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Is This the Next Frontier for Airline Fees?

In April, Frontier Airlines announced a change in its rules whereby passengers will be charged between $20 and $50 for the use of overhead bin space. Adding new fees is hardly surprising for ultra-discount airlines like Frontier, but it's worth taking a look at how far this policy could spread.

Ultra-discount airlines
For a long time, discount airlines were the new alternative in the airline industry. One of the biggest players among discount airlines is Southwest Airlines (NYSE: LUV  ) , which has prided itself on having fewer fees than traditional airlines. But as Southwest has grown in size, ultra-discount airlines are adopting an ever lower fare model, except it doesn't come with "Bags Fly Free."

Ultra-discount airlines are creating a business of ultra-low fares along with fees for everything from snacks to printed boarding passes. Spirit Airlines (NASDAQ: SAVE  ) embodies the ultra-discount airline by offering fares as low as $9, some of the least legroom in the industry, and charging fees for almost everything, including carry-on bags.

In fact, Spirit Airlines charges even more for carry-on bags than Frontier Airlines. The following chart gives a handy price comparison based on when the carry-on bag was reserved:

  Frontier Airlines Spirit Airlines
At time of booking $25 ($20 for Discount Den members) $35 ($26 for $9 fare club members)
At airport check-in $35 $50
At gate $50 $100

So, Frontier's approach is not unique, but it does show how a policy of charging for carry-on bags is spreading.

Who else will start charging?
With ancillary revenue essential to the operation of ultra-discount airlines, and the current adaptation at both Spirit and Frontier, carry-on bag fees are highly likely to spread to other ultra-discount airlines.

At first, one may assume a policy of ultra-discount airlines would next find a home at discount airlines. However, Southwest, and airlines that brand themselves in similar ways, would probably be the last ones to adopt such a fee. Even as checked bag fees have become commonplace at traditional airlines, Southwest continues to allow two free checked bags to its passengers as well as offer one of the most flexible change fee policies in the airline industry.

Instead, carry-on bag fees are more likely to make a jump to traditional airlines, where the checked bag fee was born. Although checked bag fees were seen as an outrage at first, they soon spread to almost all traditional airlines and have been grudgingly accepted today.

There have already been some strategies brewing against carry-on bags among traditional airlines. In March, United Continental Holdings (NYSE: UAL  ) began cracking down on oversized carry-on bags -- oversized being any bags that can't fit in the airport sizer displays. The airline claimed the move came amid complaints from passengers regarding oversize bags taking up too much space. However, critics argued United Continental is just looking for more fees since oversized carry-on bags have to be checked and a checked bag fee is collected.

If traditional airlines do move toward charging for carry-on bags, they may start by only charging a minimal fee for bags reserved at the time of booking with the larger fee applying to carry-on bags at check-in or at the gate. This would follow a similar pricing structure as the ultra-discount airlines regarding carry-on bags.

Will it happen?
Fees for carry-on bags are growing among ultra-discount airlines, but many other travelers are wondering whether these fees will find their way into traditional airlines. Traditional airlines have already made ancillary revenue a major part of their business through everything from checked bag fees to upgrades.

Traditional airlines are probably watching how these fees work out at ultra-discount airlines and running the calculations while waiting for other carriers to make the first move.

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Read/Post Comments (9) | Recommend This Article (2)

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 15, 2014, at 12:26 PM, GeaugaTruck wrote:

    If this keeps up, a new service will pop up transporting just your luggage concurrently to your destination for way less than the airlines charge.

  • Report this Comment On May 15, 2014, at 1:49 PM, cityperson wrote:

    People keep complaining and the media about airline fees as robbery. So stop flying for about three or four days and see fees these fees go away. Most of these airlines are having a good laugh, just like the banks and other companies with the ir additional fees

  • Report this Comment On May 15, 2014, at 3:11 PM, iangilson wrote:

    United will transport your luggage for you (for a hefty fee of course), pick it up and deliver it to your destination. This service has been available for a couple of years.

  • Report this Comment On May 15, 2014, at 5:16 PM, Catfishmugs wrote:

    I just want to say that I agree with cityperson. Cause what these deregulated companies have forgotten. Its a privilege for the companies to do business. Sorry its not a privilege for us to use their services. Cause we have a lot to choose from.

    These days business can be done at home while sitting in our pajamas. Don't need to always fly there.

    Also I have always said with the banks and their BS. Its time for everyone to go close their accounts. I do not care if you even have just a penny in there. Go take it out. If just one day was designated for this.

    I am willing to bet they will quit being a pain in our !#$#@Q@'S

  • Report this Comment On May 15, 2014, at 5:49 PM, ldlduvall wrote:

    If people are stupid enough to give those airlines their business, they deserve to get the business.

  • Report this Comment On May 15, 2014, at 6:26 PM, johntraveller wrote:

    Oh please! The airlines' business model has changed because their customers refused to pay a fare that covered their cost and made a profit. It's called business and what you now get is what customers will pay and it's not going back. So get over it. And never mind that what you pay now is only for what you use, unlike the past where you paid whether you used it or not.

  • Report this Comment On May 15, 2014, at 7:34 PM, mobycat wrote:

    I wish the airlines would crack down MORE on people trying to take oversized bags as carry on. I find it obnoxious when people have two large bags or even three bags with them. You know there are others on the plane, too, right?

  • Report this Comment On May 15, 2014, at 7:51 PM, johntraveller wrote:

    @mobycat That's exactly what United is trying to do. For the reasons you mention.

  • Report this Comment On May 16, 2014, at 11:06 AM, BIGSHCLUNK wrote:

    This is not surprising IMHO. I've been on many flights with over packed bags going carry on to circumvent a baggage fee. And taking up ALL the bin space!

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Alexander MacLennan

Alexander MacLennan is a Fool contributor covering Industrials, Airlines, and Financial companies. He is always ready for a good growth or turnaround story and tries to find them before the market does.

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