More than 5 years ago, in the early days of the blog, I awarded American a gold star for changing its booking interface to show different fare categories. The different categories were superficial at the time with no real product differentiation and that’s why I said that it was a “gold star-in-waiting so we can see what they actually do with this technology.” Five years later, American has finally done something with it. I like the idea a lot, but I’m not completely sold on the pricepoints.
Last week, American announced “Fare Choices” with three different tiers for travel within the Continental US only. The current fares remain as-is under the Choice name. The first buy-up is to the Choice Essential fare for $34 each way, or $68 roundtrip. (American has started displaying prices as roundtrips on its website, so it’s focusing on the $68 cost.) People who are used to flying Southwest will actually find the benefits quite familiar. The Choice Essential fare looks a lot like Southwest’s regular fare.
Wanna Get Away
|$34 each way over Choice||-|
But the similarities don’t end there. American then created a second buy-up into the Choice Plus fare. This one is $10 each way or $20 roundtrip over Choice Essentials (so $88 roundtrip over regular Choice fares.) You’ll find that this looks a lot like Southwest’s Business Select option.
|$10 each way over Choice Essentials||$16-$28 each way over Anytime|
In general, I like this idea. Fare bundling doesn’t make sense when you bundle everything into the base fare, but it does makes sense as an add-on. When it’s all in the base fare, you end up giving people something they might not want and making them pay extra for it as part of the fare. (See Southwest and its often higher fares.)
But bundling as an add-on makes a lot of sense because you can make people pay more than they would if they did it a la carte. For example, somebody might pay the $50 roundtrip to check a bag but they wouldn’t pay for priority boarding. Now they might be tempted to pay a little more to get the Choice Essential fare which includes both and a waived change fee as an added bonus.
That’s why this whole thing depends upon the math working out right. Bundling, when done well, can mean more money for the airline and better options for customers. But when it’s done poorly, it just ends up diluting the revenue that’s already there. And I’m not convinced that the price is right here.
Making the Math Work
For Choice Essentials, the early boarding thing isn’t likely to sway a lot of people. It also doesn’t cost American anything, so it’s a throwaway. The real math here is between the change fee and bags. And there are two different types of people that need to be considered.
For someone who is checking a bag at $50 roundtrip anyway, American is betting that he’ll pay $18 more for the right to not pay a change fee. But what American is really betting here is that for every 9 bag-checkers who buy this, only one will make a change. Because it needs 9 people paying $18 roundtrip to make up for the one person who will no longer pay $150. From a bag-checking traveler perspective, it seems like a no-brainer to me unless you’re booking at the last minute and know for sure that you won’t need a change. From American’s perspective, this seems like it should be priced higher.
The other traveler is the person who doesn’t check a bag. The bet here is that she’s more likely to need a change and so will pay $68 on a roundtrip to avoid paying the $150 later. For $68, you’re really only going to appeal to someone who has a high likelihood of needing to make a change because otherwise the price is too steep. But American only succeeds in this plan if less than half the people who buy it make a change. It may be even less than that, because this allows for unlimited changes without a fee. So multiple changers will get an even bigger benefit at American’s expense. For these people, however, I’d say the price might be too high. At this price, you’re only going to get people who expect to have to change and it will be hard to get many others onboard.
Of course, it could be that one group signs up in droves and the other doesn’t. That’s ok too as long as they add up to higher revenue in the end. This is incredibly complex, and I’m only scratching the surface of all the different possible behaviors here. I assume American has crunched the numbers pretty handily – the airline should certainly good at that – but this is really a study in consumer behavior. We can’t know how people will perceive these new pricepoints or how many will buy-up in advance.
The Choice Plus bundle faces a similar set-up. The benefits are pretty minor, so I can’t imagine anyone buying up all the way from Choice to this fare. But since it’s only $20 roundtrip over the Choice Essentials fare, some people might buy it just to get the bonus miles or the $75 same day change fee waived. It probably appeals to the same market that buys Southwest’s Business Select today, and that market isn’t that big. Choice Essentials should be the bigger seller with Choice Plus just some gravy on top.
As I said earlier, I do like the idea of trying to get people to buy-up with bundles (and I’ve given praise to Frontier for the exact same thing), but the implementation so far seems to be lacking a little. It was delayed due to tech reasons more than once. That’s not uncommon, but when the multiple delays happen after the press has already been briefed, that’s not good.
And when it did come out, some very important functionality was missing. On AA.com, you can no longer sort by price, duration, etc. American tells me this is on the wish list, but it never made it the first cut. Let’s hope that gets fixed very soon because it severely hurts usability.
There’s also the issue of selling this on the travel agency side. It can be done, so that’s good, but it’s not simple. For those who know travel agent-speak, they filed the fares with a different passenger type, so you have to be proactively looking for the higher fare bundles – they won’t just show up. And of course, the online travel agencies aren’t likely to do anything with this because, well, they generally don’t change even though it’s sorely needed. (Maybe Priceline will since they have a direct connection with American.)
All of this makes you wonder if this was rushed out too quickly – it’s all about timing, right? Anyone want to bet that it’s no coincidence that American management is currently fighting to stay in control of the airline? It’s trying to prove that it can do things differently. This is different, but whether it’s actually a revenue-positive move for the airline remains to be seen. Even if it’s not, the basic idea is a step in the right direction.