It may seem counterintuitive that an airline responsible for the least legroom in American aviation would be a help to travelers who want more legroom. But for all its rough edges, Spirit Airlines (NASDAQ:SAVE) may be helping everyone out -- especially those who will never fly the airline.
More fees, less space
Major airlines have been raising fees on everything from flight changes to checked bags in an effort to generate more ancillary revenue. At the same time, legroom isn't expanding, and many airlines are packing more seats onto planes in an effort to increase per-plane capacity.
Why is this working? Because major airlines are doing it in tandem. American Airlines, a subsidiary of AMR (NASDAQOTH:AAMRQ), was the first legacy carrier to institute a checked-bag fee. The $15 wasn't much by today's standards, but it was an outrage back in 2008. Other airlines were quick to follow, and today, checked-bag fees are accepted as an industry standard.
But the trend of tandem fee increases continues. In April of this year, United Continental (NYSE:UAL) raised its ticket-change fee to $200 from a previous $150, the general standard among major airlines. This increase was soon adopted at US Airways (NYSE:LCC) and later at Delta Air Lines (NYSE:DAL) and American Airlines.
Because of a far smaller number of competitors in the industry today and a management mindset of profit generation rather than market-share wars, airlines are increasingly able to raise fees knowing competitors will match. This strategy has even been extended into packing planes tighter, as major airlines use slimmer seats to create more dense configurations.
And the situation looks unlikely to improve anytime soon. A series of airline mergers has resulted in four large legacy carriers, and each merger gave more pricing and fee-raising power to the industry as a whole. The previous mergers, although a tough deal for passengers overall, can certainly be argued as necessary for an industry that used to be a frequent flier in bankruptcy court.
Today, another airline merger is awaiting trial. The merger between US Airways and AMR is being fought out by the legal teams of the airlines and the Department of Justice, which, along with several state attorneys general, filed a suit in August to block the merger. But there's a tough situation here. A report from Reuters notes that if US Airways and AMR aren't allowed to merge, United Continental and Delta could dominate international routes as the separate US Airways and American Airlines struggle.
Many analysts, including a recent report from JPMorgan Chase, note a reasonably high chance that the US Airways/AMR merger will proceed, either through a settlement or a victory in court. Either way, airlines have significantly more pricing power than they had before this recent wave of mergers.
Legroom is possibly the most coveted thing among travelers, and you may be concerned that trends in the aviation industry point to much more uncomfortable flights ahead. While the thinner seats prevent any legroom loss now, major airlines may decide they can start decreasing legroom in the future. But, ironically enough, the king of knee crunch may make this step financially unprofitable. In Part 2 of this article, I will examine why, of all parties, Spirit Airlines may be saving fliers of major airlines from the dreaded knee crunch.
Alexander MacLennan owns shares of AMR and Delta Air Lines and also has options on Delta Air Lines and US Airways Group. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.