As Airlines Continue to Create New Fees, What Will Happen to the ‘Standard Fare’?
|Date Posted: May 16, 2012|
Employers that send employees on business trips may have noticed that Spirit Airlines is the first carrier to charge customers $100 for a carry-on bag under any circumstances. Beginning Nov. 6, Spirit will charge passengers $100 if they choose to wait until arriving at the boarding gate to pay their carry-on baggage fee. That is an increase from $45. A Spirit Airlines spokeswoman said, “We don’t want customers to wait until they get to the boarding gate to pay for their carry-on bags as this delays the boarding process for everyone. We expect that our new $100 fee, charged only for those who wait until they get to the boarding gate, will ensure that customers purchase their carry-on bags before arriving at the gate.” She compared the fee to a speeding ticket -- it is intended to have a deterrent effect.
The low-cost carrier is hardly alone in charging fees á la carte style. Domestic airlines have been slowly shifting more of the cost of a plane trip away from the base fare and making certain perks, such as priority boarding or extra leg room, optional -- for a fee.
But splitting the price of a ticket into separate charges -- sometimes called “unbundling” -- presents problems for employers making decisions about travel reimbursement policy. (Do we reimburse fees for on-board WiFi? How about extra leg room?) An employer’s reimbursement of an airline ticket purchased by an employee is generally excludible from the employee’s income as a working condition fringe benefit, provided it was for business purposes.
The continued splintering of fees could present problems in the administration of other fringe benefits down the road. Some employers maintain private airplanes for the use of their employees, usually top management. If an employee uses the company plane for a personal trip, he or she may reimburse the company for the cost of the trip in order to avoid having its value included in their taxable income. But what is the value of the flight? For tax purposes, The federal government provides guidance for calculating that amount, a key component of which is the Standard Industry Fare Level, derived from cost data for fuel and other components, and from market data; that is, standard air fares. What is a “standard air fare” in the changing world of airline pricing? So far, the federal government hasn’t weighed in on that issue. But what if the trend continues?
Barry Rogers, director of TCG Consulting’s air practice, said he would be surprised if Spirit’s “speeding ticket” fee caught on elsewhere. He is not aware of any other airline considering such a fee, and he pointed out that “other so-called low cost airlines (specifically Southwest Airlines) currently promote their lack of fees as an advantage.”
But that doesn’t mean other more ordinary-sounding fees, like those for checked bags, won’t keep multiplying and spreading across the industry. “I think the airlines would like to be able to move to a model where customers can purchase á la carte,” Rogers said, “but move everything to the point of purchase. In other words, to be able to buy an economy class ticket, with two checked bags, one drink and a meal and the ability to make one change in your itinerary for a single price -- perhaps getting a discount by bundling a specific set of features up front.”
Another fringe benefit that could be affected by changing fare practices is the security exclusion under the working condition fringe benefit rules. IRS regulations allow that benefits provided by an employer “primarily for the security of employees” are excludable as working condition fringes if such security precautions are ordinary and necessary business expenses. This might come up in the case of a top company executive or a control employee. A corporate plane, for example, can provided additional security, and so the company would apply the security exclusion to that trip. But the exclusion is limited to the difference between the total value of the transportation and the “deemed value” of the transportation without added security. The deemed value has a safe harbor calculation currently equal to about 60 percent of most first-class air fares.
But first- and business-class tickets are not exempt from the unbundling trends. “Unbundling applies to business class as well,” said Rogers, “and, to a lesser extent, first class. In business class, there are already change and refund fees, restrictions on advanced seat assignments, etc. for what the airlines consider ‘discounted business class’ fares,” which can be as much as 70 percent below the full, unrestricted business class fare. “I do think [the airlines] will continue to look for ways to unbundle other types of services such as refunds and changes, and the ability to make reservations over the phone and the like,” Rogers said.