With Change Fees Gone, American Repositions Basic Economy

American

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 EconomyRegular Economy
ChangesNot allowedNo fee, fare difference applies
Advance Seat AssignmentFor a feeNo charge
Boarding GroupGroup 9Groups 6-8
Earn Elite Qualifying MilesNoYes

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.

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28 comments on “With Change Fees Gone, American Repositions Basic Economy

  1. I really appreciate that AA is including Mexico and the Caribbean as no change fee destinations. Once the blanket COVID waivers are gone I definitely will choose AA over Delta assuming that the price and schedule are similar.
    If the Basic Economy fares are close to Spirit and Frontier, then choosing AA would be a no-brainer as you would get a slightly better seat, a snack, and less likelihood of a catastrophic delay or flight cancellation.

    Since AA does allow you to keep the fare difference if your changed flight is lower cost, do you believe that they will need to limit the number of allowed changes to prevent customers re-booking to pocket each $5 drop in fares? Does Southwest have a problem with this today?

      1. I agree that few people will want to bother to “change” a ticket to get a few bucks back, but as always the 1% of people who do so incessantly may well ruin it for the rest of us.

        I’m guessing it probably wouldn’t be that hard for someone to develop an app or service that checks for lower fares on flights you’ve booked, then emails you with a direct link to the airline’s web page to change the itinerary and get the fare difference back.

        Something similar already exists for packages from online retailers that were delivered later than promised. You have to give the service permission to read your inbox, but when a package is delivered later than promised it gives you a link to click to request a courtesy credit, and a form letter to that effect to copy/paste in.

    1. NathanP – I’m sure there is some of that gaming going on, but it’s a necessary evil. If people want to focus on looking for lower fares to take advantage, then they should feel free to do it. I don’t think American can really restrict this.

      I would actually be ok with something that allows you to keep the residual unless you don’t change your dates and cities. Then you forfeit it. But that’s probably hard to implement.

  2. The big 3 will choose how they wish to be competitive with each of the actions each other took; that is a given in any fare or service related change in the industry when there are differences in application. Some airlines might not choose to be competitive with the lowest common denominator.

    The real target here is the ultra low cost carriers whose model has been built on nickel and dime tactics which the public has accepted to get a lower fare. Even though some have been convinced that carriers like NK would lead the recovery, this is very bad news for them because it shows that a few competitive policy decisions can wipe out a huge part of ULCC revenue. No one will choose to pay for a soft drink and seat assignment and a dozen other charges when you get them for free on one of the big 4. And UA will be more competitive with WN.

    The far bigger aspect of recovery is how well airlines are positioned from a network standpoint coming out of this. I do not expect WN will sit by idly to this news and will add more routes esp. in UA strength markets. DL appears set to become the largest airline at LAX in addition to holding that title in NYC which will have major impacts on its ability to compete for valuable passengers. They really need to add just LAX-ORD to be a viable competitor to AA and UA in the top Chicago markets since they already have ORD-LGA/JFK and BOS plus their hubs.

    This is just one shot in a war that will attempt to strengthen the recovery potential of each carrier but it will all take place against that carrier’s own financial situation. AA is still heavily in debt with the highest CASM that won’t change based on the plans they and other carriers have announced. UA had a weak domestic network and will be held back by international travel for multiple quarters if not years. DL and WN have higher share in their core network, better customer perception, and better financial strength.

    The best thing is that airlines are doing this with survival not really in doubt over the next 6 months or longer which also makes it unlikely that Washington feels a need to pour more money into the industry right now.

    1. And that is why I still don’t think the regular fare matches Southwest yet. But I’m stunned American got rid of the change fee.

    2. have you seen how empty overhead bins are on flights these days? Unless you are moving, you can easily carry on enough baggage to meet your needs.

      1. Exactly. Other than the whole mask/virus risk thing, plus the closed shops/restaurants in the airports, flying in even Basic Economy these days is actually quite enjoyable relative to pre-COVID times, especially on airlines that are restricting the number of pax (like Delta)

        Plenty of overhead bin space, and with blocked middle seats my personal item goes under the middle seat in front of me, so I have room for my feet.

        I know it can’t/won’t last, but it’s good to look on the bright side and enjoy the advantages of less full planes.

  3. I think you’re being pretty optimistic here. My expectation once things start to return to normal is that the “Basic Economy” fare will become the normal fare and the “economy” fares will become the old full fare. Maybe they’ll start allowing changes on basic economy fares with, say, a $300 change fee. We’ll be back to where things were but with different names. (Not too different from what happened with First/Business/Premium Economy over the last few decades.)

  4. Alaska too now, with Alaska’s elimination of change fee for all non-Saver tickets, including international. Of course, their network is very different, but I wonder if this includes the AS-marketed, QF-operated flights to Australia?

  5. When you say AA’s Regular Economy offers no charge seat assignment, although technically true, how many non middle seats are available without a charge? Not too many.

  6. I wonder if United learned that American was about to make a big announcement and rushed out their “no change fees forever” news in a hurry just to get credit for being first. It seems American has put a lot more thought into this than anyone else.

  7. While all this change fee news is making waves in the circles that follow aviation is the average consumer paying attention right now? I didn’t see any mention of this in the mainstream news over the past couple days. And pre-Covid when times were “normal” how many people booked flights based on change fees? I honestly don’t believe WN has that many customers just because of their no-fees policy. Most people book flights not planning on changing them. If you’re flying for work on other-peoples-money do you even care? My employer has paid many change fees. I never have.

    Yes, a good move. Yes, helps make AA/DL/UA more competitive with the ULCC’s on paper. Does it really change anything materially? Highly doubtful.

    1. > I didn’t see any mention of this in the mainstream news over the past couple days.

      I saw stories on morning and evening news shows of the broadcast networks. Definitely received a lot of attention.

  8. All else is still not equal however. AA still charges for checked baggage, WN allows you 2 checked bags. AA assigns you a seat and with either fare, it’s bound to be a lousy one. With WN, it’s open seating and checking in early enough can get you a decent boarding position. And, lastly yet importantly: WN offers a MUCH more generous seat pitch than AA. So your flight will be more comfortable.

    Stack it all up and AA is not going to win any head to head with WN.

  9. Basic Economy is a crappy product, but the USA public drives that need…..they want to pay as little as possible, show up whenever they feel like it, ream the agents for telling them they missed their flight, etc.
    These customers are what gave the crowded main cabin that they have no business complaining about. Lower prices= more people in seats. It’s simple economics. Now with no change fees, guess what? More baggage will not connect with domestic passengers, and the people will but the cheapest fare, roll to the earliest flight in the AM, and hassle the agents all day why they are not getting on the flight.

    Poor decision by the carriers, for customer service ratings will go down, and lost baggage will go up. SHORTSIGHTED.

    1. Matt – David Lazarus has never met a company he liked. I just generally disagree with him on all counts. He wants all-inclusive fares and no fees, but you can be sure if that were to happen, he’d complain that fares were too high.

      1. Talk about a non-answer answer. Do you agree with him on the premise/opinions/facts? Or do you disagree with him just because he’s the one saying it?

        Forget the author for a second and re-read the story at face value. Agree? Disagree? Why?

        1. Matt – I’m not sure which exact premise you’re referring to, but as far as I’m concerned, change fees were too high and they should have come down. I even gave United the Cranky Jackass in 2013 when they jacked it up to $200. But I think change fees in general are fare, and something in the $25 to $50 range for domestic is entirely reasonable. For fees overall, no, I think his suggestion that fares should be all inclusive is absurd.
          Not everyone wants everything included, and they should be able to pay less.

  10. What are AA going to use to store the residual credits, EMDs? Will multiple residual credit EMDs be able to be reissued to one ticket? It will be interesting to see the implementation of this in Sabre. In addition, with so many Air Extras becoming available with Basic Economy, is it likely that AA will implement the ability to purchase these in a GDS with EMDs and not just on AA.com or in AACoRN?

    1. James – In the GDS, they’ll be treated just like residuals are today. That uses MCOs, but eventually they’ll have to move over to EMDs.

      1. Still would love to know why AA paid seating for intl routes (or MCE for non status pax, which I assume is paid for via EMD) needs to be done in AACoRN or on aa.com and you can’t in Sabre?

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