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While travelling with carry-on only and smugly skipping the baggage collection queue is one of life's great joys, it's about to get more expensive for fliers of one budget airline.
Last week, budget airline Jetstar announced they're making changes to how much they charge for carry on luggage. Essentially, travellers will be afforded underseat luggage and if they want to utilise the overhead baggage compartment, they'll need to pay extra.
We know Spaceship Voyager investors are money-savvy and love to travel. So we asked Lead Analyst APAC and Middle East at eToro and frequent flier, Josh Gilbert: "Paid overhead luggage. Are they having a laugh?" Over to Josh.
Why Jetstar is charging for overhead bags
"Unfortunately, they're not having a laugh, they're following the most profitable playbook in budget aviation.
Ryanair and other European low-cost carriers have charged for overhead bags for years, only a small under-seat bag flies free, and it's a big part of how they keep headline fares so low.
Jetstar is doing the same thing, from February you'll get a free under-seat bag with every fare, and overhead locker space becomes an optional extra starting at A$25 depending on the route.
Airlines make thin margins on the seat itself, the real money is increasingly in everything around it, bags, seat selection, and boarding order.
These add-ons are high-margin and they let the airline advertise a cheaper base fare while earning more per passenger.
It also tells you something about the competitive landscape in Australia. Jetstar can charge for the locker because Australian travellers don't have many options.
Why Australia has an airline duopoly
History is littered with challengers who thought they could crack the Qantas and Virgin duopoly, and most have ended up like Tiger and Bonza, because any new entrant has to win customers on price, and the moment fares drop low enough to pull travellers away, the margins stop stacking up.
Virgin Australia itself experienced turbulence in 2020 when it filed for bankruptcy, before it was sold to private capital.
The big two also hold the loyalty card, the Qantas Frequent Flyer and Virgin Velocity programs keep corporate travel locked in and give everyday flyers a reason to pay a few dollars more, and a startup with a handful of aircraft can't compete with that.
And the group structure is the quiet advantage, Qantas knows that when travellers baulk at its fares and go looking for a budget option, the only real place to land is Jetstar, so the customer stays inside the group either way.
That's the duopoly and pricing power going to work at both ends of the market.
In Australian aviation, scale wins, and right now only two airlines have it.
What it means for Aussie airline investors
So while a locker fee is annoying at the boarding gate, if you're a Qantas shareholder, it's exactly what you want to see, a dominant market position being turned into revenue at every price point.
Like any company, Qantas also faces risks, including those of fuel costs, competition, and regulatory scrutiny of dominant carriers. It costs a lot of money to keep its aircraft up to date, and the airline expects to spend as much as $5.4 billion on capital expenditure in the next financial year. It also remains to be seen how travellers respond to these new baggage rules."
Our Spaceship Origin Portfolio invests in Qantas at the time of writing.
This is general information only and doesn't consider your personal financial situation, objectives, or needs. Before making any financial decisions, consider whether this is right for you and read the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD), available at spaceship.com.au.
Important! We're sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it's important, and interesting, to let you know what's happening with Spaceship Voyager's investments.
However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn't a reliable indicator or guarantee of future performance.
