American Airlines used to believe that ‘basic economy’ would be worth a billion dollars to the airline. They shifted to talking about segmentation as worth a billion dollars (basic economy, extra legroom coach, premium economy).
The bet was that making the coach product worse would get customers to spend more to avoid it.
United quickly found when they rolled out basic economy that customers booked away choosing other airlines that didn’t yet have basic economy restrictions instead. Those airlines offered more value for the same price. The initial United rollout led to about $100 million in losses.
American has already reduced the most draconian restriction on their basic economy fares: customers can now bring a full sized carry on bag onto the plane. That leaves only United with that restriction.
What American explained is that customers can increasingly see the total cost of their trip for the things they want. So customers who want a carry on bag found Delta’s basic economy fares to be a better value. American Airlines was more expensive than Delta for those customers, so customers were booking away.
In other words, American could not rely on the ignorance of its customers so they had to compete and improve their product.
Meanwhile Southwest Airlines is the largest carrier of domestic passengers. Their fares aren’t displayed through most online booking sites. Customers don’t always see that Southwest has no first or second checked bag fees, no change fees.
Understand this in the context of American’s choice of accounting and how they track what constitutes success. Even biased towards claiming victory they have to concede that making your product worse and hoping customers spend more hasn’t been as big a success as they told investors it would be. And they wouldn’t be saying it’s underperforming unless the difference was material.
But fear not, that strategy will somehow work better next year.