US airlines on Wednesday drew bipartisan condemnation from politicians for using complicated and concealed fees to increase seat and luggage costs for consumers while generating billions of dollars in revenue.
“They feel, with more than understandable justification, that they are piggy banks being shaken down by these skyrocketing fees that seem to have no connection to any cost that the airlines incur,” US Senator Richard Blumenthal, who chairs the Permanent Subcommittee on Investigations, said during a hearing.
Wednesday's hearing, named "The Sky’s the Limit – New Revelations About Airline Fees", follows a report released last week accusing airlines of introducing junk fees over the past 20 years to boost their revenue and make flying more costly for consumers.
The report focused on five major US airlines – American, Delta, United, Spirit and Frontier, whose executives testified before the subcommittee. American, Delta and United are part of the “Big 4" (along with Southwest) which dominate the US domestic market. Southwest, which currently does not charge for luggage or seating assignments, was exempt from the report.
From left, Steve Johnson, vice chair and chief strategy officer at American Airlines, Robert Schroeter, senior vice president and chief commercial officer at Frontier Airlines, Peter Carter, chief external affairs officer at Delta Airlines, Matthew Klein, executive vice president and chief commercial officer at Spirit Airlines, and Andrew Nocella, executive vice president and chief commercial officer at United Airlines, are sworn-in during a Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations hearing in Washington, DC, on Wednesday. Bloomberg
The committee's report – the work of a year-long investigation – found that the five airlines received $12.4 billion in collective revenue from seat fees last year, a 50 per cent increase from 2018. The report also said Frontier, Spirit and United airlines may be avoiding federal transportation excise taxes by labelling parts of their charges as non-taxable fees.
Mr Blumenthal also pushed back on notions that airlines are implementing these higher fees to offset rising costs, saying that the report found checked bag fees are unconnected to costs to transport them.
“And it's obvious that assigning paid seats is pure profit,” he added.
Frontier Airlines raised the price of its most expensive extra legroom seat from $50 in 2018 to $141 last year, according to the report. United's most expensive legroom fee increase from $256 to $319 during this period while Spirit's most premium offering rose from $140 to $899. The report also noted American's top extra legroom fee dropped by $20.
Mr Blumenthal said airlines are using new algorithms and potentially artificial intelligence to implement consumer-specific pricing which “will make it much easier for airlines to discriminate against particular passengers” and raise fees.
Airlines counter the claim
Airline executives countered that their fees are transparent and offer an array of options for customers who have different needs for flying.
“Our customers who prioritise affordability have the option to choose a lower, fair product, and in doing so, opt out of paying for additional services they do not need nor want,” said United Airlines executive vice president Andrew Nozella.
“But we also have customers who seek more services, and they retain the ability to use this value for an incremental fee, like a seat with extra legroom or checked bags.”
The report also found Frontier and Spirit airlines paid gate agents $26 million between 2022 and 2023 to catch customers for not following airline bag policies, often forcing those customers to pay a bag fee. Frontier estimated it would generate more than $40 million in fees from enforcement in the programme's first year, according to the report.
Frontier Airlines' senior vice president Robert Schroeter confirmed the carrier pays gate agents to pick out customers' bags that are allegedly too large.
"So how much have you paid people to pull out customers who are in line with a bag that's two centimetres too big?" Mr Hawley asked Mr Schroeter.
"Well, we recognise this is a hard job, and so, therefore, we incentivise them to do that" before confirming the carrier pays employees $10 per bag, said the Frontier executive.
Spirit Airlines executive Matthew Klein said the carrier stopped paying gate agents to confiscate bags on September 30.
A coalition of airlines in May filed a lawsuit against the Department of Transportation over rules requiring carriers to disclose fees upfront. The department said the rule would save half-a-billion dollars for customers each year. A US federal appeals court temporarily blocked the rule in July following a request from the airlines coalition.
Airline executives said they would not drop the lawsuit when pressed during Wednesday's hearing.
US airlines have been accused for using complicated and concealed fees to increase seat and luggage costs for consumers while generating billions of dollars in revenue. Getty Images
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
The Cairo Statement
1: Commit to countering all types of terrorism and extremism in all their manifestations
2: Denounce violence and the rhetoric of hatred
3: Adhere to the full compliance with the Riyadh accord of 2014 and the subsequent meeting and executive procedures approved in 2014 by the GCC
4: Comply with all recommendations of the Summit between the US and Muslim countries held in May 2017 in Saudi Arabia.
5: Refrain from interfering in the internal affairs of countries and of supporting rogue entities.
6: Carry out the responsibility of all the countries with the international community to counter all manifestations of extremism and terrorism that threaten international peace and security
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