Another Airline Adds a Carry-On Fee (With a Twist)

Last week, Republic Airways (NASDAQOTH: RJETQ  ) subsidiary Frontier Airlines announced that it would change its fee structure, most notably introducing carry-on-bag fees for certain customers. Carry-on-bag fees have been a source of extreme controversy in the U.S. for the past three years. Supporters claim that the charges reflect the scarcity of overhead bin space and the cost to airlines of dealing with bulky carry-on bags, while detractors argue that the fees take advantage of customers.

However, while other airlines have used the carry-on-bag fee primarily as a tool for boosting revenue through price discrimination, Frontier's carry-on-bag fee is much different – at least for now. Frontier is only charging a carry-on-bag fee for passengers who book their tickets through third-party channels, such as online travel agencies like Orbitz (UNKNOWN: OWW.DL  ) . The purpose of this fee is to entice more passengers to book through Frontier's own website, so the carrier can cut down on travel agency commissions.

Rise of the carry-on-bag fee
In April 2010, ultra-low-cost carrier Spirit Airlines (NASDAQ: SAVE  ) became the first airline in the U.S. (and possibly the world) to introduce a fee for carry-on baggage. Spirit's management decided that adding a carry-on baggage fee would allow them to reduce base airfares, stimulating demand, while improving efficiency by discouraging travelers from bringing large carry-on bags. Two years later, Spirit finally got some company as fellow ULCC Allegiant Travel (NASDAQ: ALGT  ) instituted its own carry-on-bag charge.

For Spirit and Allegiant, adding a carry-on-baggage fee had two main goals: speeding up the departure process by encouraging customers to check their baggage, and allowing the carriers to lower their base fares. Allegiant's management has specifically stated that customers are more likely to start the reservation process when they see a low base fare. Ultimately, customers may be willing to pay more if they are choosing all the "options" themselves than they would be willing to pay if everything was bundled in a higher base fare.

A different approach
Frontier's addition of a carry-on-bag charge was perhaps foreshadowed by Republic's decision in early 2012 to convert Frontier to an ultra-low-cost carrier model. However, Frontier actually has a different rationale for implementing a carry-on-bag charge, compared to Spirit and Allegiant. Frontier has a loyal customer base in Denver, which it does not want to offend by charging for carry-ons. Accordingly, customers who book their tickets on Frontier's website can avoid the fee. Since loyal customers are likely to book directly on Frontier's website anyway, this policy effectively exempts them from carry-on charges.

In fact, instituting a carry-on-bag charge for tickets bought through third-party channels is part of a broader strategy for Frontier to reduce distribution costs. Southwest Airlines (NYSE: LUV  ) has successfully followed a long-term strategy of minimizing its reliance on third-party distribution of tickets in order to keep costs down. Southwest does not participate in most of the global distribution systems and does not sell any tickets through online travel agencies.

Frontier doesn't have the same nationwide brand recognition as Southwest, so it is harder for the company to go "cold turkey" on third-party distribution. However, Frontier has been attempting to drive more traffic to its own website since late last year. This has included initiatives such as giving fewer frequent flier miles to customers who book through travel agencies, offering advance seat assignments only to customers booking on Frontier's website, and charging higher fees to customers booking through travel agencies. Frontier also stopped selling tickets through Expedia (NASDAQ: EXPE  ) earlier this year, after the two could not agree on the terms of a new distribution agreement.

Frontier's carry-on-bag fee – charged only for customers who book through a third-party channel – is thus a natural continuation of its recent moves to entice customers to use the Frontier website. Ever since online travel agencies like Expedia and Orbitz stopped charging booking fees for most flights, customers have had less incentive to book directly through the airlines. However, the commissions charged by these online travel agencies are significant, particularly given the low-margin nature of the airline business.

Frontier is therefore finding innovative ways to align customers' interests with its own. If customers absolutely want to use an online travel agency – for instance, because they can get a big hotel discount as part of a vacation package – then Frontier is willing to serve those customers. However, it will try to offset the added cost of travel agency commissions through higher fees for those customers, such as the carry-on baggage charge. Otherwise, Frontier is encouraging customers to book through the Frontier website, which is the lowest-cost method of selling tickets.

Foolish bottom line
For now, Frontier's carry-on-bag fee looks like the continuation of its recent strategy to entice customers to book through the carrier's website rather than third-party channels. (It is of course possible that Frontier will eventually extend the carry-on-bag fee to all passengers.) By exempting customers who book through Frontier's website, Frontier will avoid alienating loyal customers, while rewarding others for booking directly, rather than through travel agencies. It will be interesting to see how customers react to the changes, but Frontier's new carry-on-baggage policy seems like a very sensible strategic decision.

Solid companies selling at depressed prices have consistently helped generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns. For one such company, read our free report: "The One Remarkable Stock to Own Now." Just click here to get started.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 08, 2013, at 2:04 PM, SanPasqual wrote:

    Next up. A seat fee. The fee will be obligatory as no standing will be allowed in flight.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2413909, ~/Articles/ArticleHandler.aspx, 9/30/2016 10:24:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,257.61 114.16 0.63%
S&P 500 2,162.04 10.91 0.51%
NASD 5,287.68 18.53 0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 10:03 AM
RJETQ $0.88 Down -0.03 -3.19%
Republic Airways H… CAPS Rating: **
ALGT $130.23 Down -0.12 -0.09%
Allegiant Travel CAPS Rating: *****
EXPE $117.19 Down -1.21 -1.02%
Expedia CAPS Rating: ***
LUV $38.09 Down -0.06 -0.16%
Southwest Airlines CAPS Rating: ****
OWW.DL $0.00 Down +0.00 +0.00%
Orbitz Worldwide CAPS Rating: *
SAVE $41.56 Down -0.10 -0.24%
Spirit Airlines CAPS Rating: ****