With the imminent launch of Basic Economy on both United and American, we are on the cusp of a massive change that will impact anyone who buys travel in the US. While I personally agree with the strategy behind Basic Economy, there’s one thing that I just can’t stand: the inability to add back amenities after purchase if you change your mind.
The idea behind Basic Economy is relatively simple. There are two things that drive air travel purchase behavior more than anything else: price and schedule. And for many people, price is the most important factor by far. The ultra low cost carriers (ULCCs) have seized on this by cutting out frills and offering an incredibly low base price. The demand is clearly there as the ULCCs continue to grow despite the general level of hatred directed their way (in the US, at least).
The Big 3 (American, Delta, and United) in the US initially tried to ignore them. That didn’t work. So then they tried to match them. American became the most aggressive at matching after the US Airways merger, and it had the desired effect: Spirit shut down growth in Dallas/Ft Worth. But there was a problem. It wasn’t sustainable or profitable.
To match those lowest fares, the Big 3 had to offer their full product. Of course, the base product has eroded over the years, but it is still far more than the ULCCs offer for that same price. There were experiments to try matching the ULCC fares at a level of base price + carry on bags, but that didn’t work quite as well even if most people were carrying on bags and paying the ULCCs to do so.
So the decision was made, first by Delta, to create Basic Economy. The various implementations have been slightly different. Delta allows carry-on bags while the other two don’t. But there’s one thing in common. If you buy Basic Economy, there’s no way to pay to get a higher level of product if you change your mind. And that to me is the fatal flaw.
ULCCs will let you buy anything and customize your product. That’s nice, but it’s also gone too far in the other direction. There are so many options that it confuses and overwhelms travelers. That’s why we’ve seen the return to bundling. Frontier in particular has done a good job of that with “The Works” that can be purchased at the time of booking. But people who still want to piece their product together can do it if they wish.
The Big 3 have made this impossible in Basic Economy, and at least some of them are doing it on purpose (the others are stymied by tech issues). They want to make Basic Economy so unattractive that the only people who will buy it are those who truly care about price and nothing else. No advance seat assignments, no changes, no carry-on (on two of them), etc. This feels punitive and it’s not good business.
What they should do is let you add on what you like. Now if you buy Basic Economy and then decide you need or want a carry-on, what can you do? Nothing. You have no option but to check a bag. People buy tickets far in advance, and their needs change. If the fare difference between Basic Economy and regular coach is $25 (random and not grounded in reality), then why not let someone pay for a carry-on online at any time before day of departure for $30? The airline still ends up making more money and the customer doesn’t feel so locked in.
American has given a nod to this by allowing people to pay for seat assignments 48 hours before travel if they want. But even that isn’t enough. It’s hard to know if a seat will be available so close to departure, so it adds stress to the situation.
Eventually, the way the ULCCs and the Big 3 price should converge into something better. There should be multiple tiers that are well-explained to allow people to just choose things off the shelf as they please. But then travelers should be able to modify as they want later.
My assumption is that the Big 3 are hamstrung by technology, as is always the case. But for some (not all), I think this is more than technology. It’s part of the strategy. This is a way to create gigantic fences to separate the truly price sensitive from everyone else. That sounds good in theory, but in practice, customers won’t like feeling trapped. I hope the Big 3 rethink this part of the strategy in the future.
“American became the most aggressive at matching after the US Airways merger, and it had the desired effect: Spirit shut down growth in Dallas/Ft Worth. But there was a problem. It wasn’t sustainable or profitable.”
Scott Kirby insisted on multiple earnings calls that yes, it was profitable. It’s obviously less profitable than charging higher fares to the same passengers, but it put butts in seats that he contended would have gone out empty and revenue was higher than marginal cost.
I would argue that if American and United offered the chance to prebook your overhead bin bag prior to check in, this would solve most problems. This type of product is really twofold. To encourage customers to book direct rather than through an online third party that is likely to not properly disclose the downsides of a basic economy ticket is the part of this equation that you haven’t mentioned.
The other solution seems to be that the airline would, rather than let you add a la carte, allow you to upgrade to a regular economy seat, but for a higher price than buying the ticket originally.
This also underscores the challenge of offering a bare bones fare in a more full-service oriented airline. You have challenges in that any type of bare bones fare is seen as punitive to begin with, and if the goal is to get regular non-leisure travelers to book the more pricy fare class, it has to seem punitive by design or else business travelers wouldn’t necessarily stay away from the fare.
Even if you pre-paid for a carry on bag with UA and AA, there is no guarantee that there will still be space in the bin when you board. That could lead to a lot of unhappy customers.
However, I do agree that if they did allow you to upgrade to the next lowest fare with a small premium, that it would do well for their bottom line.
Spot on Cranky, I don’t see why these guys are leaving money on the table.
I won’t see there is a big difference in product anymore though. AA, DL and UA all offer 31″ pitch, free overhead bags (except AA and UA), free non-alcoholic drinks and maybe a snack, charge for checked bags, and charge a variety of other fees. ULCC’s offer all of those things at slightly less pitch (28-30″) and, charge for non-alcoholic drinks. There are frequent flyer differences but I think those have become less compelling over the years.
All three of the big carriers also offer some form of in flight entertainment, either seat back or stream to your device. The ULCCs offer nothing.
The law of unintended consequences comes into play here for business travelers that are forced by policy to purchase the cheapest available ticket. Many of these customers can be quite profitable to the airlines but airlines are implementing pricing that is tantamount to cutting off ones nose to spite their face. There is a very real corporate movement to limit travel expenses and airlines are throwing out any loyalty affected businesses travelers may have had. Know a few friends that have been nailed by this on DL already.
I wonder if corporate travel departments will allow (or even automatically book) their mid-level employees into a higher fare class when basic economy is available.
Also, do small business travelers have the time or knowledge to book themselves into the proper fare class. It may seem like a trivial selection from the airlines prospective, but when you are traveling on business, there are a million things to worry about. Proper fare class is like #85 on the pretravel to-do list.
What Andy said. Larger companies tend to block Basic Economy-type fares from their travel portals. This is mainly because Basic fares can’t be changed at all, even for a fee. Let’s just say, that gets annoying in a hurry for a big company where client meetings have to be rescheduled all the time.
The larger concern I’d think is with mid-size companies. Those large enough to have travel departments and policies, but not sophisticated enough to see that lowest fare doesn’t necessarily mean best value.
I can speak first hand on this. We absolutely DO NOT allow our employees to book “barebones or basic” fares because of the fees. We want our staff to build loyalty as it ultimately helps when people have to extend trips last minute, have delays/cancellations and overall happiness of our field team. It’s a nice perk that keeps our field teams (and myself) very happy for a nominal difference. We’ve learned the hard way on this before. Our field teams book their own travel and do so directly with their preferred carriers.
Many larger companies actually have the basic economy fare classes blocked in their reservation systems.
This is also my concern. Our company encourages employees to book domestic travel with Southwest because of the lack of change fees and relative flexibility that they offer. To the extent that they have negotiated discounts with WN and now have us using SWABIZ as a booking tool.
However, if you need to get somewhere that WN is not an option, you’re booking through Concur and they simply throw the lowest fare at you (with some apparent favoritism toward Delta). Let me tell you, I’ve had to do some quick work to get out of flying Spirit and Frontier on a couple of routes! They do not differentiate between airlines that will charge fees for everything (Frontier, Spirit, etc.) and those that charge for very few things (WN, Jet Blue). The fare is the only consideration and you have to justify a reason that you didn’t choose the lowest one. In my case, I have done this enough to write up fine excuses that the travel dept have never questioned. But I know other employees who’ve spent hours in hell on the likes of Spirit after paying for an overnight bag in the bin.
People will try to get away with anything and everything. I can’t wait to see some of the confrontations when the carryon police try to deal with “Oh, I forgot.” Or maybe this is intended to substitute for the lack of entertainment systems.
I am sorry I forgot your name to address you. You wrote a good article making it clear the major airlines do not like competition, but they scream and run to the government for help when feeling the heat of competition from outside the US borders. Secondly, We now have the three major carriers after all the mergers have been done with Alaska Airlines moving up the ladder what with its later merger with VirginAtlantic. There is too little competition now. And the air carriers around the worldwant to restrict competition further by using their worldwide alliances such as One World as just one example. I suggest you point out the percentage shares of air miles flown by each of the big carriers to give the public an idea of just how much monopoly control over pricing there is in this industry.
I am all for the foreign carriers such as Emirates, Qatar, etc. giving the big US carriers competition at least outside US borders.
I realize my opinion might be unpopular, but I disagree with you CF.
I would never book Basic Economy because I believe I’m a relatively informed individual, who researchs fares, amenities and penalties. And I appreciate an enhanced level of travel. That said, I understand its attraction to people who are absolutely bottom line oriented. The choices I make now are different than the choices I made when I was 21 (thankfully). And if it can keep a few people from dragging on carry-ons that are the size of a coffee table, even better.
I also don’t agree that airlines have an obligation to offer add-ons to people who have made the decision to go ultra cheap. They don’t get that option in other parts of their trip. If I fly into JFK, I have multiple options available to get into Manhattan, starting with AirTrain/subway for $7.50, and going to $100+ for a full service car service. If I take the subway, I can’t add on for someone to put my bags in the trunk, hold the door open, offer me bottled water or drop me at the front door. I pay cheap, I get cheap. It’s a decision I make.
I might also hope that the no change/no upgrade rule might mean fewer people lining up at the check in counter or gate agent for last minute changes, and shorter lists for cabin upgrades or stand-by passengers. Or not.
Basic Economy is new and will take some getting used to. We all had to adjust to no meals and charges for checked bags. We didn’t and still might not like it, but we learned. Travelers will figure it out.
Spot on Brian.
CF – You’re looking at this only from a revenue management lens, not an operational one. The Big 3 are already so complex with product, rules, process, etc. United cited faster boarding times as an upside of their basic product. While it sounds great to be able to add a seat assignment here or priority boarding there, in reality there’s a fairly high switching cost for the airlines when customers, in particular those who aren’t frequent customers do so.
For a top-tier elite it isn’t cheap either with calls into premium call centers, interaction with agents in lounges and at gates, etc. Even just fielding the questions and creating dissatisfaction is a major drain on staff resource and morale.
It is far easier to ring fence the basic product and say “here’s what it is.” They haven’t paid the premium to configure their experience — they’re buying a fixed deal which the airline can very efficiently ticket and deliver without much complexity or changes. Plus they manage customer expectations. If they open the door to some changes customers see an opening for any change to their experience; nightmare scenario of customer frustration and high cost to carrier in just saying no/dealing with complaints.
Cranky, I had severe reservations about Basic Economy but I think you put it in focus very well. Essentially, it means United, Delta and American can compete head-to-head against bone-crunching torture chambers masquerading as LCCs and ULCCs.
The interesting question is going to be when a mid-level economy passenger faces the real possibility that all the carry-on space is full and she or he is stuck in a middle seat between two 10-year olds. In effect, she received the same service as the Basic Economy passenger but paid materially (I assume) more. While the airlines face that problem today to some degree with the myriad of fares, if the Basic Economy idea takes off, the potential for this problem is severe enough that it would push yield downward as Ms. Regular Economy heads for Basic.
Because I am 6’5″ tall and a million miler, it will be a very cold day in a very warm place before I’m in Basic Economy or fly on an LCC or ULCC. Admittedly, that’s a choice and I’m willing to pay more or find another means of transport.
I’m 6’1″, and TBH, the thing I like most about this “unbundling” business is to actually buy an exit row seat at time of purchase. I’m willing and do pay for it.
I remember when the only time you could get those seats in advance was to be an elite. I’m glad times have changed.
I would think the bigger problem would be for individuals whose company policies require them to purchase the lowest fare in the market place.
I don’t understand why the Big 3 think they have to compete with the ULCC’s. Yeah-Kirby and getting revenue on the margins-still before these fares-who here has flown on a Big 3 Flight with a bunch of empty seats?! Me-I would never buy one of these seats on the Big 3-however I’m not so sure of my company travel department. And finally-If my company puts me in one of these seats-you the Big 3 don’t want my money to upgrade?!?! (which I do now to upgrade from Coach Plus to Business First on UA) I’m willing to give you money out of my pocket to upgrade-and you won’t take it?!?!-the Airlines have truly gone stupid.
Airlines have learned the hard way what economists (and cable companies) have long known, that bundling increases profits. If they allowed you to add back features from basic economy they would allow unbundling, and that would lower profits.
The airline price “unbundling” we went through was nothing of the sort: it was simply price obfuscation. They started charging for essentials to create ad-worthy fake prices to advertise, knowing that customers would take some time to fully understand what happened. We know that passengers still check 1.2 bags each, so they shifted some of the price to nesly created unavoidable (for practical purposes) fees. The cost of flying Spirit on average is, according to their 10-k, almost double the advertised price.
In a transparent marketplace fake pricing is eventually found out, and airlines have been found out and are starting to react by rebundling. It’s no accident that the most profitable airline is bundled-pricing and no-fee king Southwest.
CF – I think you’re absolutely incorrect on this post. Once you allow people with basic economy fares to start adding bundles, then in cases when the with-frills economy fares is significantly higher than the basic, economy, passengers will quickly find that basic economy + paid-for-extras still costs less overall than the standard economy fare, never mind the business class fares. Furthermore, if passengers learn that it’s cheaper overall, to pay for basic economy plus the frills that they really need, but still get the overall service of a network carrier, then standard economy gets cannibalised.
If basic economy is to be profitable for the big 3, and not cannibalise the standard economy offering, then there needs to be some very clear segmentation of passengers around basic economy. The big 3 provide a significantly higher overall level of service (e.g. when things go terribly wrong or punctuality) than the LCCs – the point about basic economy is just to make it *slightly* more attractive to choose (for example) American over Spirit – if it becomes a no-brainer for the customer to choose a big 3 carrier over an LCC, then the big 3 are either selling themselves too cheap or providing too high a level of service – i.e. leaving money on the table.
If the walls dividing passenger segments become like Swiss cheese, then the big 3 are going to find themselves with lots of red ink
David – That’s entirely within the airline’s control. The whole point is to price the upsell to make it more expensive for people to upgrade than to just buy the regular fare in the first place. Obviously it doesn’t make sense if the upsell is less, and the airlines should never do that.
I wouldn’t mind if they did that.
Even worse if you are stuck in the Basic Economy vice is that in reality you will very like be forced to gate check your bag. A “main cabin” full paying passenger ahead of a BE flyer will be that far back on the plane will have run out of overhead space and put both their bags under the seats.
All 3 airlines offer multiple advisories to passengers regarding what they are buying as well as offer higher priced/less onerous alternatives at the time of booking.
second, Delta, which has the most experience with economy basic fares, says that more than half of passengers who start to book an economy basic fare choose to sellup at the time of booking rather than accept the lost of amenities. They have also stated that a big part of the reason for even offering economy basic fares is to offer something competitive with ULCCs. Obviously not all passengers will choose to sellup or stay with the global airlines but they do have a price point that allows them to be more competitive.
third, overhead bin space is not an issue regarding the fare for Delta because they didn’t restrict it any more than they do anyone else that is last in the boarding sequence on a full flight. Therefore, it is up to AAL and UAL to figure out how to fix the inability to buy overhead bin space.
fourth, once a fare is purchased, a major part of the fare is no refunds/no changes. You can’t put those elements back into the fare and have the original rules meaningful. Those rules are far more significant to business travelers and companies than overhead bin space.
fifth, low cost carriers are probably more exposed to loss in competing with ULCC fares than the legacies. LUV, for instance, will not back away from its notion that all passengers get two free checked bags even though they are matching fares that are well below the cost of providing that service and which provide even less of a distinction between their own fares and those from ULCCs which they match. If passengers understand that economy basic fares are not the norm on legacy carriers in terms of full service but see no differentiation in service on low cost carriers like JBLU or LUV, then it becomes much harder to justify higher fares when LCC’s don’t want to match ULCC fares.
sixth, the airline industry is and will remain highly competitive. Airbus and Boeing are the only two western large jet manufacturers but no one would argue that they don’t aggressively compete against each other. There is ample data to show that air fares are a bargain based on historical trend lines but also that increased competition really does lead to lower fares. The only reason competition doesn’t exist is in rare cases where there is no room for the growth of low fare/ultra low fare carriers and the government has taken no steps to fix it. There are very, very few cases where that exists at US airports.
The approach forces passengers to pay more initially and then to pay more again when they’re ready to buy the ancillaries. And passengers stuck that first time who wanted another option will pay up on every ticket going forward rather than risk it. I agree that the one-time transaction is at risk of not maximizing revenue but I would bet long term it works out better for the airline in the long term.
Remember: They don’t want anyone buying these fares. Ever.
Agree 100%. They don’t care about the buy-up revenue being left on the table with Basic Economy. They are trying to win an argument. Through a punitive fare class, they are trying to prove that you should never consider flying Basic Economy ever again much less an actual LCC. By letting you fly with the Spirit on their planes they get to market the stark differences to you while you are flying with them. If your price isn’t in the ballpark, you don’t even get them on the plane to make the argument. Once you realise that this fare that you forced the airline to offer isn’t what you actually want to fly, you will write off all LCCs in the future.
They don’t want the fare sold. If they can’t convince you before you book, they want the opportunity to not only show you how bad they can make it but give you a perfect vantage point to see what you should buy next time. If they start allowing basic economy consumers the ability to reduce the pain of the experience they don’t win the argument against the LCCs.
What’s the marketing play here? You flew us once on Basic Economy, we wouldn’t let you buy the things you wanted. So next time fly us in Economy or fly a ULCC? Sounds like a long and punitive way to get to where you started originally.
They’re making the argument that the fare shouldn’t exist at all. Most customers don’t want what a Frontier $39 gets them. They pay more. But they will only look at the LCCs if the price is a lot cheaper. Consumer behavior has shown this. What the legacies are charged with is to get into the conversation by offering the fare and then convincing the customer that it’s not what they are really looking for. They don’t have that chance if they don’t offer the Basic Economy and if the reduce the pain of upgrading from the basic bucket, all you’re doing is lowering the entry level price-point for your superior product.
I’m wondering whether the presence of Basic Economy will induce the Big 3 to raise fares on regular coach seats (compared to what those fares would’ve been in the absence of Basic Economy).
Another variable in the equation is allocation — any conjectures on what percent of their pax the carriers expect/intend will be flying these Basic Economy fares?
I think that it is intentional (and maybe smart) that legacies don’t want allow you to add on features al la carte. I think most customers see air travel as a commodity and are indifferent to which carrier they fly on. So, they by default end up searching for their trip by lowest price to highest price. Having a basic economy fair that can compete with ULCC’s allows legacy carriers to appear near the top of the page when you search on expedia or google flights. But, once you click through and realize how awful the product is, they are hoping most people will end up buying the regular economy fair. If you were to offer the option to buy seat assignment or refundability separately, that would make basic economy undifferentiated from regular economy. Airlines make more if you buy a whole bundle rather than just the features you want. And given how undesirable basic economy is, I am assuming a lot of people are willing to buy up to regular economy.
I think another reason that UA & AA might be hesitant to add the ability to upgrade a basic economy ticket is that they are relying on these tickets to help solve the constant issue of overhead bins filling up, and having irate high status flyers forced to check their carry-ons as a result. So if you allow basic economy ticket holders to pay to carry-on a bag, you negate this advantage. Additionally, since the BE ticket holders are last to board, what happens when they have paid to add a carry-on bag, but then the overhead bins fill up and they are forced to check the bag. They might not be very happy that they paid for something they didn’t receive.
The only time I really see a truly high status flier check their bags is when they aren’t at the gate on time.
If you are in boarding zones 1,2 3 you won’t have to check your bags.
I don’t think they want many people buying these fares, but want to show they have these fares like the ULCC do. It’s not like they would offer a lot of the bare bones fares for sale anyway on a flight.
So by not offering a buy later option a person may learn not to buy the ultra low fare next time.
Great post, as usual.
One comment–you say in your next to last paragraph about things that ought to be “…that are well-explained to allow people to choose things off the shelf as they please.”
“well-explained!” Are you talking about our beloved airline industry? “Well-explained” is stuff written by and for lawyers, stuff lacking in common sense, and we’ve had this for years and probably always will!
And, with this new Administration? Hopeless!
You’ve got some good ideas. My guess is that after this ball starts rolling, UA and AA will come to their senses and allow for payment of carry-ons and/or seat assignments but closer in to the date of travel (ie., 48 hours prior).
This will (largely) eliminate those passengers who will insist on arguing and debating at the gate, a horrible scenario for gate agents who are boarding 100-200 people on a flight and who want to do it in a timely manner. Why? Because no matter how much is in print or advertised etc, you will always have passengers in denial of the rules and facts or think nothing of holding up a line of people to selfishly satisfy their own needs.
Also, there will be people who will still manage to get through the TSA security (who could care less about the airlines’ carryon requirements and rules). Those same passengers who get through will then use that as the “guideline” to argue at the gate. “They let me through Security” etc. Honestly I will have to come to work with kneepads and a helmet to get through the day !!!
My understanding is that you will not be able to self check in if you buy be on ua.
I can still see people attempting to get around the rules though. Where there is a rule there is a way around it.
Joey – United will allow you to check in online in advance IF and only if you have paid for a checked bag. If you haven’t paid to check a bag, then you have to check in at the airport. You will, at least, be able to use a kiosk at the airport, but presumably that kiosk will be equipped with a million warnings.
Just to put this whole discussion in perspective, Spirit just reported their 4th quarter and full year 2016 financials.
Under operating statistics, it is worth noting that they get almost as much revenue from non-ticket revenue per flight segment as they do for ticket revenue. Their model is HEAVILY built around selling a ticket for a low up front price and then loading it up with extras.
Me thinks that the legacy carriers that match ULCC fares with their economy basic product couldn’t come close to providing 90% sellup; someone can give us an example of a market but I don’t think it can be done in very many markets because the economy basic fares are just not that cheap.
Thus, talk about what the legacy carriers look like or gain out of economy basic fares has to be measured against the carriers who actually file those type of fares in the first place.
I bought a ticket on Qantas to come here to Tahiti from JFK. On the portion LAX to Tahiti I could choose my seat ahead of time but not on the portion JFK to LAX on AA. I had to wait until I got to the gate.