By Jeffrey Dastin
(Reuters) - United Continental Holdings Inc <UAL.N> took a leaf out of its low-cost competitors' playbook on Tuesday by unveiling a new low fare that limits customers to one carry-on bag that fits under a seat, part of a broader plan to boost profit over the next four years.
Chicago-based United is the first major U.S. carrier to make such a move for carry-ons, which it hopes will attract some new customers and push some of its regular flyers toward higher fares.
Combined with better flight connections and revamped pricing algorithms, the airline said at its investor day that it aims to add $4.8 billion to yearly operating income by 2020, excluding the effect of rising wages.
The new fare class, known as 'Basic Economy,' risks frustrating flyers who already feel burdened with airline travel restrictions and fees, but could push some customers - especially those with large luggage - toward higher-priced fares.
The No. 3 U.S. airline by passenger traffic will begin selling the no-frills fares in the first quarter of 2017 for travel starting in the second quarter. Prices will be comparable to low fares it now charges for the economy cabin, but with more restrictions.
United said Basic Economy customers would not be assigned seats until the day of departure, meaning people on the same ticket may be split apart.
"Flights do run pretty full today. You’re probably going to get a middle seat," United's President Scott Kirby said in an interview.
Survey data indicated travelers and employees do not like scrambling to stow carry-ons when overhead bin space is limited, Kirby said. United believes the new fare creates more options for customers, and should not provoke a backlash.
Charlie Leocha, chairman of consumer advocacy group Travelers United, took a different view.
"This action clearly shows how airline consolidation is eliminating choice," he said in an email. A single carrier's decision now means more customers are impacted.
Those who book Basic Economy on United will be barred from carrying on bags that can only fit in overhead bins, and they will not accrue miles toward elite status.
Fare initiatives will account for $1 billion of United's income target, as more customers pay to check bags or select higher fares that give them two "free" carry-ons. And airlines still have ample room to invent fare packages they can sell to customers, Kirby said.
"It is ridiculous that we will sell a seat for $49 and a seat next to it for $800, and we treat them exactly the same, just because they book later in the process. There’s no other industry in the world I can think of that does something like that," he said.
United shares closed up nearly 5 percent. Part of the rise may be from billionaire Warren Buffett's Berkshire Hathaway Inc <BRKa.N>, which disclosed stakes in four U.S. airlines including United on Monday, boosting investor confidence in the sector.
United's announcement follows a similar decision by Delta Air Lines Inc <DAL.N> in 2014 to sell more tickets that are cheap but prohibit itinerary changes and seat selection.
Delta and United are hoping to lure customers away from low-cost carriers with competitive prices and upsell them once they reveal the conditions of the ticket.
The practice of marketing cheap tickets that become expensive once add-ons like carry-on bags are included had helped companies like Spirit Airlines Inc <SAVE.O> and Frontier Airlines undercut their bigger rivals, until the likes of Delta borrowed from their playbook.
Frontier was lowest for customer satisfaction in J.D. Power's North American airline survey in 2016. Spirit was not included in the survey.
United's latest move appears to be the most restrictive yet for a large airline's basic economy fare, said Bob Mann, an airline industry analyst at R.W. Mann & Co.
Mann said United still had some way to go before it matched the profit of Delta, the No. 2 U.S. airline, whose margins are about twice those of United. American Airlines Group Inc <AAL.O>, the biggest U.S. carrier, is expected to launch its basic economy product early next year.
It was unclear if the move by United would prompt similar bag limits from rivals. However, airlines have frequently copied each other, as when they added fees for checked luggage in the last decade.
Delta declined to comment on whether it would follow suit on carry-on bags. An American spokesman said the airline was in the process of evaluating its own basic economy offering.
In addition, United said it would defer 61 Boeing Co <BA.N> 737-700 planes originally due in the next two years to a date to be determined, reducing capital spending by $1.6 billion through 2018. It will convert those 61 orders to newer 737 MAX planes.
The company also said it would buy 24 E175 aircraft from Brazil's Embraer SA <EMBR3.SA>, instead of leasing the planes as previously planned.
(Reporting by Jeffrey Dastin in New York, additional reporting by Ankit Ajmera in Bengaluru; Editing by Sai Sachin Ravikumar, Ted Kerr and Bill Rigby)