Could cancellation fees save the airlines?

Posted Jul 30th 2009 11:40AM by Tom Johansmeyer
Filed under: Southwest Airlines (LUV), AMR Corp (AMR), JetBlue Airways (JBLU), Delta Air Lines (DAL)

There may be new hope for the perpetually ailing airline industry. While I wouldn't expect these companies to become top performers anytime soon, it looks like the best revenue stream is the one nobody's been talking about: change and cancellation fees.

These penalties, which can reach up to $150, bring $2 billion in revenue into the industry annually. According to the Department of Transportation, they were good for $527.6 million in the first quarter -- in the United States alone. This is 3.2% of U.S. airline revenue.

American Airlines parent AMR (NYSE: AMR) raked in $116 million in revenue from these penalties in the first quarter of 2009 -- compared to $108 million from the more highly publicized extra bag fees. For JetBlue (NASDAQ: JBLU), the numbers are smaller (JetBlue, of course, isn't as big as AMR) but no less compelling. By pumping its change and cancellation fee from $100 to $150, the airline scored $32.2 million in Q1 2009, up from $25 million in Q1 2008.

The best part of this revenue stream is that it's financed mostly by business travelers -- the people least able to avoid it. Some have defected to airlines like Southwest (NYSE: LUV), which don't assess change fees, but expense management and sometimes inflexible engagements can take away many of a business traveler's choices. The management consultants, M&A lawyers, and remaining investment bankers shouldn't fall in love with LUV yet, though, as CEO Gary Kelly said in an earnings conference call, "We've got to be open-minded to anything." His shareholders might appreciate the sentiment.

The airlines already in the cancellation fee game are doing a great job of using it to bump revenue up. Midwest Express has the toughest penalties, pulling in 7% of passenger revenue from them. JetBlue is next at 4.6%, with US Airways (NYSE: LCC) an above-average 4.3%.

Delta (NYSE: DAL) got a little sneaky, reporting only cancellation fees and not change fees. The reported number, $3.6 million, is clearly way off. Delta has estimated total change and cancellation penalty revenue of $100 million for the first quarter, with another $58 million at Northwest.

Tags: airline change fees, AirlineChangeFees, american airlines, amr, cancellation fees, CancellationFees, dal, delta, featured, jblu, jetblue, jetbluecancellations, lcc, luv, southwest, ticket change fees, TicketChangeFees, us air