NCL Personal Finance Issues
A central fact of life is that sometimes things happen that consumers can’t expect or plan for. This can make planning for a vacation or other travel a tricky endeavor for even the most careful consumer. An unexpected family illness or injury, for example, could mean that flights to Disneyworld need to be rescheduled or cancelled altogether. What is a consumer to do? Consider travel insurance? Not so fast.
Unfortunately, over the past few years, the airlines have discovered lucrative new ways to profit from these events by raising cancellation and change fees. These fees now stand at $200 per ticket for the four legacy U.S. airlines. For a family of four, if a child breaks an arm at soccer practice or a loved one goes into the hospital, needing to rearrange travel plans could quickly lead to $800 in fees. These fees are big business for the industry. In 2012, the airlines collected more than $2.5 billion in cancellation/change fees, a 176% increase since 2007, according to the Department of Transportation.
What about refundable tickets, you ask? While these tickets, also known as “unrestricted fare” tickets give travelers more flexibility they come at a significant premium over. A NCL analysis of refundable and non-refundable ticket prices found that the cheapest refundable tickets were on average 350% more expensive the cheapest non-refundable ticket for the same flight. Given this disparity, it’s no surprise that the overwhelming majority of consumers opt for restricted, non-refundable. Since 1993, according the DOT, refundable-fare tickets have never accounted for more than 20% of all tickets sold in the U.S.
Given rising cancellation fees and unaffordable refundable tickets, consumers may look to travel insurance as a way to hedge against the risk that travel plans could change. Consumers are likely familiar with these policies thanks to add-on offers at the end of the online ticket-buying process. Unfortunately, the marketing of these policies tends to include misleading language (e.g., “peace of mind is just a click away”) that does not adequately disclose the significant limitations and exclusions of many policies. For airlines, however, selling these policies is almost pure profit. Commissions range from 10-40%. In a $1.9 billion market (including travel-related services), this can mean significant revenue for the airlines.
Caught between rising cancellation fees, unaffordable refundable tickets and misleading travel insurance marketing, consumers are finding that the deck is stacked against them. NCL’s new report, $tuff Happens: Airlines Benefit Handsomely From the Unexpected … and Consumers’ Fears About It, examines these issues and calls for a series of reforms to make the travel industry friendlier to consumers whose plans change unexpectedly.
To address these issues, NCL is recommending the following industry reforms:
- Travel insurance policies sold through airline Web sites or online travel agencies should be marketed in clear, non-misleading language – Wording on travel Web sites for travel insurance policies should disclose in large font and plain language important limitations to policies. Consumers should be told where they can find insurance coverage details and informed of the timeframe to purchase travel insurance. Consumers should not be pressured into purchasing travel insurance while shopping for airfares and should not be led to believe that these insurance products are only sold through the ticket checkout process.
- Travel insurance loss ratios should be reported – According to the UStiA, 17% of consumers who have purchased travel insurance file a claim at some point. But we do not know how many consumers are ever compensated when they file a claim. The industry should be required to publicly report the loss ratios of their policies, i.e. the percentage of premium dollars paid out in claims.
- Tiered cancellation/change fees based on proximity of travel date – The ability of an airline to sell a seat vacated due to a cancelled or changed ticket is greater with more lead time before a particular flight. This should be reflected in a tiered cancellation/change fee policy. Flights cancelled or changed more than 5-10 days prior to the departure date should incur no fee.
- Consumers should be able to transfer their tickets without incurring a fee – While some airlines accommodate consumer requests to transfer their unusable ticket to another traveller, this is not standard industry practice and is rarely easily done. With reasonable timeframes in place, consumers should be able to transfer their ticket to another person easily and without incurring a fee.
- Congressional oversight hearings should be convened to examine the growth in cancellation fees, disparities in the price of refundable and non-refundable tickets and misleading marketing of travel insurance are needed. The development of an official record regarding the industry practices detailed in this report will help shape necessary legislative or regulatory reforms to establish much-needed basic consumer protections.
- Standby fees should be eliminated for missed flights. Consumers who elect to fly standby on the same day in the event of a missed flight should not be required to pay an additional standby fee, which is currently required by many airlines, since it costs the airlines virtually nothing to fill an empty seat.