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Why do airlines bill in advance when hotels let you pay after your stay?

May 05, 2020
5 min read
Why do airlines bill in advance when hotels let you pay after your stay?
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Reader Questions are answered twice a week by TPG Senior Points & Miles Contributor Ethan Steinberg.

The ongoing coronavirus pandemic has turned a spotlight on the economics of the aviation industry, between the years of multibillion dollar stock buybacks that are making government bailouts harder to swallow and the difficulty many travelers are facing in getting refunds for canceled flights. TPG reader Marla wants to know why airlines collect your money months in advance, while many hotels let you wait to pay until you check out ...

[pullquote source="TPG READER MARLA"]Why do airlines collect airfare at the time of booking when other travel-related industries don’t? Hotels don’t — we consumers book reservations, but don’t pay until we check out. Rental cars don’t — we don’t pay until we return the car. How did it evolve to be the case that airlines collect our money upfront and then hold onto it, sometimes for as long as 9 to 10 months, before eventually providing the goods/service purchased?[/pullquote]

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Marla poses an interesting question, one that I'm sure many travelers who've been given the runaround when trying to get a refund are asking as well. The short answer is that airlines do offer a more flexible booking option in the form of refundable tickets, but they price them at such an expensive premium that they simply aren't an option for most price-conscious travelers. Even if you do book a refundable ticket, you pay for it up front and just retain the option to get your money back down the road.

Take a look at this one-way American Airlines flight from New York-JFK to London (LHR). You can see that in every cabin, the flexible/refundable tickets shown in the second image are significantly more expensive than the regular versions. In economy, you need to pay 6.5 times as much for the privilege of having a refundable ticket!

Hotels, by comparison, charge a much smaller premium. Even at luxury properties, the difference between a fully-refundable and nonrefundable room rate is often $50 or less, and while that may still be a large percentage out of the rate, it's more affordable for people in real dollar terms.

Related: When plans go wrong: Your guide to booking refundable travel

The answer as to why things work this way is complicated, and is a mix of "because it's always worked that way" and the fact that airlines have much more varied expenses to cover. An airline needs to spend a lot more money up front or your flight won't take off. Fuel and catering supplies need to be delivered before the flight, and the minute your aircraft touches down and pulls into the gate the airline is subject to taxes and fees, even if your flight doesn't take off for another 10 hours. This is to say nothing of the ground crew, baggage handlers, gate agents and more who need to be paid to work your flight. There's also the cost of the plane itself, something the airline starts paying for (with help from your ticket sales) months or years before your specific flight takes off.

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It's also important to note that airlines are not the only travel companies that collect payment at the time of booking. Many trains, buses and cruises require passengers to pay some or all of the cost of the ticket upfront, for many of the same reasons mentioned here. In fact hotels are a notable exception in the travel industry, and that inevitably leads to some last-minute changes and cancellations when travelers aren't financially committed to the reservations they've made.

Of course, none of these are reasons that things have to be done this way as much as they're an explanation for why they currently are. An airline could switch its sales model at any point, though that would create a huge temporary liquidity crisis and could only be done if said airline had sufficient cash reserves. At the end of the day, the best answer to Marla's question is likely that this is always the way things have worked, and there's no real incentive for any one airline to buck the industry-wide trend at their own expense.

Related: How to refund a nonrefundable airline ticket

Bottom line

I hear Marla's frustration in asking this question, as airlines charge quite the hefty premium for customers who want the option of refundable tickets, and they still collect many from those passengers at the time of booking. Once things become set in stone it's hard to change, and airlines must have decided that the immediate cost of changing the sales model wouldn't result in any significant financial benefit.

Thanks for the question, Marla, and if you’re a TPG reader who’d like us to answer a question of your own, tweet us @thepointsguy, message us on Facebook or email us at info@thepointsguy.com.

Featured image by Getty Images

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Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
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10XEarn 10x points on eligible hotels and car rentals booked through the Credit One Bank travel partner site
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    Earn 10,000 bonus points after spending $1,000 on eligible purchases in the first 90 days and redeem for a $100 statement credit, gift cards, or travel

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The revamped Wander Card from Credit One Bank earns cardmembers up to 10 points per dollar spent on eligible travel purchases. With no foreign transaction fees, the card is also great for international travel. However, points earned from this card can only be used at a fixed value, so it may not be the best option for those striving to get maximum value from their rewards.

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Cons

  • While cardholders can earn a significant amount of points on travel purchases, there isn't any way to redeem points from the Wander Card for maximum value (beyond 1 cent per point).
  • Earn 10,000 bonus points after spending $1,000 on eligible purchases in the first 90 days and redeem for a $100 statement credit, gift cards, or travel
  • Earn 10x points on eligible hotels and car rentals booked through the Credit One Bank travel site
  • Earn 5x points on eligible travel, dining, and gas
  • Earn 1x points on all other purchases
  • Redeem your reward points for statement credits, gift cards, merchandise, flights, hotels, and more
  • With $0 Fraud Liability, you won’t be responsible for unauthorized charges
  • Free Online Credit Score and Credit Report summary, terms apply
  • If you are a Covered Borrower under the Military Lending Act, you may get a different offer
  • See Rates & Fees