What’s the point of flight ticket cancellation charges?

Question

Many airlines sell tickets with fare rules that include a “cancellation penalty” if the ticket were to be cancelled prior to departure. It seems to me that this mostly applies to the economy class fare option (e.g., Aegean Air), and the cancellation penalty may be waived if the ticket is cancelled within, say, 24 hours of purchase (e.g., by Indian law).

According to this Travel SE answer, most people would prefer a no-show over cancelling their ticket if that entails paying a fee. The answer also mentions that the fee exists due to “convoluted revenue optimization systems”.

I thought that this cancellation fee functions as kind of a “service fee” in order to pay for processing the cancellation request. However, from my layman’s perspective, the fee does not make any sense. I think an airline should provide its customers with an incentive to cancel their tickets as soon as they decide they are not going to travel, instead of them choosing to simply not show up. This would enable the airline to resell the seat and potentially save up on other costs such as by preparing less meals. Moreover, this will decrease the number of no-shows in general, which could reduce the need for overbooking.

So, what is the point of such fees?

Answer 1

A cancellation implies a refund, and the fee eats into that.

It's really that simple. The only reason to bother cancelling a ticket is that you want you money back. (Possibly only the airport charges and not the nominal fare, but for many low-cost carriers the former is a significant if not major part of the total.)

The airlines in general don't want to have to give you your money back. The purpose of the cancellation fee is to discourage you from doing that. The fee will eat your entire refund for the cheap tickets and make you think twice about cancelling the more expensive ones. A no-show is a great thing for the airline, as they get to keep all of the money but save on the fuel and passenger processing costs. (Plus, if there are any standby passengers, the airline gets paid twice for a single seat.)

Answer 2

Imagine a world where there were no change fees, and no cancellation fees. If you bought a ticket and then changed your mind, you could just cancel or change it. In this world, tickets would not be cheaper if you bought them in advance. After all, I could buy a ticket for a year from now then change it the day I was going to fly, and the airline would have to accommodate me. They wouldn't get a benefit from my making firm plans in advance, so they wouldn't motivate me with money to make my plans in advance. You probably wouldn't like this world, because all plane tickets would cost about what "I need to fly this week" plane tickets cost today, which is about 5x what you pay if you plan far enough in advance.

Now, imagine the same world with no change fees or cancellations, but with no refunds either. You buy a ticket, use it or not, we don't care, but it's paid for. A bit like putting a subway token in a turnstile but then not going through. You wouldn't like this world either: plans do change and people don't want to lose all the money they paid for a plane ticket. Travel insurance exists, but doesn't cover everything.

So, ok, the airline is going to charge you some money to change or cancel your plans. There are two ways to establish that charge. One is "what does it cost them" which is a few pennies in IT stuff and then possibly thousands in switching to a bigger plane for the route or whatever. That's too much of a lottery for passengers to take on. A sort of average charge of a few hundred might be fairer. But the other approach is "what will deter this behaviour?" If changes cost hundreds, you won't book until you're really very sure you going to do it. (Example: I book hotel rooms for events I might or might not attend, since they book up fast and can be cancelled no charge. I don't buy the plane tickets until I know for sure I'm going.)

Then on top of that you have to think about the system-gamers. You fly once or twice a year. But there are people who fly every week. And they want to get upgraded, they want maximum status miles, they want to be home half an hour earlier than they would normally be, and all kinds of things that aren't an option for you or don't matter for you. They invest time and energy into gaming systems. They book three flights from A to B on the same day, so they can decide on the day which one they want and that's cheaper than buying a last minute ticket on the day. They do "nested returns" and "hidden cities" and a ton of things you'd never do. The fees have to be robust against that kind of nonsense too.

So what this adds up to is that fees must exist, mostly to control your behaviour and make your plans firmer, so that they can plan their staff and equipment usage properly. Sometimes it seems like they would do better if they didn't charge you that fee -- but that's because you haven't thought about how to game that if you fly that route every single week.

Answer 3

I think you're obfuscating things by switching from the penalty terminology to the service fee terminology. It is definitely a penalty.

The airlines (like any business) would like to have a predictable revenue stream. If you buy your ticket way ahead of time, you're rewarded for helping them achieve a more predictable revenue stream: You get a better price. If you buy your ticket at the last minute, you don't get this reward.

Similarly, if you cancel or change your ticket, you're working against that predictable revenue stream, so you're punished with a fee. If you go ahead and travel with the ticket you bought (or you simply don't show up for your flight), you're not punished, because you didn't negatively affect the revenue stream.

Answer 4

Besides all the other excellent answers, yet another consideration. Cancellations can be used for nefarious purposes. Two that come to mind is credit card fraud and money laundering.

These things can be resolved, but dealing with it would cost the airline very substantial amounts of money. So they'd rather not deal with it in the first place, or at least limit the number of cancellations. Making only expensive (and thus most profitable) tickets refundable is one way airlines can limit the damage.