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,

1. Making the basic business class product worse
   
2. 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?