Skift Take

This is how competition should work. American, Delta, and United have been poaching customers from discount airlines with their no-frills basic economy fares. Frontier doesn't like that, so it has come up with a new passenger-friendly policy to try to sway potential passengers.

As some of its competitors increase fee prices to add revenue as fuel prices rise, Frontier Airlines seeks to differentiate itself by reducing how much its charges many customers to change or cancel tickets.

The ultra-low-cost airline said Thursday it has stopped charging change or cancellation fees to customers who tell the airline they don’t plan to fly at least 90 days prior to departure. Passengers who cancel or change between two weeks and 89 days of departure will be charged $49, down from $99. The $99 rate remains for customers who seek to make changes 13 or fewer days before the flight.

Change fees can be profitable because they allow carriers to wring extra revenue from an existing customer, and then sell the passenger’s seat again. Major carriers usually charge $200, though some of their cheapest fares — usually called basic economy — can not be altered, even for a fee.

Some low-cost-carriers charge less than larger global network airlines, but two historically generous airlines — Alaska Airlines and JetBlue Airways – have tightened policies in recent months, charging more to many customers. Southwest Airlines does not charge change fees whether a ticket is canceled months in advance or last minute.

Frontier’s policy switch comes as the airline tries to reinvent itself amid harsher competition from larger U.S. airlines. Not long ago, the largest U.S carriers often ignored Frontier and Spirit Airlines, calculating that they would not be hurt by letting their most frugal customers defect to the no-frills competition. But in the past three years, American Airlines, Delta Air Lines, United Airlines and Southwest have become much more aggressive in pricing against discounters.

Frontier is now betting customers will choose it over legacy airline competition, even when larger carriers match its fares, because Frontier’s tickets will offer more flexibility.

“We are often competing now with airlines who offer basic economy in terms of competing with our fares, and basic economy fares don’t allow changes,” Daniel Shurz, Frontier’s senior vice president for commercial, said Thursday in a conference call. “They are truly non refundable, non-changeable tickets.”

Giving Up Revenue

Frontier makes a substantial percentage of its revenue from non-ticket sources such as change fees, according to a report released this week from Cartrawler.

In its annual Ancillary Revenue Yearbook, it said Frontier generated 42.4 percent of its revenue last year from sources other than fares, putting it third in the world on the metric, behind Spirit Airlines (46.6 percent) and Mexico’s Viva Aerobus (43.6 percent). Frontier, the report said, earned an average of $48.33 per passenger from non-fare sources.

Shurz declined to say how much money the airline makes from change fees, saying only, “change fees are a reasonable source of non-ticket revenue.”

Still, he said reducing fees may produce a financial boost. One problem for Frontier, Shurz said, is that customers have not told the airline they’re not going to fly, particularly when they buy cheap tickets. Before Thursday’s policy change, a customer who paid $99 for a fare had no incentive to cancel, since the passenger would get no credit back.

Now, Frontier is incentivizing customers to let it know as soon as they know they can’t fly, permitting the airline to sell the seat again. The customer will get credit toward another  flight.

“We would like to offer a deal to customers who cancel further out,” Shurz said. “We are going to get more customers who are not going to travel to cancel and it will give us more time to resell the seats,” he said.

The airline is also guessing more passengers will book far in advance, allowing Frontier to book more revenue earlier in the booking curve. While some may cancel before the 90-day mark, many will not.

“It is giving customers piece of mind that they can book us with lower risk,” Shurz said. “We are essentially assuming that we will get more customers and they will likely be repeat customers.”

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Tags: airline innovation, ancillary revenue, basic economy, change fees, frontier airlines

Photo credit: Frontier Airlines is reducing its change fees. Pictured is one of the carrier's Airbus aircraft. A. Doumenjou / Airbus

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