Carry-on Baggage Fee, Airline Pricing and Subcontracting

Abstract

In 2010, Spirit airlines announced that it would start charging passengers for carry-on baggage. Using a vector of route level characteristics, we construct a matched group consisting of routes which best match those served by Spirit (treated group). We then run a diff-in-diff estimation using the treated and matched group, and examine the impact of Spirit s baggage fee policy on its rivals ticket prices. Our results show that Spirit s rivals reduce their prices by about 5.8% after Spirit charges carry-on baggage fee. We also take into account the subcontracting status of Spirit s rivals, i.e., whether they subcontract operations to regional airlines. The results suggest that price reduction mainly comes from major carriers which subtract to regional carriers. In particular, price reduction by non-subcontracting carriers is small and insignificant, and price reduction by subcontracting carriers is large and remains significant. We also discuss how the significant price reduction on subcontracting routes may negatively impact regional carriers.