The Case Against Anti-Drip Pricing Rules for Airlines
Time to get off the "junk fees" bandwagon
The UK government has just completed a consultation with a view to introducing anti-drip pricing regulations. Mercifully, it seems that these rules will not ensnare airlines, an industry in which they could have caused considerable damage. I still object to the proposed regulation. But given the airlines decision will no doubt provoke a backlash from “consumer groups,” I re-publish here a version of my case against anti-drip pricing rules for the passenger airline industry, as published in The Times newspaper in late November.
We’ve all been there. You’re ordering dinner on a meal delivery app, readying what looks like a reasonably priced deal and bam! Checkout hits you with a service fee, delivery charge, maybe even a “small order fee”, and then the option to give a tip. Frustrated? Sure, but you’re hungry and spent enough time choosing your meal, so you grudgingly pay up.
The government dislikes this sort of “drip pricing” - a “technique in which firms advertise only part of a product's price and reveal other charges later as the customer goes through the buying process.” It is consulting on it and stands ready to legislate against it, as set out in the King’s Speech. The Department for Business estimates that we collectively shell out between £600 million to £3.5 billion a year on fees and charges that are added for online purchases — a growing source of revenue across the transport, entertainment, retail and hospitality sectors.
At a time of high inflation, banning sneaky fees, or mandating transparency about them, will surely be popular. But is this sound economics? I fear that a crude new regulation will not only affect genuinely deceptive charges, but make using other fees serving important economic functions more difficult, potentially even weakening competition.
Consider airlines. The government sees the raft of “optional surcharges” such as baggage, boarding pass printing and seat selection fees as examples of drip pricing. Yet aren’t these just payments for extra amenities? Stopping airlines from charging passengers to transport extra cargo, have admin tasks done for them, or occupy prime plane real estate risks undesirable consequences.
Sam Bowman, the economist, notes that luggage fees discourage extra weight on flights from checked bags, reducing plane fuel and baggage-handler needs, thus lowering flight costs. Charging for boarding pass printing similarly reduces the need for airline agents and queues at check-in desks, lowering operating costs again. On seat selection charges, is it so bad that airlines charge extra for those who really value prime spots or a quick exit from the plane?
The economic literature here is clear. Airlines unbundling their services like this introduced opportunities for revenue and lowered firms’ costs. The prospect of additional profit from such pricing encouraged new low-cost airlines into the sector, delivering cut-throat competition and lower ticket prices. One recent paper found that the proliferation of US baggage fees reduced average prices by 2 per cent alone.
It is therefore no coincidence that the lowest-cost carriers price through these drip mechanisms. These charges aren’t bonuses, but essential business revenue. If banned, restricted or made more difficult to implement, the firms wouldn’t simply eat lower profits, they’d raise basic ticket prices to offset losses. This would force poorer passengers to pay for services they don’t need while undermining these firms’ no-frills business models.
Yes, a mandate merely requiring disclosure or explanations about fees up front would be less destructive than a ban. But, even then, to avoid giving consumers an information overload, such a mandate would practically force all airlines into re-bundling services under broader ticket categories.
Ironically, of course, for all the talk about how desirable transparency is, itemising costs at payment gives the consumer more information about what they are getting than some all-in price. Consider our food delivery example: apps show the food costs clearly vis-a-vis the delivery charges. That surely facilitates stronger competition.
It’s obviously annoying to face unexpected charges and wrong when they are outright deceptive. But most markets entail repeat custom and, to the extent consumers feel deceived, they are hardly likely to use the service again. That some other customers merely dislike paying separately for services they’d prefer to be universal, or don’t care for pricing complexity, is no justification for one-size-fits-all anti-drip pricing mandates.