American Airlines announced today that effective September 5 Basic Economy fares will no longer preclude customers from bringing a full-sized carry on bag onboard their aircraft. The ‘personal item only’ restriction will be lifted.

That’s what I told you to expect at the beginning of July, without the specific date of the change. And it’s along the lines of what I’ve been saying to expect from the beginning.

On today’s earnings call American acknowledged that customers were choosing other airlines because American’s product provided less value at the same price. Delta’s basic economy allowed customers to bring on full-sized carry on bags. Southwest Airlines, the largest domestic airline by passengers carried, allows carry on bags on all of their fares (and checked bags, too).

• The bet here, essentially, is that customers are stupid. They don’t know the difference in product.
  
• So when facing a choice between a basic economy fare on American, and a more expensive fare that allows a carry on bag, customers would pay American more money.
  
• But enough customers realize they don’t need to do this, they can pay the same amount of money to a different airline instead.

Basic Economy was never a new lower fare. American acknowledged this in their roll out, even as United obfuscated the fact. Basic economy represented new restrictions on the lowest fares. The goal was for customers to spend more to avoid an inferior product.

In other words basic economy was a targeted fare increase on customers who value the overall travel experience, while continuing to offer lowest fares to the most price-sensitive customers. However when customers have some semblance of choice, enough will exercise that choice for it to matter.

Senior Vice President of Revenue Management Don Casey sharedL

• 63% of customers were buying up from basic economy. These numbers have never been all that revealing. It’s unclear if this just means “37% of customers were traveling on basic economy fares” or if it actually means those presented with a choice were choosing to pay more. Many corporate booking tools will not show basic economy fares at all.

• With this change they expect the buy up rate to drop to 50%. Some customers will choose basic economy now that the carry on restriction is lifted.

• However more customers will choose American rather than booking away onto another airline.

• American is going to make Basic Economy available in more markets they’ve withheld basic economy in many markets because it was causing customers to choose other airlines instead. Now they feel like they’ll be able to bring basic economy back into those markets without losing as much business. So a smaller percentage buying up, but out of a larger overall pool of customers given the choice.

Now that American has announced this move United is going to have to follow this lead and remove their own carry on restriction from Basic Economy.

• The carry on restriction wasn’t something United was going to roll out originally. They hired American Airlines President Scott Kirby, and retooled their offering with the idea he liked.

• When United rolled out Basic Economy before American they initially lost $100 million. Kirby said that was because customers were booking away from United while American wasn’t yet offering basic economy.

• If American offering a better product than United on competitive routes at the same price meant United lost money on Basic Economy and they acknowledged it, it’s reasonable to predict that American will gain share from United again.

• If Delta and American and Southwest all offer a better product than United at the same price, (some) customers will choose one of those airlines instead of United. That’s something United already has experience with.

United Boarding in San Francisco

Now when United acknowledged these losses American suggested they weren’t seeing share shift from United, and no one ever really brought up Southwest in this context.

American’s CEO Doug Parker’s comments on the earnings call were interesting. He attributes customers booking away from American’s basic economy fares to sites showing prices inclusive of carry on bags, websites asking ‘do you plan to bring a carry on’ and then showing appropriate fares that allow it. American’s lowest fare allowing it was their non-basic economy fare, and it was being compared to Delta basic economy.

Parker suggested consumers were being presented with lower Delta fares without naming Delta. Southwest Airlines doesn’t pay to distribute their fares through online travel agency sites for the most part.

I don’t think OTA’s customizing travel search based on passenger preferences is yet big volume but if Parker is right then Southwest wouldn’t be picking up that much share because they don’t make their inventory available via these sites. Perhaps Southwest doesn’t get the credit they deserve for better experience because customers aren’t seeing that option, or in the future as personalized search grows they’ll need to.

It’s difficult to see how United can stand alone, though, with the most draconian restrictions among the largest US airlines. With Delta’s claim that American and United basic economy were driving revenue to them, and with American abandoning their own carry on restriction, it’s just a matter of time before United must react.

I don’t know how quickly this will happen. Initially they could just stop offering Basic Economy in certain markets. But it’ll definitely be something to watch for.