American Airlines spoke several times in its quarterly earnings call about its new Basic Economy fares that it will begin offering shortly.
They say that “basic and premium economy combined” will be worth more than $1 billion in incremental revenue to the airline, that they’ll get 20% of the way there this year and 80% next year. They don’t split up their projections across the two, and they haven’t even begun selling either (let alone retrofitting international widebodies to sell premium economy). But those numbers are insane.
Delta by contrast sees basic economy as only a role player not a driver of major revenue.
[E]ven if you experience a 60% sell-up rate, which is slightly higher than we’ve experienced in the past, so let’s say 50% to make the math easy. On an average sell-up of $40, you’re not talking about a huge amount of money, I think it’s more of a competitive tool than it is a huge value driver in the long run.
Of course American’s Basic Economy is more severe (and similar to United’s) in eliminating the ability for customers to bring full sized carry on bags onboard. That will mean fewer customers want to buy it. And somehow they think making their product less desirable will lead to profit (as opposed to customers booking away onto other airlines.. like Delta).
Basic economy starts in 10 markets in the next few months. They say they plan to “make sure [they] can do it effectively at airports.. understand how customers react.” They hope to fully roll it out throughout the domestic network by the end of 2017 or early 2018.
The idea is to “tap [customers’] willingness to pay” in other words charge customers more. Apparently “business customers are interested in paying a bit more” because “corporate customers don’t want [American] to distribute the basic product to them because they don’t see it as attractive.” Businesses will pay to avoid basic economy fares — the question is whether they’ll pay American, Delta, Southwest, JetBlue etc.
American also sees “increased willingness to pay for leisure customers” that a product allowing a checked bag only and no full-sized carry on is a “critical” pain point that will push individuals to spend more.
Interestingly, though Basic Economy fares will utilize the “B” bucket American said that “main cabin and basic product share the same inventory” and “will exist on all the flights we operate in each market.” So perhaps that means that they’ll book into B, as a discount of some amount off of whatever the prevailing fare is in the market.
Thanks again for being one of the few airline bloggers to actually take the time / effort to dig into airlines’ financial statements / earnings calls. They’re gold mines of information that a lot of bloggers don’t pay attention to / gloss over
Have they announced which 10 routes Basic Economy will be a part of?
I have over 4 Million miles lifetime miles on American. Almost all from flights not CC or other means.
I think it is a disgrace the way loyal customers are being treated. I vowed 15 years ago to never fly Delta again but I will rethink that and also start flying more on Alaska Airlines . They treat me better than AA does any more.
@Gary:
I second the thanks for staying on top of this.
A question regarding the business traveler: what do you recommend business travelers do in situations where there is no guidance from management on whether to pay for Basic Economy only vs. paying up for a more inclusive fare? This may end up being a whole new category of ethical concerns. I remember you have written in the past about the ethics of things like Citi Prestige 4th night free when reimbursed by the employer, and wondered what you’d make of the ubiquity now of Basic Economy.
I am only planning to spend points with AA this year, same as last year.
@Peter H. — +1 Gary shows true thought leadership in these posts
I of course also continue to appreciate stories and pics of hot naked chicks.
1) Give customers a product they don’t want
2) ?????
3) Profit
Would you still get a free checked bag in Basic Economy if you have a Citi or Barclay AA card?
somehow they think making their product less desirable will lead to profit
It’s “Simply Bad Business”(TM).
@Kevin – yes, and you get priority boarding and can take on a full sized carry on
@Sam S Barnes – (1) fly Southwest, (2) fly Alaska/Virgin America, (3) if forced to fly United or American, buy the lowest reasonable fare which is not basic economy. Checking your carry on, creating not just the delay at the airport (and need to arrive earlier) but also the risk of losing it doesn’t make you effective for your employer. Unless the employer specifically insists you buy the cheapest fare offered regardless of suitability (# of connections, reliability etc) then I think ‘cheapest reasonable option’ makes sense.
Where this gets tougher is a family spending their own money across say 5 people where the extra cost is $60 roundtrip per person that $300 really stings.
@Hunter they have not
Decided to split my trip to DFW between AA and DL. A month out I booked the seats and was buying up to Comfort+/MainCabin Extra. AA I had no trouble, got the seat I wanted and it was cheap for that leg. DL only had middle seats available so I snagged a seat I wanted further back. While it was bad news that I missed out on the seat I wanted on my return it was VERY clear to me that DL has its act together and AA is just playing house in the airline business. AA is a joke.
+3 from me in appreciating this post, Gary.
In addition to the good observations you and those commenting here have offered, I have to wonder: At what point does all of this stuff just become too complicated to bother dealing with?
With so many hoops to jump through at AA, UA and DL in figuring out which categories of seats to purchase, which types of trips generate the most miles, which types of trips generate the revenue necessary for status, etc., etc., the alternatives of Alaska/Virgin, Southwest and JetBlue (not to mention the ultra-discount carriers) just become so much easier (and often cheaper) to deal with.
The question of simply going with the alternatives becomes even clearer for certain categories of travelers, such as: 1) as you’ve pointed out, many folks looking to accumulate miles can do so far more easily with credit card bonuses than by flying; 2) some international travelers looking to accrue AA status (and possibly UA and DL also, though I don’t know their programs as well), are far better off flying their international alliance partners or are simply likely to go with better international competition since the status and miles don’t mean as much anymore; and 3) folks with lifetime status still get some perks by virtue of that status, so why bother shooting for a better status if it comes with so many hassles (and even if the airlines dilute lifetime status, that’s more likely to lose them long-time customers than to persuade such customers to fly the three legacy airlines more).
@Gary Oh, so the credit card kind of negates the effects of the basic economy really.
@Kevin although you still won’t get advance seat assignments (at all on United, without paying at American)
@pat love the underwear gnomes reference
The solution here is simply to dump AA and go with other airlines. If you voluntarily keep paying these fees that go higher and higher then you deserve to have your money taken. People in hubs without many options well your basically screwed but those of us with choices don’t be loyal to one airline anymore. They aren’t loyal to you.
Wasn’t deregulation a good thing, boys and girls? I would invite foreign carriers to fly domestic flights. Give the big three a run for their money. That would strike fear for their arrogance.
@ Kenneth Means — How is it a “disgrace” to offer you a product you don’t want to buy? If you don’t want the cheaper product, you ignore it. Just like if you go to a steak house and they offer you a “come-on” $13.99 steak, but it’s only 6 ounces, so you decide to buy the larger (and more expensive one). Do you boycott that restaurant because they have the audacity to have a promo you don’t want?
The airline business isn’t set up to be able to fly you to Florida for $49. Even the “ultra low cost carriers” can’t make money at that price. So the business model they’ve invented is to sell you a $49 ticket (on certain off-peak flights), and omit all the things that typically come included at that price — like bringing a normal-sized carry-on aboard.
Most airlines, traditionally, haven’t offered an unbundled product. If consumers were a little sharper — or if they valued these ancillary services a little more — airlines like AA wouldn’t have to match the ultra low cost carrier fares. But since many consumers will just buy the lowest fare on any airline going to their destination, AA has to charge less but doesn’t get to upsell the ancillary services. Instead, you as a consumer get the cheapo fare AND a free carry-on. All AA is trying to do is stop customers who would otherwise be willing to pay more from getting these things for free.
Seems like a reasonable business strategy to me. I’d save your moral outrage for bigger things.