How valuable is the bare-bones model? The feds give mixed messages

In the lawsuit filed to block the merger of Spirit Airlines with JetBlue, the Justice Department emphasized the importance, from a competition standpoint, of keeping the U.S. ultralow-cost carrier (ULCC) sector robust. 

Now, the CEOs of Spirit and Frontier are making the case that Justice’s position could complicate efforts by the DOT to write regulations requiring airlines to be more transparent about ancillary fees during the flight-booking process.

At the J.P. Morgan Industrials Conference in March, Spirit CEO Ted Christie said Justice “clearly agrees with me in the regard that we do have a very defensible consumer model.” 

Later that day, Frontier CEO Barry Biffle argued that since the federal government is stressing the importance of ULCCs to the marketplace, it would be a challenge for the DOT to push through rules that harm the business model. 

Under the proposed regulations put forward by the DOT in September, airlines, third-party sellers and metasearch sites would have to clearly disclose baggage fees, change fees, cancellation fees and family-seating fees to consumers whenever fare and schedule information is provided for flights. There would be no holding back of information until later points in the booking process. 

In announcing the proposal, the DOT emphasized its view that such changes would spur air travel competition.

“The department believes that the disclosure of passenger-specific fees whenever fare and schedule information is provided would promote informed buyers, enhance competition and lower prices,” reads the proposed regulation.

Although ancillary charges are most prolifically deployed by ULCCs such as Spirit, Frontier and Allegiant, the Justice Department emphasized the importance of preserving ULCC service in the lawsuit it filed early last month to block the proposed merger between Spirit and JetBlue.

“The merger of JetBlue and Spirit would result in higher fares and fewer choices for tens of millions of travelers, with greatest impact felt by those who rely on what are known as ultralow-cost carriers in order to fly,” attorney general Merrick Garland said as he unveiled the suit on March 7.

A proposed DOT rule would require airlines to display ancillary fees from the start of the booking process. This screen shot shows Spirit doesn't immediately show such fees.

The suit says that Spirit accounts for approximately 50% of the domestic ULCC market and notes a JetBlue estimate that when Spirit stops flying a route, average fares go up by 30%. Justice also seems to back the ULCC approach of offering a bare-bones fare, with upcharges for everything from carry-on bags to seat assignments to food and beverages.

“Spirit’s low unbundled fares, which a senior JetBlue executive has characterized as Spirit’s ‘key weapon,’ have enabled more consumers to fly, and to fly at a lower price, by providing the opportunity to purchase the products and services they truly value,” the suit says, sounding similar to the marketing material ULCCs themselves use.

‘We want Spirit to become better’

The case garnered immediate public backing from the DOT, which announced on the day of the filing that it “fully supports” Justice’s action. 

The discrepancy between the support for the ULCC sector and its model on the one hand and the DOT’s move to more tightly regulate ancillary fee disclosures on the other even drew notice from consumer advocate Bill McGee of the American Economic Liberties Project. 

But McGee argued that those two juxtaposed positions aren’t hypocritical. Spirit, he noted, can be a problematic airline from a consumer perspective in terms of its business approach and practices while also offering consumer benefits. 

“We want Spirit to become better. We don’t want to see Spirit go away. We don’t want to see any low-cost carrier go away,” he said. 

ULCCs regularly argue that they are already transparent when it comes to fee disclosures, even without displaying ancillary costs on the first page of the booking path. 

“The decisions that our consumers make are educated ones, and assuming otherwise is quite frankly ignorant,” Christie said at the J.P. Morgan conference. 

Rob Britton, a Georgetown University adjunct professor and a former American Airlines executive, said that while he opposes the proposed transparency rules, he doesn’t think they would ultimately have a lot of impact on airlines. 
But like Christie and Biffle, he noted the mixed messaging coming from federal regulators. 

“There is an inherent conflict in the way things are being said,” Britton said. “The Justice Department can’t think of ancillaries as the savior of competition [while] a bunch of people at the DOT think it’s a bad idea.”

McGee said that, ultimately, those types of arguments are “a bit of a red herring.”

“They know full well that they aren’t going to be going in to talk about the nitty-gritty of ancillary fees with the DOJ,” he said of Christie and Biffle. “It’s going to be the DOT, and the DOT has not contradicted publicly its comments in the past on fees and fee transparency.”

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