On last week’s Delta Air Lines earnings call, executives “drum[med] up excitement for premium product announcements in November.” That’s when the airline is holding its Investor Day, and they’ve already told us what to expect: ‘basic business class,’ doing to the premium cabin what they’ve already done to coach.
Delta Will Strip Benefits Out Of Business Class
The airline is planning to add more premium seats to their fleet. Normally when quantity supplied grows, price falls. Delta wants to forestall this. And they think they can do it by,
- Making the basic business class product worse
- In order to price discriminate – charge more for people who today purchase the full package, while discounting only to fill incremental seats
They haven’t told us exactly what to expect yet for an unbundled basic business. That’s something we will presumably learn at their Investor Day in November. Other airlines they might copy have done things like:
- 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
Delta One Lounge JFK, Credit: Delta
No One Has Really Ever Made This Work
Currently Delta will sell business class upgrades to coach passengers for as little as $299 if they think seats will go out empty. But they don’t want to cannibalize premium fare paying customers who might choose to buy a ticket, wait for a cheap upgrade offer, and if it doesn’t come then rebook into the higher-priced fare. So they want these to be different products.
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. The closest may be British Airways with seat assignment fees for most business class customers, noting that they also have large business class cabins and discount frequently.
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.
Delta Is Against Upgrades
Delta has been on a decade-long quest to monetize first class. They used to upgrade passengers into 90% of first class seats. They thought they could eliminate first class upgrades altogether by 2018. CEO Ed Bastian has said that upgrading passengers into premium seats is stupid.
This May Risk Their Brand – And Not Even Work
The Atlanta-based carrier sees itself as a premium airlines, for premium customers, who should pay them more money. How premium is it to take perks away from business class passengers? Do they risk their reputation, already on thin ice after their extended CrowdStrike meltdown?
Bear in mind that this strategy may backfire not just for Delta’s reputation, but losing customers to other airlines that don’t do it – and also because bundling of things like seat assignments, checked bags and lounge access happens for a valid reason.
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 CNBC 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, bundling is the clear profit-maximizing strategy. By the way it’s why as onboard 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’s. This is why I started predicting twelve 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.
Delta Air Lines Business Class
Will It Become Standard In The Monkey See, Monkey Do Airline Industry Anyway?
Since other airlines tend to look at Delta executives and assume they’re smarter, and simply copy its moves (whether or not they’re ultimately right for Delta, let alone for other airlines in a different market position), will we see similar unbundling from American and United?
And will we see other airlines around the world follow suit, if only because Delta owns significant stakes in airlines like Air France KLM, Virgin Atlantic, Korean Air, LATAM, and more?
Here before oil Timmy busts out the Delta knee pads
Airlines have been working behind the scenes on unbundled Business Class fares since the easing of the pandemic. Some airlines — such as the Mideast legacies, have actually launched them, seemingly without eroding their brand propositions.
Once Delta pulls the trigger, Basic Business fares will become a big thing in a matter of days to weeks.
I think all we need to do for a preview is look at the business class options AF and KL offer on all intercontinental routes *except* North America transatlantic, which they haven’t been able to do because of the metal neutral JV with DL. They offer three bundles:
– lowest bundle doesn’t have lounge access, free advance seat selection and it has change fees
– medium bundle doesn’t have free advance seat selection (in line with what BA and maybe LH are doing these days, including to the US)
– highest bundle has everything included + is refundable
United has been focus grouping “unbundled” business and my understanding is the feedback has been overwhelmingly negative. I think UA (and AA) would be best served to let DL test the waters here…
You can bet other domestic carriers will follow Delta’s lead. Stupid is still stupid.
Basic Business on any airline and Centurion Lounge access works just fine for me.
Why pay Delta thousands more for SkyClub access and a seat assignment? With direct aisle access, the latter is irrelevant.
I have already given up on Delta Lounges, they are too full, so that is about $800 less a year I pay. I am resigned to the fact that I will not get an upgrade most of the time. Delta is just a bus to me now, actually buses have more leg room and wider seats. Within 5 hours of driving time, I do just that, I drive. Sometimes I take the bus, in a few cases Amtrak (though Amtrak too often in the midwest is unreliable.
Doug you sound like I feel about the decline of our airlines. Down trodden.
the most obvious item will be dirt cheap J-cabin fares will become nonchangeable
I think the BA case is different. There were huge differences in seat with the old ClubWorld layout so it made sense to try and get something extra for the better seats.
With new CW, I doubt they are making as much on seat fees, as all the seats are pretty much the same
Deeper unbundling yet – no meals, or beverages (even water) – and the in-flight costs are exorbitant! $79 for a bottle of water, $159 for an “economy” sandwich.
Seems to me like Delta is gonna seriously screw themselves
Perhaps outside of Marriott no USA based company has such a deep seated loathing and contempt for customers as Delta. The only people they despise even more than the paying customers are engaged loyalty members. I have no problem making an honest buck from willing customers but Delta really thrives on their hatred of the people who keep them alive. That’s intensely unhealthy.
Delta?who flies that uncomfortable metal over priced tube?
Other than the desperate in Atlanta
It seems as though all the upsells and egregious price gouging that Delta engages in thanks to its high rate of pricing control in most of its hub markets (let’s leave Seattle, Boston, and LAX aside, as none make money), and you have the curtain pulled back on how this airline actually makes the money it does. On fees. Unbundling the premium offering is something some airlines have tweaked with but it is far from the norm. AF and the ME3 have done it, to some extent, but Delta is none of those airlines. It is a domestic trunk carrier where 2/3 of its long haul fleet and Delta One product is on 20 year old seats and interiors.
The airline doesn’t pay anything on the excise fees, as the passengers pay that. They might have a more competitive fare compared to a bundled fare, where the passenger will pay more on the bundled fare than by buying the same product in two transactions.
But, that implies that the passenger will buy up, which is rarely the case in basic economy. Unless lower fares convince corporations to allow lower level employees to buy unbundled business, those seats might still not full.
I really can’t really see it working for long
The whole thing is idiotic, but nothing would be more so if they started charging for checked bags.
The scourge of increased (and at times extreme) carry-on bags and the nightmarish boarding and deplaning would ruin business class and put Delta even more at a disadvantage on long haul routes.
it’s like when my greek yogurt when from $1 to $1.25. I just stopped buying them. Do I really need to fly conus US? nope. I’ll just stay home, or go international.
@Gary Leff: “No One Has Really Ever Made This Work”
QR seems to make it work.
Typical DL speaking out both sides of its mouth. Marketing to death how ‘premium’ they are, yet delivering this kind of garbage ‘basic’ product in reality. I flew their new F product in the A321neo for the first time last month on a 5 hour Hawaii flight, and my behind still hurts from it. I couldn’t believe how poor the seat comfort was. But that further illustrates the point that this airline has no clue what it’s doing long term.
BA, AY, QR, AF, KL, SK all do this already to some degree. With seat assignments as the most common thing that’s extra.
I think the biggest flaw is to not allow no changes or refunds. It’s one thing for a 59 dollar fare in Y basic. It’s another when you are asking someone to risk thousands of dollars.
I think you make see more last minute upgrade offers internationally.
Gee…sounds like we’re going back to the First, Business, and Coach model. Why they keep changing it up is beyond me. No, it’s simple…they are preparing for the next round of bankruptcies. Wealthy people don’t want to dick with this crap…and will go elsewhere lol. Stupid.
Boy has the industry changed. For the worst. This applies to all carriers. Full service , LLC ALL. We need a new breed of thinkers in this industry.
Pretty much irrelevant for my business travel. Out of Seattle, DL has priced themselves ‘out of policy’ so I end up on Alaska domestically, and a variety of airlines internationally. I was loyal, and able to book, DL for many years. Very close, but still may never get to million miler, after wasting too many years on BA SEA-LHR.
@Dom – what makes you think this is a positive contributor to their net margin?
– From time to time I do see offers of upgrading to First for ca. $40-50 on AA and I am aware of several folks jumping on such offers when they are planning to check a few bags and have no status/credit cards to do this for free. So they are actually saving money flying domestic F/J vs. coach. Getting the lowest price J customers to pay for luggage will weed out such customers and hopefully increase upgrade pool for elites.
Excited for when Premium Delta announces their Basic Premium Economy product… This silliness is getting out of hand.
@ Gary — This will go over about as well as last year’s status changes. I’m not even seeing Timmy here defending this moronic move. This is great news for AA.
@Gene,
Daddy is over at OMAT…he’ll be here shortly…and then you’ll be AMAZED at how he’ll school you with his opinion-based facts (that are never wrong) about the world’s #1 PREMIUM airline!
Just another “log on the dumpster fire” IMO. This longtime DL Plat Med finally gave up on them last year. I now avoid them whenever possible. The staff is great, the planes are old, and their business model is now not to take care of their best customers, and just be a credit card company.
Nothing assures a positive NPS like paying thousands of dollars for a ride somewhere and being treated like dirt before the flight.
@DWT
LH does not play that game. You can pay more for refundability or to cancel. Otherwise all biz is equal. Only difference is rollout of Alegris seating options on A350. Not sure that will work out in the end.
This does not make me happy. I fly DL J to Europe each year, and they want me to pay extra so I don’t get stuck in the “2” of a 1-2-1 seating?
Delta better tread very carefully here. They finally “got” a premium product that people are willing to buy outright. If you take away the mediocre premium elements of that product, I don’t think people will buy it. Especially domestic first-class. If I can get an aisle seat in the first row of extra-legroom or the exit row, I’m not going to buy first-class if I no longer get Sky Priority, no longer get free seat assignment, no longer get a meal, and can’t do same-day change. Arguably, the biggest plus of Delta domestic first-class is same-day change. I have to imagine it will disappear with a “basic first” airfare. Internationally with Delta business-class, same-day change doesn’t exist. I would have less of an objection with international Delta One flights eliminating a meal because the lounge food is pretty good and dinner and breakfast on a 6-hour transatlantic flight are a waste of time.
@Gary
As Dom mentioned, QR is making it work. I know for a fact that they’ve gotten my business away from Cathay (I’m based in HK) – when Cathay charges $6k in J from HKG to LHR and QR charges $3k (albeit with a 2 hour layover in DOH), it’s a no brainer for me. The QR tix comes without lounge access, seat selection and baggage, but all of these become available for free once I add my Oneworld Emerald FFN onto the ticket. In essence, if I already get these for free, it makes sense that I’m paying for something that I already have. It also encourages customers to stay on the elite status threadmill.
@LarryNYC: Qatar may or may not make it work in international longhaul. How is Delta going to make it work domestically? Often, you can buy two economy main cabin seats for less than the price of first-class. And domestic first doesn’t come with lounge access.
Upgrades may not go away completely but will become rarer. As far as “unbundling” business fares. Isn’t this why you pay for business? The perks?
Fare bundles rely on setting the prices high enough to make the whole revenue exercise worth it, but low enough to capture those that may only put a premium on one item in the bundle. Looking at AF/KLM as the likeliest model for DL, the distinction for “basic” seems to be lounge access and a 2nd checked bag. However, DL already heavily monetizes lounge access, so how much would they squeeze out with that? AF/KLM are in a very different position with their single hubs that previously gave the same lounge access to all C pax.
It seems like Delta is taking a page from AA and treating customers as a nuesense rather than someone who pays for your services. This stripping if business class perks just resorts to having a flying cattle car. Now it appears the only people who will matter are tge lucky 16 who pay crazy money to occupy a first class seat.
Just flew Delta business class and was unimpressed,,once they make this change I will probably never fly Delta again except to use up my airline miles and then sayonara Delta
The only way I see this working is to sell the premium seat but without the premium food and drink in flight. It’s all about the seat.