Last year, one of my favorite bloggers, Brett Snyder, AKA The Crank Flier, wrote up some observations made by airline CEOs speaking at symposium. In one installment, he quoted Doug Parker of US Airways as saying “Please no new taxes or fees.”  I couldn’t believe that he of all people would make that request.  At that time, I was the first to comment:

This was sarcastic right? Did everyone in the room start laughing when the CEO of US Airways started complaining about fees? Isn’t this the same guy who thought charging passengers for water was a good idea?

I don’t like airport taxes and fees any more than he does, but this industry in particular has zero credibility with the public when it comes to complaining about fees imposed on them when they are tripping over themselves to impose fees on us.

Airline Hypocrisy Knows No Bounds

Never underestimate an industry’s ability to criticize any taxes or fees placed on themselves. For example, airports are seeking to increase their passenger facility fees from $4.50 per passenger to $7, a whopping 56% increase.  Of course, the airline industry is opposing this increase. Naturally, the airports are fighting back in the wake of this week’s reports that the airlines are collecting record baggage and change fees. The airports argue that these fees go to critical safety, security, and capacity improvements.

Over at Aviation Week, Andrew Compart covers the airports calling out the airlines on their rank hypocrisy:

In the press release, Barclay argued that “the carriers’ continued opposition to an increase in the local passenger facility fee is both shortsighted and inconsistent given the airlines’ increasing reliance on ancillary fees to support their own operations. With ancillary fee collections growing rapidly and producing billions in airline revenue, it’s difficult to understand why the industry opposes the collection of a mere fraction of that amount by local authorities to fund critical airport safety, security, and capacity improvements.”

The airline responded by claiming that their fees are optional while the airport fees are mandatory:

“What’s more, it is not a direct comparison to ancillary fees; the fees collected as reported by the BTS reflect airline charges for optional services—changing a ticket or checking a bag,” it continued. “Last we checked flying into an airport was not an optional purchase.”

Yeah right. There are tons of mandatory airline fees out there. Ultra low cost carriers like Spirit and Allegiant are full of such fees that are unavoidable. Many airlines charge fuel surchage fees that are about as mandatory as an airport. US Airways charges award booking fees and so forth.

At Least Passenger Fees Go Somewhere

In fact, I would argue that passengers see more value in airport fees than they do in airline fees. An airline might charge a passenger $150 to change a ticket, something that the passenger may do online at virtually no cost to the airline. At the same time, airport fees go to real brick and mortar projects that cost the airport actual money. Have you been to an airport lately? Virtually every airport is constantly be upgraded, expanded, and refurbished at all times. Atlanta is getting a new international terminal, Denver is getting a train station, Chicago is re-aligning all of their runways and so on. Passengers get a big bang for their buck from these fees as opposed to the $125 to carry your pet on board.

Airports Aren’t Blameless

My argument against the airlines does not absolve the airports for their request to raise their own passenger fees 56%. One could argue that all of the airport improvements are occurring with the current fees, so why raise them? The most important new projects, new runways, are more at the mercy of environmental regulations and local opposition, not a lack of funds. I would be happy with the fees staying where they are and airports continuing to charge the airlines a per passenger fee. This allows the airlines to compete with each other for the lowest fees to attract the most service. Finally, airports charge plenty of fees themselves. Parking rates are rising much faster than inflation, and the United States is one of the few countries where airports charge for the use of luggage carts. High airport rents also result in inflated prices at airport stores and restaurants.

Frankly, I have yet to see a persuasive argument against the status quo. Meanwhile, airlines will continue to quietly increase their fees on passengers while loudly complaining when an airport tries to do the same. I expect no less from this industry.

I just received an email solicitation to apply for the Costco American Express card. The offer is for $150 cash back as a sign up bonus.  I like Costco and I visit frequently, but I will not be applying for this card. Here is why:

1. The $150 is only if I make $1,000 in purchases at Costco in three months. Normally, meeting these minimum spending requirements is pretty easy for me. Even if I need to spend $2,500 in three months, like with the British Airways card, that isn’t all that much for someone who charges all day to day purchase and puts as many bills as possible on the card. I love Costco, but I don’t think that I would spend $1,000 in the next three months.

2. $150 is not really the greatest sign up bonus. In the last year, I received $1,000 from the Capital One Match My Miles offer, 1 free round trip plus $500 from Southwest Airlines, and of course the 100,000 British Airways miles. While the Capital One deal was straight cash, the Southwest and British Airways deals were worth far more than $150. Since you can only apply for so many cards, I choose to sit back and wait until I am offered something that is worth at least $500-$1,000 or more.

3. I really don’t like how this card distributes rewards. You get a voucher in the mail once a year. If you cancel your card or if they cancel on you before that date, you loose everything. Even if you do get your voucher, you have to go to Costco to use it. You can use it to make purchases at Costco or redeem it for cash. I would then have to visit my bank to deposit the cash. Call me crazy, but I was more than satisfied with the statement credit that Capital One gave me. It happens at the end of each month, and I do not have to drive all over town and wait in lines to claim it.

Some Other Weird Things About This Card

You get 4% cash back on gasoline at Costco or any other station, 3% back for restaurants, 2% for travel, and 1% for everything else including purchases at Costco.  This seems to break all the rules of retail affiliated cards. The whole idea of the card is that the store wants to encourage you to there. Heck, Costco sells travel services, but it appears that you get a lower return rate if you from them over another travel agent!

What I Like About This Card

Most cards that offer high returns on gasoline specifically exclude warehouse stores like Costco. Costco does have some of the best prices around on gas, and 4% off of that is very good. Nevertheless, my families transportation strategy these days relies heavily on bicycles and a Prius, so thankfully, we don’t spend that much on gas anymore. I personally consume more orange juice than gas on most days : )

Three percent back on restaurants is also pretty good. For all my transportation frugality, I do have a weakness for eating out, so I probably should have a rewards card that gives me a bonus for dining out.

What You Should Do

I am not saying that this is a bad card. What I am saying is that there are plenty of other reward cards that offer a higher sign up bonus and better rewards than this one. If you are a heavy consumer of gasoline and you eat out a lot, this card might actually make sense for you. Just be sure you get the card with full knowledge of its terms. You wouldn’t be the first person to loose out on your reward check because you canceled the card, or they can canceled you, before receiving it.

I have gotten into a couple shouting matches recently over at FlyerTalk on this subject. For those of you who don’t know, hidden city tickets is when you leave the airport at an intermediate destination, forfeiting at least one leg of your itinerary. Back to Back ticketing is when you plan on visiting a city multiple times, returning home on the weekends. Instead of paying for tickets that do not include a Saturday night stay, you book one flight for the first outbound and the last return, and then other flights home for the weekend originating in your destination with Saturday night stays.

What’s The Problem?

Most airlines have clauses in their contract of carriage saying that you are not allowed to do either one. For example, Delta’s contract of carriage says:

3) Delta specifically prohibits the practices commonly known as:
A) Back to Back Ticketing – The issuance, purchase or usage of flight coupons from two or more tickets issued at round trip fares, or the combination of two or more round trip excursion fares end to end on the same ticket for the purpose of circumventing minimum stay requirements.
B) Throwaway Ticketing – The issuance, purchase or usage of round excursion fares for one way travel.
C) Hidden City/Point Beyond Ticketing – The issuance, purchase or usage of a fare from a point before the passenger’s actual origin or to a point beyond the passenger’s actual destination.

4) Where a ticket is invalidated as the result of the passenger’s non-compliance with
any term or condition of sale, Delta has the right in its sole discretion to:
A) Cancel any remaining portion of the passenger’s itinerary,
B) Confiscate unused flight coupons,
C) Refuse to board the passenger or check the passenger’s baggage, or
D) Assess the passenger for the reasonable remaining value of the ticket, which shall be no less than the difference between the fare actually paid and the lowest fare applicable to the passenger’s actual itinerary.

So basically Delta is saying it “prohibits” these practices and can take specified actions.

Are These Practices Illegal?

No, of course not. American Airlines has even admitted that such practices do not break the law. At worst, an airline can say that you are not complying with the terms of the sale, but so what. As a customer, you are giving the airline money, and they are providing you with a service. The entire basis of these claims of non-compliance have to do with how you consume or fail to consume their service, which I do not believe any airline can enforce, no matter what terms it puts in its contract.

In the case of hidden city ticketing, you are simply not consuming part of the service. It would be like getting a great weekend rate for a hotel, yet not spending the night there on Saturday. I fundamentally believe that you can’t defraud a company by not consuming services you paid for. Delta or any airline can put such clauses in its contract, but I don’t think any court would uphold it.

In the case of back to back ticketing, the claims of fraud rest on the idea that you are not consuming services in the order that the provider would like. Ironically, it would not be against the contract of carriage if the back to back tickets were purchased from multiple carriers or if you took another mode of transportation back to your point of origin over the weekend. Consumers will always make purchases that are in their rational best interest, and I just can’t fathom how it can be fraud to legally purchase and consume services in such a way that it saves you money. You are under no obligation to purchase goods or services in a way to maximize the seller’s revenue, regardless of what someone puts in a contract.

For example, a friend of mine and I used to a cookie pie at the mall. Buying the pie was cheaper than ordering the two or three cookies that we wanted to eat. We would eat half the pie and throw it away. Obviously, we were stupid teenagers with high metabolisms, but I digress. Now I suppose the cookie company could have put some small print on the box saying “This cookie is intended to be consumed in full by a large party. We prohibit customers from purchasing it for the purpose of saving money on smaller cookies. If we find you have been doing this we will attempt to charge you for the price of many individual cookies.”  Such a notice would be laughable, and I think the airline’s case would be similarly laughed out of court. To my knowledge, no airline has ever attempted to enforce this in a court of law, for obvious reasons.

One FlyerTalker Disagrees

There is a certain former airline employee who trolls FlyerTalk who thinks that an airline’s contract offcarriage can essentially compel their customers to do anything and that non-compliance is fraudulent. Once the subject comes up, this persona will respond with an endless barrage of accusations that rational consumer behavior constitutes criminal fraud. I am genuinely confused as to whether this person actually believes his own arguments or is just being an Internet troll.  It is really hard for me to imagine that this person would actually cancel an already booked itinerary, pay a change fee, and then rebook a flight that terminates at a point where the person was originally connecting through. On the other hand, I have met some really strange, right wing, corporate apologists. Some may actually believe that private companies can enforce anything that they can put into a contract and that just about any action can be seen as acceptance of a contract. Of course, as someone who spent a lot of his life surrounded by lawyers, I know that every provision in a contract is not always enforceable.

I personally have found many occasions where airlines have not complied with their own contracts of carriage. I am not saying that two wrongs don’t make a right, but neither am I accusing an airline of fraud. Just as no right is considered absolute, neither is any condition placed in a contract valid and enforceable. To believe otherwise is to imagine we live in a world where corporate power is so complete, that we can be compelled under the force of law to consume goods and service only as those companies specify, and only in such a way to maximize their profits. Only an extremist and misguided ideologue, or an Internet troll, would bother to advocate such a position.

The Center for Responsible Lending just released a report indicating that the reforms in the CARD Act of 2009 are working.  They have not raised prices and they have contributed to consumer transparency. These results are of course contradictory to the propaganda that we heard from the industry. They very ingenuously claimed that the act would hurt consumers by raising prices. As anyone can see for themselves, the report concluded that the reforms didn’t even make a dent in the solicitations that consumers have been receiving in the mail.

What The Report Found

Stated prices were tracking actual prices a lot more closely. They also found that prices remained stable and available credit was not curtailed beyond what can be attributed to the economic downturn.  One interesting methodology they used was to compare the market for business cards with that of the consumer market. Since business cards were not subject to the CARD Act, they were able to use those cards as a control group in order to draw conclusions about the consumer market.

My Thoughts

I had always been a huge supporter of the CARD Act, and this reports seems to vindicate my belief that it was a success. In fact, I had thought that higher interest rates was an acceptable trade off for the elimination of the tricks and traps business mode. It actually surprised me that interest rates did not rise appreciably. It has always been my hope that the CARD Act was just step one in a persistent effort to effectively regulate credit cards. I can only wish that those opposing future regulations can have their arguments effectively countered with this report.

Update On Swipe Fees

Yesterday, Congress handed yet another victory to the retailers by refusing to delay the implementation of the swipe fee cap on debit cards. While I am not normally too concerned with the debit card market, I am worried that this precedent might affect credit cards in the near future. These caps will eliminate all debit card rewards and may come around to increase banking fees for consumers. I can appreciate the argument that there are far less costs to the banks for debit card transactions. There is no risk of default or chargeback in the same way there is with a credit card transaction. At the same time, there is also little opportunity to profit from interest like credit cards do.

My worry is that if swipe fees on credit cards were regulated, all of the reward cards would disappear just as debit card rewards are. Consumers should understand that rewards are subsidized by merchant fees. Rewards are basically kick-backs of merchant fees from banks. While merchants complain how unfair this is, they rarely cite all of the ways that they benefit from credit card acceptance. We won’t see prices fall at retailers now that debit card swipe fees are being slashed, and we certainly would not see any price breaks if credit card fees are cut either. The real looser will be reward card users like myself who would actually have to fly on an airplane to get frequent flier miles.

Who Else Would Loose

Just because people would have to pay for an airline ticket to get miles, doesn’t mean that they actually will. In fact, the fragile airline industry has been making billions from the sale of miles to the banks. If the banks can’t charge swipe fees, they can’t use that money to purchase miles to give out to their customers. The whole gravy train grinds to a halt pretty quickly. There are not too many mileage earning debit cards, and they are not too popular, but I have a hunch that the banks will stop ing as many miles as before and the airlines will notice.  The same will be true, to a lesser extent, for the hotel industry. Once the airlines feel the pinch from the loss of milege sales to banks, you can expect them to line up against credit card swipe fee regulation. It might not be a public lobbying effort, but they will certainly be doing their part behind the scenes. Sure, airlines would save some money by not paying the swipe fees, but I think they are getting more money from selling miles and other business arrangements that rely on reward credit cards.