Is This Outlandish Airline Fee a Game-Changer?

To say that airline fees are getting out of hand could be quite the understatement. Last year I chronicled 10 of the most outlandish fees that airlines charge, ranging from a $450 overweight international baggage fee for American Airlines, to Hawaiian Airlines, which will charge $175 just to bring your pet on board.

The comforting fact about many of these charges, if there is one, is that they're usually optional. You don't have to buy a $3 bottle of water from Spirit Airlines (SAVE 0.25%) or pay $17 to $25 for a pillow and blanket from Allegiant Travel (ALGT 0.87%) if you don't want to -- and they're often confined to a single airline. However, one charge is slowly infiltrating the sector that may soon become commonplace and promises to be a game-changer -- namely, the carry-on baggage fee.

Source: Commons.wikimedia.org. 

Charrrrrrrrrge!
Spirit Airlines began charging customers for carry-on bags in 2010 as part of its campaign to undercut regional and national carriers with ultra-low ticket prices and allow consumers to add optional items at their discretion (baggage, carry-on baggage, food and drinks, etc.) to drive its margins. Spirit learned quickly that these ancillary fees, which it typically discounts if they're booked online, or in some cases even at the airport's point-of-sale machines, rarely require a physical airline representative for collection purposes, making them beefy margin boosters. Spirit later upped its carry-on fee to as much as $100 for customers who wait to check their bag at the gate.

Allegiant followed suit in April of last year, announcing a plan to charge $30 for carry-on bags that were booked online, and also adding a surcharge for bags booked at the airport.

On Wednesday, Republic Airways (NASDAQ: RJET)-owned Frontier Airlines announced that it, too, plans to join the carry-on-bag-charging club. However, Frontier's carry-on baggage charge, which will range from $25 to $100, is unique in that it doesn't slap every customer with the charge as Spirit and Allegiant currently do. Instead, carry-on bags will remain free for customers who book their flights through Frontier, but an added charge will apply for customers who book their flight through third-party websites such as Expedia (EXPE 0.55%) and Orbitz (NYSE: OWW) which typically offer cheaper flight prices than what you'll find on airline companies' websites.

Source: Commons.wikimedia.org. 

"A whole different animal"
Frontier's move is groundbreaking for two particular reasons.

First, it adds yet another airline to those charging for carry-on bags. Spirit and Allegiant are writing the book on utilizing high-margin optional fees to drive bottom-line growth, and other regional airlines appear likely to catch onto this growth-driver. Either that or they will simply be left behind.

Second, it could put third-party booking sites in a bind. The advantage of third-party sites such as Expedia and Orbitz is that they usually undercut airlines' website ticket prices and allow users to bundle their flight with other items like a car and hotel to maximize their savings. However, if airlines suddenly begin penalizing passengers who purchase their ticket through these third-party websites by imposing carry-on baggage fees, if the math makes sense, they'll simply make their purchase via the airlines' website.

But before you panic ...
If you're suddenly frantic to click the "sell" button on third-party travel sites, consider this point: While airline tickets make up a big chunk of travel sites' gross bookings, it's hotels that provide the biggest margin boost. Since competition among airlines is fiercely competitive, and most airline websites are introducing travel prices that are somewhat competitive with Expedia and Orbitz, margins tend to be low in airline bookings. Third-party travel sites make the bulk of their profits from hotel bookings, which are far less transparent to consumers, making it easier for them to charge a premium. This move may actually have less bearing on the third-party booking sector than you might think.

For airlines, though, it could have a big benefit. As I said, these fees are almost pure profit with little need to add representatives for collection purposes. Don't be surprised if you see a wider adoption of carry-on baggage fees -- at least in the sense of being directed at customers making purchases through third-party websites -- by regional airlines in the coming year.