When American and US Airways merged, there were plenty of people assuming that the airline would use a blunt instrument to increase revenues; we’d see flights slashed and fares skyrocket. What seems to be happening instead is that the airline is revisiting many aspects of its revenue generation capabilities and tweaking in more subtle ways. The clearest example of this so far? Changes to American’s Choice fares.
When Choice fares launched at the end of 2012, I had trouble understanding how the math worked, but I wanted to give the airline the benefit of the doubt. It now appears that the math didn’t work, and we’re seeing some big changes.
The Choice Essentials fare was $34 more each way over the regular fare. It included 1 free checked bag, priority boarding, and no change fee. That was a pretty hefty benefit for not a ton of money. For an additional $10 each way, you could get the Choice Plus fare which also came with 50 percent bonus miles, free same day changes, and one drink. So the Essentials fare had the meat while the Plus fare was fluff.
It appears that the structure of this has changed dramatically. The price of Choice Essentials has now dropped to only $29 one way, but the change fee benefit is gone.
So now, you get a checked bag and priority boarding for $29 one way. A checked bag is $25 alone, so you’re paying $4 for priority boarding. You probably don’t care about priority boarding, but American figures this would be a good way to get people to prepay for a checked bag and then make a little extra revenue as well. There’s no cost to American to offer priority boarding so it’s just gravy if someone buys it.
Meanwhile, Choice Plus becomes a much bigger draw. It still includes all the fluffy stuff from before, but now it’s the only way to get that change fee waived. And American is now admitting that it was severely undercharging for that benefit before.
The Choice Plus fare is now $51 more per direction, or $80 more than the base fare.
Does this make sense? Absolutely. Will travelers like it? Of course not, because it costs more to get the same benefit. Either the new management team has a very different view of how this should work or a year’s worth of data has given them more ammunition to price this correctly. I’m going to guess it’s a little bit of both, though clearly the new management team is leaving its mark here.
I’d like to think that this is just a first step because it’s not perfect. After all, this Choice Fare product is a very clunky solution. It’s part of the filed fare as opposed to an add-on bundle, so that means it’s subject to the US 7.5 percent excise tax. It’s also very difficult for travel agents to book, even though it looks simple on the airline’s website. Even basic things like how it’s displayed on the website could use some help. (Why is it so hard to determine the value of each line item individually?)
As American continues to push forward on direct connect capabilities, I would think that the airline would pull these bundles out of the filed fare and instead be offered as a dynamic bundle. That would allow for the flexibility to change what’s included in each bundle along with the price. But maybe I’m getting ahead of myself here.
The point in the short run is that American is discovering two things here. First, to tempt people to buy-up at all, American is lowering the cost of the first buy-up level. Sure, the benefits dropped as well, but that’s not as important when it comes to optics. People may be tempted to prepay for a bag and then get that bonus priority boarding for just $4 more. Once American has convinced someone to consider the upsell, then they can offer the big buy-up with the more substantial change fee benefit.
The other thing American discovered is that it was clearly undercharging for the change fee waiver. This should be painfully obvious. Remember, when American launched this, the change fee was only $150. (Choice fares are only available within the Continental US.) Now it’s $200 and the bundle pricing hadn’t changed at all. So clearly this was due for an adjustment.
Is this going to have a huge impact on travelers? Probably not in a meaningful way. But it will allow American to make more money with the assets it has.
