It did not take long for the Big Three US airlines to fall in line with this whole “change fee go bye bye” thing. But while Delta appears to have put out a hastily written statement matching United’s policy, American appears to have been working on its own plan for some time.
The really interesting part of American’s plan is not the waived change fee itself. No, what grabbed my eye was how this enables the airline to reposition Basic Economy. In a good way. No, really.
Before we get into that, I suppose I have to highlight the differences between United’s announcement and American’s. They are:
- American will eliminate change fees in Canada, Caribbean, and Mexico in addition to what United has done only in the 50 US States, Puerto Rico, and the US Virgin Islands
- If a change results in a lower fare, American will allow you to keep a credit for the difference, unlike United which makes you forfeit it
- Change fees are gone on award tickets for American, but on United they’re only gone more than 30 days before travel
- Basic economy gets a makeover, and that’s where I’m focusing
Think about Basic Economy today. How is it positioned? Well, if you have a succinct answer, I’m all ears. Every airline has a different policy on what is or isn’t included. When Delta first started rolling it out, it was a very limited weapon to compete with ultra low cost carriers (ULCCs). But over time, it just became this gangly mess that was the default entry-level fare. Sometimes it was just slightly lower than regular economy. Other times there were hundreds of dollars in between.
More often than not, it just made people angry. If ULCC fares were like an ice cream sundae — you could add on whatever toppings you wanted to pay for — Basic Economy fares on legacies were like a prison. Once you were there, you couldn’t get out.
That changed over time as some airlines started allowing you to pay for seat assignments and more, but it was never very clear. And now, American has started moving in a better direction. As I see it, this is how things will now work.
- Basic Economy = ULCC Fare
- Regular Economy = Southwest Fare
Let me try to explain this a little better. In effect, there are now only four real differentiators between Basic and regular economy on American.
| Basic Economy | Regular Economy | |
|---|---|---|
| Changes | Not allowed | No fee, fare difference applies |
| Advance Seat Assignment | For a fee | No charge |
| Boarding Group | Group 9 | Groups 6-8 |
| Earn Elite Qualifying Miles | No | Yes |
There are two main selling points to get you to buy the higher fare: if you want to be able to make changes and if you want to earn elite qualifying miles. All the other differences? Those are mostly gone. If you want to pay to upgrade, pay for seats, pay for priority boarding, etc, you can do that. It’s getting closer to the ice cream sundae that the ULCCs offer.
That, in a sense, improves the value of Basic Economy in that it’s not as restrictive as it once was. But the removal of the change fee on regular economy fares means that the value of regular economy grows even more.
Just think about all those $50 Basic fares that required paying up to, say, $100 for regular economy. With a $200 change fee, neither one was actually changeable. Now, it’s a whole different story. Now you have regular economy fares behaving like Southwest fares. You can use that credit for anything within a year of original purchase and there’s no penalty for doing so. That makes buying up even more worthwhile.
I said yesterday, this would be good for Southwest. It makes other airlines raise fares (eventually) since they won’t have change fee revenue. But I may have to walk that stance back. I don’t know how good this will actually be for Southwest until I see how it gets implemented.
With this structure, the Basic Economy fare should return to being more of a strategic weapon. It should be deployed to compete against ULCCs where necessary. For American, this has always involved Spirit, but now there is increasing overlap with others like Frontier in Philly and Miami and even Allegiant. Remember, American is getting more interested in less-than-daily flying in leisure markets. That flight from Phoenix to Bismarck (ND) that was just announced, for example, actually does compete with Allegiant. There will be more.
In those markets, there should be a modest upsell into regular economy. The ability to pay up to use that credit for something else if needed is a big selling point, but you can’t charge too much for it. If American finds the sweet spot, it should get more people buying up than it has seen before and that will be good for revenue.
There are undoubtedly other ways to use Basic Economy as a tool. In markets where American is trying to stimulate traffic, it can put in Basic fares to get those low fare searchers onboard. But in markets that are competitve with Southwest? There likely isn’t a place for it. Think of something like Phoenix to Albuquerque or Chicago to Kansas City. These are markets where ULCCs don’t matter. Southwest is king, and so the entry level fare should be regular economy.
This could go off the rails quickly. American could think that it should go in and undercut Southwest by lowering Basic fares below the market fare that Southwest is offering. The problem there, however, is that Southwest will just lower the fare to match. But until this all unfolds, it’s hard to know exactly who will be a winner in all this.
What I do know now is that American’s elimination of change fees seems to be much more coherent and strategic than what we’ve seen elsewhere. This may cause United to rethink its strategy, and Delta is still trying to figure out its own plans. There will continue to be shifting, but so far, the shifting is all pointing in a good direction for consumers.
