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The Business Logic of Airlines' New Standby Fees

This week, United (UAUA) stopped allowing people to stand by for earlier flights without a charge. Instead, United will now charge you $75 for a confirmed change on your day of travel or $50 if you go standby and you make it on the plane. The only thing surprising about this move is that they aren't charging even more. Why would the airlines hold back? It's all part of the new revenue game.

For most airlines, the old policy was simple. If you were traveling and you showed up at the airport early, you could go standby on that earlier flight for no charge. They figured if they had an empty seat and you were there, they might as well give it to you and get you on your way. The only holdout? Southwest (LUV). Southwest's policy has long been to require that you pay the difference between your fare and the cost of walking up and buying a last minute ticket (they have no additional change fee). Customers universally hate this policy, and it was long one of the few positive differentiators when legacies compared to Southwest, but that advantage is eroding.

For the last couple years, until United's move this week, the legacies all offered a product where they would charge $50 to confirm you on an earlier flight on your day of departure. Only US Airways continued to offer free same-day standby (and still does), but only if there are no seats available. If seats were available, you had to pay the $50 fee. (My guess is that's more of a technical issue than an attempt to be a hero.)

You might be wondering, why are the airlines doing this at all? Why not just charge the change fee and difference in fare? Well, it's because they see this as a good revenue opportunity. If they charged the change fee and the difference in fare, very few people would take advantage of this program. The difference between an advance purchase ticket and a walk up fare is insanely large on legacy airlines, so most people would just opt to stay in the airport and wait it out. That's no good for the airlines since they can't make money off someone just sitting in the airport.

So they introduced a $50 fee. That, or possibly even $75, is worthwhile if the customer can get home before her kids go to sleep. Nobody wants to sit in the airport waiting around for a flight if they can go home early, and that's what the airlines are banking on here.

This fee, like most of the new airline fees, walks a tightrope. Airlines want to make as much money as they can, but they don't want to antagonize passengers so much that they kill the goose that lays the golden eggs. So I expect we'll likely see this fee creep higher and higher, until it kills demand, just as with most fees.

[Photo via Flickr user sittered]

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