Delta was the first US airline to launch a ‘basic economy’ fare. Originally designed to be more restrictive on routes where they competed directly against low cost carriers like Spirit Airlines, these fares meant no upgrades for elites, no changes, no advance seat assignments and last to board.
These fares have spread to other markets generally. The thinking is that some passengers, like business travelers spending their employers’ money, will pay more to avoid these restrictions. We now see basic economy on transatlantic flights even.
United and American copied Delta’s basic economy idea, but they both took the idea a step further. They added a restriction (for non-elite frequent flyers who don’t have the airline’s co-brand credit card) that basic economy passengers can bring a personal item on the plane only but no full sized carry on bag.
American Airlines Economy
When United introduced this they admitted they lost $100 million. They assured they’d make money doing it once American Airlines followed suit, but in the meantime customers had a choice — they could fly United basic economy or for the same price get a better (non-basic economy) product from American. Nevermind that Southwest Airlines carries more domestic passengers than any other airline and doesn’t have basic economy restrictions. They don’t charge change fees. They don’t charge for the first two checked bags even.
American followed United implementing draconian basic economy. Reportedly they’re looking to bring back carry on bags on basic economy fares some time this summer.
Now Delta’s President says the stricter basic economy rules that United and American have, which means that those airlines offer customers a worse product at the same price as flying Delta, is costing those airlines business.
During yesterday’s second quarter earnings call, Duane Pfennigwerth of Evercore ISI asked whether the way “the rest of the industry has implemented basic economy so far… the more punitive implementations of it, no carry-on” has led to “positive share gain” (people choosing to fly Delta instead of United and American).
Glen Hauenstein concluded that yes, it’s “certainly a contributing factor” to Delta’s (better) ” relative revenue performance” over American and United. While he acknowledges it’s hard to isolate which areas of offering a better overall product than their competitors are causing customers to choose Delta instead of other airlines, and as a result give them stronger revenue, having a better product even for basic economy is part of it.
CEO Ed Bastian then added that “customers of all classes are preferring Delta in increasing numbers” and that includes basic economy passengers, as reflected in improvements in the airline’s net promoter scores.