Delta Air Lines confirmed during its second quarter earnings call a plan for ‘basic business.’ Just like they have ‘unbundled’ economy class, offering basic economy that doesn’t allow changes or mileage-earning and where you don’t get to pick your own seat, they view ‘unbundling’ of the features of business class a new step in maximizing revenue from customers.
J.P. Morgan’s Jamie Baker asked Delta President Glen Hauenstein about the idea during the call,
Glen, this concept of unbundling the front cabin is one that I’ve been thinking about, in part because unbundling and segmenting the rear cabin has been such a success for Delta and a few others. I want to be careful about asking about future pricing on that. But I’m curious what the pros and cons are in terms of possibly going down this path? Or is one price for all how we should continue to think about the D One cabin?
Hauenstein confirmed that they’re planning a basic business product, and that they’ll be announcing it at their Investor Day this fall, “We’ve talked conceptually about that. I think we’ll be giving you more details as we go, but we’re not ready to talk about the details of those plans moving forward. I think the investor day this year should be very exciting.”
Delta wouldn’t be the first airline to do this, but if Delta does it then we’ll certainly see more follow. First, because other airlines think Delta is smarter than they are – if Delta does it, it must be right. Second, because Delta owns significant stakes in airlines around the world like Air France KLM, Virgin Atlantic, Korean Air, LATAM, and more.
KLM Business Class
So what is an ‘unbundled’ business class like? British Airways charges for advance seat assignments in business class, unless you have status or are on a full fare ticket.
British Airways Business Class
Emirates started selling ‘basic business class’ fares in 2020. Qatar Airways followed, restricting access to lounges and to advance seat selection on the cheapest business class tickets. Finnair’s 2021 entry into this space was absolutely brutal:
- Pay to check bags
- Pay for seat assignments
- Lounge access not included
- No business class check-in, priority boarding, or premium security
- No changes or cancellations
Emirates A380 Business Class
You might buy a business class ticket from Europe to Asia in business class, have to check in with economy passengers, get turned away at the lounge and pay for checked bags.
While Basic Economy has caught on and had mixed results, it’s going to be a lot harder to do with Business Class and that strategy will probably cost an airline more than it’ll generate in incremental revenue. Your cable television bill helps explain why.
Why Basic Economy Can Be Useful
Basic economy isn’t about what most people think it’s about. It isn’t primarily a way to get customers to spend a little more on each ticket, maybe $20 more each way. It’s a tool for price discrimination – to segment business travelers from leisure travelers.
Traditionally business travelers bought expensive last minute tickets, while leisure travelers bought cheap tickets far in advance. Fare structures promoted this. When a plane takes off with empty seats, they can never sell those seats ago. That’s call spoiling inventory. And since there’s almost no extra cost to carry an additional passenger once a plane is flying anyway (a little extra fuel based on the weight of that passenger in coach), any money they get is worthwhile.
However airlines don’t want to sell tickets at a lower price than a customer is willing to pay. So they work hard to charge high prices to those willing to pay high prices, yet still fill those empty seats with low fares.
They used to do that with:
- High fares for last minute purchases
- Saturday night stay requirements on cheap fares
- 14- or 21-day advance purchase requirements for the best fares
- High change fees, that make it impractical to buy a cheap ticket unless your plans are firm
Those strategies broke down over time as low cost carriers became more prevalent and adopted different pricing strategies – one way tickets for half the price of a round trip (so no Saturday stay required), cheap fares available at the last minute. Major carriers had to match or lose those incremental sales, but matching meant that business travelers could buy the cheap tickets too. That hurt the revenue they earned from their most lucrative customers.
United Airlines Boeing 777-300ER Economy
Corporate travelers have largely gone along. Big businesses haven’t required their employees to book the cheapest Basic Economy fares. An airline can offer cheap fares with restrictions to leisure travelers, while charging higher non-Basic prices to business travelers.
Restrictions on basic economy have been reduced in some cases. Only United Airlines restricts you from bringing a carry-on bag on board with these fares, and won’t allow you to skip the check-in lines if you aren’t checking bags. When United Airlines rolled out Basic Economy in pre-Covid times it cost them $100 million from customers booking away onto other carriers. American Airlines has change penalties and lower mileage-earning.
Business Class Is Different
For a decade, since Basic Economy debuted, there’s been discussion of whether Basic Business could make sense. It largely didn’t. However there may need to be deeper thinking about how to make it work with changing consumer behavior as business class has become a premium leisure phenomenon and not just a corporate managed travel one (it was called business for a reason).
Up until now airlines have been able to retain their traditional restrictions on deeply discounted business class fares, differentiating leisure travelers from business travelers. Those cheap business class tickets have historically had to be purchased about 50 days in advance of travel which doesn’t work well for business customers. Airlines haven’t needed Basic Business. And the prices on the table to incrementally purchase services bundled with business class tickets have been so high that they likely would have meant more people buying Basic Business, and lower total revenue to the airline, as I’ll explain in greater detail in the next section.
So how do you continue to segment customers willing to pay more from those you need to discount to generate business from? It’s hard. The traditional strategies all have problems.
- No carry on bag. This is a significant restriction for short distance flights, where time spent at baggage claim is a meaningful portion of the total journey, and where turning around the same day or after just a few days is common. For longer journeys where people are buying flat bed seats the ability to only bring what you need for the flight itself into the cabin isn’t a significant restriction.
- No lounge access. The savings from one less person using a lounge is very low. If you set the price equally low people may buy it but it won’t do the job of Basic Business in keeping high fare customers from buying the fares. If you set the price of lounge access high, people will forego it and trade down to Basic Business. It will cost the airline more revenue (people opting for the lower fare) than they’ll generate in savings, and won’t be enough of a reason for people to spend say $500 a ticket more. That’s an expensive waiting room>
In any case the choice often isn’t between spend $500 for lounge access on an itinerary or have nowhere comfortable to wait. A customer can use a pay-in lounge. Many airlines offer lounge day passes for less. They can get a credit card that comes with Priority Pass. Their elite status may entitle them to lounge access even if their fare doesn’t. Or they could take a small fraction of the money and have perhaps a better meal than the lounge would offer inside an airport restaurant.
- Non-refundable and non-changeable. This is a big restriction when buying tickets 50 days in advance, much less so close to departure. However booking a couple of weeks out, it could make sense for someone whose plans are meaningfully likely to change to spend a couple hundred extra dollars to ensure the entire fare isn’t wasted.
- No elite qualifying credit. This would be particularly bizarre, rewarding loyalty for a less expensive coach ticket while providing no credit towards recognition on the more expensive albeit discounted business one.
United Polaris Lounge, San Francisco
While the concept of Basic Business – the need to segregate high fare passengers from low fare ones in order to discount available seats without cannibalizing revenue (allowing people who would pay more to get their tickets for less) – is an intriguing one, no one has come up with a way yet to make it really work.
Furthermore, much of the benefit of unbundling domestic economy is driven by the tax code. U.S. airlines save the 7.5% federal excise tax on airfare when part of the ticket cost is moved out of the fare and into fees. But that benefit doesn’t apply to international, and there aren’t as many premium passengers so it doesn’t scale as well domestically.
Why Bundling Services Makes More Sense Than Unbundling When Marginal Cost Is Near Zero
Cable TV providers bundle ‘packages’ of channels instead of selling each channel individually because it is profit-maximizing to do so. The cost of adding another customer to a television company’s access to Fox News or ESPN is near zero, and so a bundled strategy makes sense. And notice that even new ‘cut the cord’ TV streaming providers are pricing the same way even though they’re built from the ground up.
Let’s take a simple example.
- Customer A will pay up to $100 per year to get news channels, but only $10 a year for sports channels.
- Customer B will pay up to $100 per year for sports, but only $10 a year for news.
The cable company might sell sports and news each for $99. Customer A would buy sports, customer B would buy news. And the cable company would generate $198.
Instead, if they bundle sports and news into a $109 package, customers get both channels at a price that’s worthwhile to each and the cable company generates $218.
The cable company gets more money, and consumers get more channels which are worth more to them than what they have to pay.
When the cost of providing a service is next to zero, then bundling is the clear profit-maximizing strategy. By the way it’s why as on board internet bandwidth has grown there’s been a move to bundle internet in with ticket prices (‘make internet free’). That wasn’t possible when there were tradeoffs between one passenger’s use of bandwidth and another – and indeed was still a challenge when Delta tested the free model. This is why I started predicting eight years ago that inflight wifi would be free within 10 years (so by 2022). People thought I was crazy but the logic was sound.
Putting carry on bags in overhead bins rather than the checked baggage hold, giving a business class passenger access to a lounge that the airline is already operating and stocking with food and beverage just doesn’t come at a significant marginal cost.
If it costs $50 to add a customer into a lounge, and some customers value that access at $75 and others $300, charging $250 is going to keep out customers and give up the $75 – $249 they’d have been willing to spend. It’s going to cost an airline revenue.
What a surprise!! Timmiboy cheerleading for Delta as usual. And doing it with plain lies as usual too.
Maxpower is absolutely right Timmiboy. There’s no way to know the profitability by regions. So, you’re simply lying. End of story.
” United made $2 billion less than Delta on a system basis in 2023.
There are good reasons for that difference.
The sooner you explain WHY UA makes less money – and not try to use some cop out about unfair advantages in ATL, DTW, SLC and MSP which have next to nothing to do with international profitability, the sooner I’ll stop regurgitating the same data sources that you want to pretend don’t exist.”
I’ve told you the reason many times, but you keep lying. The ONLY reason Delta reports higher profits than United, THE ONLY, is because they play financial games with their refinery to have much lower fuel costs. Thats it. It’s so plain to see looking at the fuel price they report and the fuel expenses on the income statement.
1Q 2024 is not the right quarter to see it because United was affected by the grounding of the Max 9, but let’s take a look at 4Q 2023. Operating income for Delta 248 million higher than United. Fuel expenses for Delta 374 million lower than United. You know basic arithmetic Timmiboy, right? Without the difference in fuel, United operating income is higher than Delta’s by more than 100 million. So Timmiboy, stop all that crap about regions, premium cabin, loyalty program, service, etc, etc. You’re lying. It’s just FUEL. It’s the games Bastian plays with the refinery.
strike out, Marco.
Delta has accounted for its refinery separately and transparently since the day it put it into service.
It has made over $1 billion for DAL in some years but is on a run rate of just a couple hundred million dollar savings for Delta this year – 1/10th of the profit difference between Delta and United.
And Delta’s fleet is 6.5% more fuel efficient than United’s and about the same for American – in part because of the 777 which is the least fuel efficient widebody in the US carrier fleet and in part because of AA and UA’s higher usage of RJs.
and then, once again, listen to the Air Show and let those folks tell you why Delta’s fleet and maintenance expenses are so much lower
United could have done everything that Delta now has as profit advantage but Delta did it while AA and UA have floundered strategically for decades.
DL now makes a revenue premium over the Pacific – the area where UA is strongest and DL specifically noted that it easily covers the cost of capital over the Pacific which means there is alot more Delta capacity coming to Asia and the S. Pacific – and Delta will win the revenue that UA has long depended on to run the company.
I get the finances and strategies perfectly. You and MAX cannot admit that DL runs a better business and airline because your identities are wrapped up in UA’s success while I just note the facts.
Would the price of bundled business seat cost more than currently?
Jon,
I did not try to compare DL business class to the ME 3.
I did note that DL competes primarily with AA and UA – and JD Power surveys say that DL offers a superior product to AA and UA.
and Delta doesn’t even fly to the Middle East or any markets that logically flow over the Middle East other than a stray 5th freedom route from NYC to Italy which does more harm to AA than DL – which is probably why EK started MIA-BOG
One lie after another Timmiboy. You just can´t stop.
“It has made over $1 billion for DAL in some years but is on a run rate of just a couple hundred million dollar savings for Delta this year – 1/10th of the profit difference between Delta and United”
In the last 4 quarters (up to Q124) fuel expenses for DAL 10991 million and 12431 for UAL. The difference is 1440 million. In that same period, the difference in operating income is just 1114 million. You can keep lying but the numbers are clear. The difference is just fuel. Without the fuel difference, UAL makes more money.
“And Delta’s fleet is 6.5% more fuel efficient than United’s and about the same for American – in part because of the 777 which is the least fuel efficient widebody in the US carrier fleet and in part because of AA and UA’s higher usage of RJs.”
More bullshit. Gallons consumed are very similar. The difference is in the price. Delta gives their refinery a 6-cents margin for gallon while the market margin is 20 cents per gallon. That’s how they manage to have a price 12/15 cents lower than the rest of the airlines.
Before you write, read the financials and stop lying.
If the refinery was the solution, why did UA fail to get its own refinery when it tried?
No, son, Delta’s profit advantage comes from its passenger revenues.
The refinery is not coming close to making a difference in profits this year.
Denial is not a river in Egypt. It is where you live.
I’m not the other “Marco”, but let’s be clear that UNITED is the prime US carrier, with the best network, best hubs, best alliance, great mileage program, and superior technology. We don’t really fly Delta or American, except for emergencies or if living in one of their hubs.
@ Tim — Nickeling and diming BUSINESS CLASS passengers will simply drive them and their large revenue away. What a stupid idea. This disaster will rank up there with Delta’s massive failure in screwing its elite members in late 2023. And, no, this isn’t about me. I know multiple people who have moved on to other airlines because of DL’s greed and arrogance. Hauenstein needs to go away now.
big M Marco,
if that were true, then UA should be able to turn it into more profits – but they don’t.
As much as some want to argue, otherwise, UA flies the most capacity of any US airline – and of any airline in the world, but generates less revenue than DL and less profit than a number of global airlines – and just 60% of DL’s profits.
UA clearly flies a lot of capacity that does not add to its bottom line because it is so fixated on status and market position and, more recently, made the decision during covid NOT to retire older less efficient aircraft so has been trying to fly them all and made disastrous decisions in the process including dumping tons of capacity into Asia and S. Pacific markets last winter which resulted in a Pacific loss for them while Delta made money – and DL says it is making enough money that it can justify expanding its network because it more than covers the cost of expensive new aircraft and not just make a marginal profit.
Scott Kirby said when he got to UA in 2017 that he intended for United to make as much money as DL and yet 7 years later there is a huge gap – because he is fixated about size and market position while DL is fixated on making money first which starts with providing the best service among US airlines and getting the most revenue for it.
UA has the potential to be much more profitable than they are now but they will have to change their mindset about capacity – both domestically and internationally – and use some of the massive number of aircraft orders it has to massively retire some of its older, less efficient aircraft .
And it is certain that AA and UA will follow DL’s lead if they unbundle business class fares.
As certain as tomorrow’s sunrise.
I’m in DL J across the Atlantic each Summer and this does not sound good to me.
@ Tim — Airlines generally do not “give away free upgrades”. They attract revenue by promising elite upgrades as an EARNED benefit. Intending to never provide those benefits is fraud, but that behavior is straight out of Delta’s playbook. Customers aren’t as stupid as you and Delta think. They see through fraud and are taking their money elsewhere. The statement that Delta “earns” the highest profit is a backward-looking one. Delta won’t necessarily do so as customers catch on. You act like Delta is somehow owed a higher profit margin and that customers like myself are being selfish by doing what is in their best interest. Delta is the one being greedy and selfish.
Shows delta doesn’t even think there is value in their business class. With a good product you don’t mind spending $$$ on
Gene
And resetting expectations is exactly what multiple airlines have done. No rational company gives away more than it has to. As long as Delta keeps leading the industry in profits, it can choose how and when it gives away its rewards better than its peers
@ Tim Dunn — Fraud.
@Tim Dunn – “As long as Delta keeps leading the industry in profits, it can choose how and when it gives away its rewards better than its peers”
Delta announced its profits and its stock sank. Delta also announced they expect lower profits than anticipated in the coming quarter. The market was sure unimpressed, and it doesn’t matter that other airlines are worse. Meanwhile Delta is generating a lot of revenue from a well-negotiated American Express deal, but SkyMiles is lower margin than AAdvantage and lower margin than MileagePlus!
The airline has a lot going for it but your framing as ‘gives away’ is mistaken. Airlines offer future rewards in exchange for current business, and the one area where Delta lags peers is loyalty. They lucked out with a legacy American Express deal that positioned them incredibly well when Costco pulled the plug, but the mere fact that deal has higher top-line revenue than peers doesn’t mean they’re executing as well as they could or even reasonably should be.
And yet Gary SkyMiles results in more money for Delta than any other loyalty program.
I get how it works as do you.
My comment was to Gene who incessantly dishes on Delta but somehow pretends other loyalty programs haven’t done the same thing.
As for the stock,Delta is still up more than any other large jet US airline.
And investors will cringe far more when other airlines report. Delta simply is the canary in the coal mine. They will be the most valuable airline by market just as they are now. Industry stock growth is taking a break.
Unbundled business class is awesome for people who have elite status. You don’t pay for the benefits that your elite status has already entitled you like lounge access and free checked bag.
I like where this is going.
@Will you’d think so, right? However, it’s likely that the basic business fares will be priced around the current rates, not at a steep discount (based on some trends from other airlines who’ve done it). Essentially, you’re paying the same for fewer benefits. Do note that you likely won’t access the new D1 lounges with elite status.
I can only speak for myself: I think this sucks. I am a DL 2 Million Miler, which now makes me a lifetime Platinum. That’s the only recent change at DL that has done me any good (2 million lifetime miles was only good for lifetime Gold status before). As noted, DL’s treatment of its elite flyers hasn’t exactly showered its most loyal customers with benefits. If DL goes through with this change, I don’t see myself as willing to pay for an “upgrade.”. Furthermore, what will it do to global upgrade certificates? One must already be in Premium Select to use them to get into DeltaOne. Will the certificate now be valid only for a seat and nothing else? The value of DeltaOne currently is as much about the extra perks ad it is the seat. No thanks.
@Will–I think your logic about FF benefits with an unbundled business class seat might be flawed. For instance, with an unbundled seat, will you get–
1. Access to special airport entrances, e.g, the Virgin Atlantic Upper Class entrance at LHR?
2. Access to DeltaOne lounges and other business class-only lounges?
You get the idea–if there is something they can withhold or for which they can change separately, they likely will. It’s a bad trend, even for elites.
@Tim Dunn “And yet Gary SkyMiles results in more money for Delta than any other loyalty program.” ignoring the substance of my comment and conflating revenue and profit
I usually fly business class for long haul flights specifically for the privacy and the lie flat seat. I never check a bag, so the included checked bags are useless to me, and I rarely make use of my lounge access, because most often there is better food and/or coffee to be had in other areas of the airport. I would not want to give up my carry-on bag and I would prefer to be able to change the ticket for free or a small fee (although, this usually equates to a steep difference in fare price and isn’t always a valuable benefit). And, while it wasn’t mentioned, I would happily forgo the business class meals, as I rarely enjoy what an airline provides in terms of food, even in business class– especially on Delta and other U.S. carriers– and I don’t drink alcohol. So, depending on the way the airline structures an unbundled business class ticket, it could be inticing for my use.
@Luke – I see your point, for sure, it could be like Basic Economy that they are going to keep the current cheapest fare and rebrand it as BE and perform a hidden price hike over the non-BE. Assuming that’s the case, then it’s bad for all since we’re not paying anything less for reduced benefits.
@Steve – Yeah, especially with SkyTeam Elite/EP, their reciprocal is the worst among three. Delta One lounge cannot even be access with non-Delta Venture partner SkyTeam flights. And with Delta, you even need to fly Premium Economy in order to get complimentary SkyClub access. For people who cares about Delta One lounge access, unbundled Business class can be bad. And now when I think about it, for some company paying their employees travel for work only buying unbundled business class for them, not only causing employees losing benefits they were entitled to, it will also drain the business class seats inventory thus further drives up the unbundled business class fare.
and, Gary, your calculations of profitability from loyalty programs make circuitous assumptions ON YOUR PART that are disconnected from what shows on each airline’s income statement.
@Tim Dunn – they’re not ‘my calculations’ they’re the margins each airline has self-reported :rolleyes:
and yet all that means is that the value of a subsidiary or business unit doesn’t translate into the bottom line.
It really isn’t any different than the refinery calculations that you claim to understand but clearly don’t.
Delta translates its earnings from Skymiles/Amex better into a benefit for the overall airline than any other airline including AA and UA.
You accurately state that AA has tried to grow NYC because of the value to the loyalty program – and yet they can’t make the flights there work while DL has the same reason to grow in competitive coastal markets and translates their coastal hub presence into higher corporate and loyalty/card program revenues.
I am on the same boat with Al. I fly D1 internationally. Do not fly UA or AA since I live in ATL. I am DL360 so Skyclub Is free. I don’t drink. Never like DL onboard food. I don’t check bags even 2 weeks work travel overseas. To me as long as I have flat bed and carry on bags, I am golden. So depending on how DL unbundles biz class, that could benefit me, especially my leisure travel if I can pay less for J class.
First, Gary thanks. I used to listen to a local DJ who would rant about unbundling cable TV, imagining his $150 for 50 channels deal would see him pay 1/2 or even 1/3 as much for the 15 he watched.
On contemplation, I see a use for this. Offer J seats with lesser perks strategically/dynamically and lock people in with a price they can’t get refunded, but that is a better price for the airline than selling late upgrades.
I’ve read that in the early laser printer days, HP used to produce three otherwise identical units. The two slower ones just had software modifications. Thus, each cost HP the same. Obviously, there were significant price differences. One can price discriminate in this way.
Delta has the “happiest airline employees” in the sky – bottom line!