Emirates started selling ‘basic business class’ fares last year. Qatar Airways came out with this, restricting access to lounges and to advance seat selection on the cheapest business class tickets. And the latest entrant into this game is Finnair, and their restrictions are absolutely brutal.
- Applies to intra-Europe flights and Europe-Asia (they have a joint venture with American, British Airways and Iberia for transatlantic which complicates doing this across the Pond)
- No free checked bags; no free seat assignments or lounge access; no business class check-in, priority boarding, or premium security; no changes or cancellations at all – if you have to cancel you lose the ticket
- Tickets only seem to be about 10% less, so you’re spending perhaps $3000 for Europe-Asia in business class and have to check in with economy passengers and pay for checked bags.
At some airlines business class fares that allow for lounge access cost twice as much as Basic Business fares. I don’t believe the fare difference will remain that stark. Very few people will spend that much extra for lounge access. They might spend a few hundred dollars more, as in the case of Finnair. (HT: One Mile at a Time)
Selling advance seat assignments to business class customers is something British Airways has been doing for years, infuriating premium passengers in the process (but British Airways has had a near-monopoly on London Heathrow airport, and tons of business class seats they’ve often sold cheap, making this possible).
What’s really interesting here is whether airlines can make Basic Business Class work as a way to generate more revenue. 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 Sort Of Works
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.
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.
Right now of course there are still very limited business travelers, especially on long haul routes. And the restrictions on basic have been reduced, too. At American Airlines the only real remaining restrictions are that tickets cannot be changed and don’t earn credit towards elite status.
When United Airlines rolled out Basic Economy in pre-Covid times it cost them $100 million from customers booking away onto other carriers. Today United remains the most restrictive still refusing to let Basic Economy passengers check in via app if they do not have checked bags, and won’t let these customers bring a full sized carry on on board.
Business Class Is Different
For several years, 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 airlines recover from the global pandemic, and as capacity comes back online faster than demand.
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.
As borders re-open and international flights are added back onto schedules, it’s likely that flight capacity will outstrip demand. It’s one thing for American Airlines or Delta to manage its schedule. It’s another if Emirates and Qatar Airways both add flights to the same city and compete for passengers connecting over their Gulf hubs into India and Pakistan. And it’s another if Korean Air, Asiana, EVA Air, China Airlines, Japan Airlines, ANA and StarLuxe all add flights competing for connecting passengers at the same U.S. gateway – not to mention Chinese carriers returning.
In that scenario airlines are likely to have plenty of open seats, even though they’ll be operating smaller planes with the retiring of Airbus A380s. Once they’re operating a flight they are going to want to sell cheap because incremental revenue is going to far exceed marginal cost. And they’re going to want to do this even up close until departure.
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.
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 actually work.
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.