When United Airlines announced the elimination of domestic change fees except on basic economy fares I pointed out that this increased the gulf between basic economy and ‘regular’ economy fares.
When American made a similar move, while adjusting basic economy I underscored how leisure fares were now basic economy fares – and elite status would no longer be earned on leisure fares.
- Airlines used to ‘segment’ business travelers and leisure travelers with change fees, advance purchase, and Saturday stay requirements. That way they charged higher prices to business travelers that were willing to pay more, while still offering lower fares (that business travelers wouoldn’t buy) to fill up empty seats on the plane.
- That’s no longer how airlines do it. Basic Economy was largely a replacement for this. Most fares started being issued one-way, so Saturday stay requirements were no longer a thing. And ultra low cost carriers offered great fares at the last minute, airlines couldn’t require advance purchase while staying competitive.
Covid-19 has been an opportunity for airlines to ‘start fresh’ in many ways and move quickly. Change fees are no longer the segmenting tool they once were. They’re largely waived through the end of the year anyway. Leisure travelers are booking last minute due to uncertainty. And there really aren’t any business travelers now to segment.
The only ‘mainstream’ writer who has picked up on this real shift that’s going on in pricing strategy in Josh Barro for New York Magazine who writes about the change in just this way.
[S]ome things have changed now in the industry that have reduced the usefulness of change fees to airlines. First, full-fare airlines introduced a fare class called “basic economy,” which bundles a low price with a reduction in the privileges that come with an airline ticket.
…As the most price-sensitive flyers have been shunted into this basic-economy box, the remaining leisure travelers who continue to buy full-featured economy (or “main cabin”) fares must therefore be relatively less price sensitive, making it possible for airlines to charge them somewhat higher fares in exchange for features like seat assignments. So from the airlines’ perspective, as they try to do price discrimination, this category of nonbasic leisure travelers isn’t as different from business travelers as the broader category of economy-class leisure travelers used to be.
Ultimately, Barro notes, the question of whether eliminating change fees ‘works’ depends on whether an airline generates more in sales and higher fare purchases to avoid Basic Economy than they’d have collected in fees and that’s the question to watch – but we’re not really going to know until 2021 at the earlier.
But the change isn’t about being ‘customer friendly’ and it wasn’t about share shift – which won’t happen, because major airlines quickly matched each other on this – it’s about modernizing the pricing model and getting rid of a tool that wasn’t relevant anymore, while at the same time making those non-basic economy fares more attractive to less price-sensitive buyers.
I hope it’ll encourage passengers who are sick to reschedule their travel without losing $200 in addition to fare differences. Probably too optimistic.
Good analysis.
And, in case you’re wondering, your readers consider you mainstream.
In many countries like the UK, EU and Mexico you can buy basic fares as throw away fares. We purchased 2- O/W tickets for Cabo to Tijuana (San Diego) for $24ea with carry on bags. They are non refundable unless the flight is canceled but it beats the $175 o/w fare from Cabo to San Diego that has a Mexican departure tax of $50/passenger. Even after paying the CBX private border crossing charge of $15/pp it’s a cheap airfare or as a hedge. Faster customs and a lot cheaper. I doubt the US carriers can compete with these fare types using basic economy. Airfares are no longer the sacred cow they used to be in the US. It will be compete or die. I think the legacy carriers are foolish to raise the “premium” economy ticket prices when you can buy disposable airfares that are this cheap.
I think there’s a more important factor in play. The demise of the hub-spoke model.
The basic economy fares are deployed mainly to mimic ULCC’s on point to point flying.
Such as the new United routes to South Florida from the upper midwest.
This is Southwest-style flying designed to get people out of their cars.
This kind of flying doesn’t get the subsidy from tickets O/D from fortress hub markets.
This is obviously a big problem for the less operationally efficient legacy carriers.
I wonder if/how long until their style of flying returns.
Side note: Josh Barro does an amazing podcast with attorney Ken White called “All the President’s Laywers”. Highly recommend.
@Steve and if you’re not following @popehat on twitter you’re missing a real national treasure!
I buy basic economy for flights 2 hours or so- who cares about the middle seat? But longer than that, I want an economy aisle. I hate paying $50-70 more to not chance the middle, but that’s where the comfort factor breaks for me.
@Gary, exactly right, and genius marketing/spin by the airlines. There must be a % increase in fares and proportional increase in buyers of regular economy (vs. basic) they’re projecting to cover the loss.
Question, though: how does all this effect cancellations? Is that still $200 to re-use the value of the cancelled fare if not ready to reschedule at time of decision, and does this make rescheduling indefinitely until you know where/when you’ll use the fare a better choice than outright cancelling?
One more reason to only fly WN, no horse manure economy.
John: sorry to contradict you, but the change fee removal is one more reason NOT to fly WN.
Believe it or not, people like to know what seat they are going to sit in, and are tired of the
corny “I’m a comedian” announcements by the FA’s
@John, Amen! Selecting WN eliminates so many problems that you get with other airlines.