months in advance, while many hotels let you wait to pay until you check out …
Why do airlines collect airfare at the time of booking when other travel-related industries don’t? Hotels don’t — we consumers book reservations, but don’t pay until we check out. Rental cars don’t — we don’t pay until we return the car. How did it evolve to be the case that airlines collect our money upfront and then hold onto it, sometimes for as long as 9 to 10 months, before eventually providing the goods/service purchased?TPG READER MARLA
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Marla poses an interesting question, one that I’m sure many travellers who’ve been given the runaround when trying to get a refund are asking as well. The short answer is that airlines do offer a more flexible booking option in the form of refundable tickets, but they price them at such an expensive premium that they simply aren’t an option for most price-conscious travellers. Even if you do book a refundable ticket, you pay for it upfront and just retain the option to get your money back down the road.
Take a look at this one-way American Airlines flight from New York-JFK to London (LHR). You can see that in every cabin, the flexible/refundable tickets shown in the second image are significantly more expensive than the regular versions. In economy, you need to pay 6.5 times as much for the privilege of having a refundable ticket!
Hotels, by comparison, charge a much smaller premium. Even at luxury properties, the difference between a fully-refundable and nonrefundable room rate is often $50 or less, and while that may still be a large percentage out of the rate, it’s more affordable for people in real dollar terms.
The answer as to why things work this way is complicated, and is a mix of “because it’s always worked that way” and the fact that airlines have much more varied expenses to cover. An airline needs to spend a lot more money upfront or your flight won’t take off. Fuel and catering supplies need to be delivered before the flight, and the minute your aircraft touches down and pulls into the gate the airline is subject to taxes and fees, even if your flight doesn’t take off for another 10 hours. This is to say nothing of the ground crew, baggage handlers, gate agents and more who need to be paid to work your flight. There’s also the cost of the plane itself, something the airline starts paying for (with help from your ticket sales) months or years before your specific flight takes off.
It’s also important to note that airlines are not the only travel companies that collect payment at the time of booking. Many trains, buses and cruises require passengers to pay some or all of the cost of the ticket upfront, for many of the same reasons mentioned here. In fact, hotels are a notable exception in the travel industry, and that inevitably leads to some last-minute changes and cancellations when travellers aren’t financially committed to the reservations they’ve made.
Of course, none of these are reasons that things have to be done this way as much as they’re an explanation for why they currently are. An airline could switch its sales model at any point, though that would create a huge temporary liquidity crisis and could only be done if said airline had sufficient cash reserves. At the end of the day, the best answer to Marla’s question is likely that this is always the way things have worked, and there’s no real incentive for anyone airline to buck the industry-wide trend at their own expense.
I hear Marla’s frustration in asking this question, as airlines charge quite the hefty premium for customers who want the option of refundable tickets, and they still collect many from those passengers at the time of booking. Once things become set in stone it’s hard to change, and airlines must have decided that the immediate cost of changing the sales model wouldn’t result in any significant financial benefit.
Featured photo by Maxian/Getty Images.
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