Flying Away from All-in-One Fares

At a three-day industry conference in Huntington Beach, California, last fall, airline executives heard speakers on topics such as “Strategies to Increase Onboard Food and Drinks Sales,” “Practically Delivering the Onboard Retail Experience” and “In-flight Internet Access – Options and Opportunities.”
It’s the third year for the airline industry’s Ancillary Revenue Conference. It’s also the third year the industry has seen rapid growth from these new revenue streams.
Under pressure from rising fuel costs and restrained spending on corporate travel thanks to the recession, airlines have found a new way to make money: à la carte pricing on everything from baggage to in-flight comforts like pillows and headsets.
Beginning with European carrier Ryanair in 2001, airlines have increasingly taken an unbundled approach to air-travel costs, throwing expenses to travelers to anticipate and manage, and by extension, to their corporate travel departments. Their hope is that doing so will help offset declining industry revenue, which dropped $11 billion in the U.S. alone in 2009.
For the airlines, the move is helping. Ancillary fees brought in $10 billion for U.S. airlines last year. Globally, those fees are expected to reach $58 billion in 2010, including $4 billion just for baggage fees for U.S. carriers, according to the Centre for Asia Pacific Aviation, an airline industry researcher.
The switch is a sea change for corporate expense management departments, which must make sense of how to account for unbundled costs that once were part of the typical airline ticket.
“This is a good example of the tax code and things we rely on always lagging the dynamics of business development,” says Tim Burley, a tax partner at public accounting firm Weiser LLP in Edison, New Jersey.

Accounting for Accoutrements
Historically, air-travel expense reporting was fairly straightforward. Airplane tickets were an all-in-one travel expense unlike hotel charges, which for years have been unbundled into separate charges for food, entertainment and other services, like laundry. But with the introduction of discreet payments for in-flight meals and other amenities, companies must now determine which items are travel costs and which should be categorized “meals and entertainment,” for which the IRS allows only a 50 percent deduction
“I’m inclined to say that peanuts, pretzels - these are incidental to travel,” and therefore shouldn’t be taxed, Burley says. Pillows and blankets “ease the pain of travel and I’d still argue they’re incidental to travel and the cost relatively small. It’s inconvenient when you’re away from home and you don’t have a choice when you’re on a plane,” unlike in a hotel, where travelers have alternatives to pricey in-room meals.
According to a November 2009 survey of 300 travel buyers from Association of Corporate Travel Executives, tracking the total cost of a trip is still unwieldy, with 29 percent reporting they don’t manage trip costs well and 73 percent reporting that collecting trip-cost data is their top challenge. Those surveyed also reported that ancillary costs made up 41 percent of their unmanaged costs.

Christa Manning, director of research at American Express Business Travel, points out that accounting systems haven’t caught up to the kind of itemizing required to track and analyze ancillary fees. “For mid-market companies, the rise in fees is bad news because most haven’t had the focus and resources to manage travel exclusively, so they may end up getting impacted more as the suppliers slip more of these fees in before they see the magnitude of them,” Manning says. “Yet larger companies are also suffering too because the technology systems aren’t set up to track these expenditures at a detailed level anyway.”
To address this systems lag, the Airlines Reporting Corporation, the air-travel payment clearinghouse organization owned by the major airlines, is rolling out a stop-gap feature that will add a “miscellaneous” expense type to track these fees. However, the new feature won't be fully implemented for some time.

Putting Policies in Place
In the meantime, industry groups like the Association of Corporate Travel Executives suggest companies would do well to get a better handle on travel and entertainment expenses — the second largest expense category at most companies after payroll, according to ExpenseWatch.com — by creating policies regarding which are allowed, pre-populating expense reporting systems with these items and considering them in negotiations with airlines.
Fortunately, some 60 percent of companies mandate a single form of payment across all travel expenses, according to ACTE, making it easier to manage such costs. The problem comes in classifying unbundled items. Should an in-flight snack be considered a “meals and entertainment” expense or part of the travel cost? Getting this wrong could possibly raise a flag with the IRS, says Burley, the tax accountant.
So what can you do? Here are steps industry experts suggest to track and contain expenses related to ancillary fees:

• Create an internal policy covering allowable expenses.
• Limit non-ticket air-travel purchases to a specific dollar amount.
• Provide a prepaid credit or charge card to be used for such items.
• Keep track of which airlines unbundle more expenses than others and determine which of those are more budget-friendly.
• To distinguish airfare costs from á la carte items, run a report showing all charges under a certain amount; costs under $100 are likely to be the new items. From there, analyze data to see which airlines are more likely to unbundle and among them, which charge more; which routes have more ancillary fees; and which types of employees are more likely to purchase these items.
• Define expenses so employees log them properly and are reimbursed appropriately.

Companies with large travel expenditures may be able to negotiate the rebundling of some costs, according to a proprietary American Express Business Travel report. “Because of the growing number of ancillary charges, business travel airline supplier negotiations are beginning to resemble the discussions companies historically have had with hoteliers. The base price is only a part of the total cost,” according to the report, Ancillary Fees: Charges Changing the Airfare Landscape. The report also states: “It is still too early to determine whether airlines will start to include ancillary products or waive charges to win and retain corporate business.” Although no one expects airlines to begin charging fees for life jackets, some unbundling may already feel extreme, especially to corporate travel departments adjusting to the changes. Even with corporate travel down 15 percent in 2009 – a trend that’s expected to continue through 2010 – getting a handle on these changes will help companies better budget and manage air travel going forward.

A la carte pricing
Here’s a sample of what some U.S. carriers are charging for amenities that used to be built into their ticket prices:

*Ben: See link for sample pricing



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