‘Basic Business Class’ Fares Are Bad Business For Both Customers And Airlines

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I always wondered about the economics of “bundling”. I knew the part about different people valuing things differently, but I thought that was a good reason to unbundle, except that I did not get the connection between bundling and zero marginal cost. Very well explained. I think there is more actual analysis in this one post than in a month of TPG.

  2. Thank you! I have long questioned the concept of “unbundling” and find it especially questionable when it comes to higher value products, such as business class. While I can understand the economics of it for the ULCC’s that do short haul (like Allegiant or Spirit), where you have cheap flights, lots of volume, and ultimately many customers who do end up paying for extras that are pure profit. However, this model gets very hazy for medium-long haul, where you have far more fuel burn and labor hours – plus added costs of doing business in multiple jurisdictions.

    And I agree with you that it will fail as far as business class goes. The expectation of a business class customer is that the sorts of “tickey tack” charges/fees are what you expect on a $39 Spirit fare from DTW-FTL, but not on a $6000 Qatar business flight from ORD-DOH-BOM. Part of the reason that you pay that upcharge is for the conveniences that such a fare class enjoys. If you’re having to check in for a seat assignment 24 hrs before departure (like WN), worry about carry ons (like Allegiant) and get no lounge access on a 20 hour journey – well, why fly with these guys?

  3. I’m surprised at QR being the one to try it – they view their lounge as a competitive strength to other carriers; excluding that from fares, especially when there is a 4 figure difference to one with lounge access, will probably have more people book away than they expect. It will also result in more dissatisfied customers who didn’t realize they don’t get lounge access when booking via OTAs or their corporate travel agent.

  4. Hmmm, how many folks will save the $$ and not use the QR lounges and use a Priority Pass lounge instead. I notice the main PP lounge at DOH is limited to four hours, but if your layover is not a long one, I’d take that for a several thousand dollar savings on a round trip.

  5. @Arlington Traveler: But you used to get those perks from QR as part of the business class fare – now you have to cobble together a PP membership. And…. by many accounts you are NOT saving several thousand dollars, QR just kept the basic business fare pretty much at the same level as regular business and added thousands to the higher tier business fares.

    In basic terms, it’s a screw job and I’m surprised at how many FF’s are applauding this and things like it.

  6. Aren’t people cutting the cord and moving towards a-la-carte services to save money? Couldn’t the same be said about airfare to?

  7. I’ve always thought that seniors would be a good market for discounted second class travel. Usually money and old bones don’t want to be in economy.

  8. This has bad idea written all over it, particularly the no carry on. They are literally trying to make it as painful as possible. Same with advanced seating. No chance that I would ever book a premium ticket with an airline that did that.

  9. I wish we could pick our cable channels vs the BUNDLE crap.. U get 10 channels you want and have to pay for the other 50 you do not want ,,waste of money for customers but great for the cable companies

  10. I’m not sure how an advance seat assignment really brings any substantive value to the table for a business class fare. The whole point of business class is that every seat in the cabin is a good one.

  11. As a small business owner I can tell you I’m not going to pay $4K for a one way business class fare to Europe, as an example. But offer me a basic business fare one way at $1700 with no lounge access (I rarely use anyway as who cares and I minimize my time in the airport) and no pre reserved seats, and I am fine with it. I just want the larger seat, more legroom, lie flat, and my iPad. And throw some food my way. I think it’s perfectly acceptable and would love to see this roll out more.

  12. @stogieguy7. Some fundamental arguments. All carriers are becoming ULCC’s. If you dream otherwise you are forgiven for not seeing the painting on the wall. It’s a race to the bottom. No stopping this train (or plane) we are on. Even if you don’t like it. Also, yes, the expectations of a business class passenger paying $6K is higher. But what if business class became more approachable and less exclusive. Where a simple lie flat seat and some basic food were offered, isn’t that where we are at already, anyway? I think airlines in contrast could offer less as a product if they charged, say, $2k, and the value would be exceptional. I don’t give a hoot about the food, really, I don’t care about the lounges or whatever. I carry on only. I use the app to check in. Why do I need to pay extra to keep YOU happy for stuff that is, in the end, absurd and just ceremony? I want a ride in a seat I can sleep in. Not a freakin hotel room at The Dorchester.

  13. @stuart: you can already find $1700 one-way fares to Europe in business class, on some carriers at least. Occasionally even $2500 (thinking of off-season fares to Italy here). The point of the article is, if it leads to prices going down, it’s bad for the airlines because a lot of people (like you) will take the offer; but more likely it leads to prices going up for the full product; but then again, more people will just take the cheaper version.

  14. @gus. I am a last minute guy and seldom can plan ahead for TAP etc special fares. That’s mostly for retired people and mileage runners. But if there became a more uniform system of pricing that is commiserate to the product offered (forget the lounges, etc) that I could grab a few days before, I am all in. Again, with less offered is fine. I do see your point as the system is now, if too cheap the last minute buyers like us will be stuck in economy. But, I really see a future for airlines like La Compagnie with all business offerings that can be scaled up as demand increases. Why? Because miles and loyalty are worthless anymore. Which was the only thing keeping people away from niche carriers like that in the past. Now, honestly, who cares? I am fine without miles in fact as they are becoming more and more irrelevant. Or some stupid designation like “Emerald” that I barely take advantage of – or anyone notices (as if that matters).

  15. I need to explain more. Twenty years ago all business class carriers charging more reasonable fares to Europe had a rough ride. I used to fly the one out of IAD to Orly that BA owned. The problem was that at the time business class consumers were more “exclusive.” They demanded lounges and brands and bells and whistles and miles miles miles. And the airlines offered them. That airline eventually folded (what the hell was the name!) for many reasons, mostly because at the time miles and brand mattered and those flying to Paris regularly preferred AF.

    But where are we now? More people are flying than ever before. Yet airlines offering less than ever before. With miles becoming more and more irrelevant every day. And status, which once had value, becoming diluted to the point of being funny. These brands, aside for a few, like SQ or EK, mean nothing.

    So for premium, why not open up a whole new approach. No miles, no lounges, pay for bags, simple but creative food, and we will get you there in a seat that’s lie flat and that you can sleep in. Uniform pricing, even last minute. Flat fares that are targeted to a more widespread demographic – and if it’s full, it’s full. If demand outpaces seats just add more flights where possible or scale up to larger aircraft.

    You might find that the evolution of this product would be that ULCC’s and the entire densely packed cabins would become a thing of the past. You might find that more people would be happy to pay for a $1500 one way fare to Europe for simple space and dignity. And without all the other bells and whistles the airlines pretend with (like miles and lounges). That you could actually be quite profitable.

    I’m actually interested in seeing what JetBlue does going forward. They may just be on to a basic system for premium that could work. The fares to start seem approachable to the formula I speak of. And timing is everything.

  16. @Stuart – You have some good points, but I do think you’re mistaken in at least one aspect: The cost of adding another flight between two popular airports supporting business class traffic is not only marginal. These airports are slot constrained as well, and that DOES impact your analysis, particularly as you talk about some of the world’s busiest international airports (London, NYC, Tokyo, Beijing, Hong Kong, etc.). Even where slots can be obtained, the timing has to make sense for business travelers, and that makes these slots the absolute most expensive to obtain and maintain, not least because they’re trading off with other, existing traffic.

    The natural solution are bigger planes, but the A380 clearly demonstrates the limits of that approach (RIP my favorite plane to fly to date).

    With all that said, I personally would get quite a lot of value out of the occasional $900 business class fare to Europe, but I’m not sure if that helps or hurts your argument…

  17. @Gary – So does this mean that Business Class as we know it will be increasing in price by 10%? That’s assuming we would want things like free carry-on’s, etc.

    What greedy airline dingbat assumes that Business Class fliers would WANT TO LOSE these services just to save 10%?

  18. @James. Sure, at Heathrow and CDG I get it. But if I could get a decent basic lie flat product without bells and whistles for $1400 one way last minute to Gatwick, I am all over it. I mean, for god’s sake, it’s just a half hour more at most to the west end. And compared to last minute $5000 fares for Heathrow? For what? Orly is the same. Go deeper and AMS and FRA do not have quite the same slot issues. Finally, increasing capacity would never be to an A380, I am talking starting like JetBlue with the A321LR and should things pan out you could potentially see increasing to an A350.

    No. One. Cares. About. Brand. Anymore. Loyalty and miles are dead. Just read the comments every day in all the blogs. And with everyone losing status now since Covid the umbilical cord is broken. It’s a free for all. And the airline that sees through the chaos and simplifies decent basic C offerings for a respectable price is going to win. Be them existing or a start up.

  19. @Stuart — why would any airline choose to sell one lie-flat seat for $1400 when they can cram in the same exact square feet ~3 economy class ones?? The economics are just not there!

    And brand is still very important, although it’s more made up by what the airline delivers vs. the frequent flyer program. In the US, I avoid Spirit and Frontier, and favor Delta — Spirit and Frontier have negative brand value, Delta positive one. To your point, who cares about the frequent flyer program of any of them.

  20. @stogieguy7, regarding the basic business class fare being the same price as the old bundled business class fare, that only works if the airlines are in collusion with each other. Also, I think you underestimate the willingness of folks to undergo indignity to save a few $$! I mean, I will pay $20 more each way to upgrade from basic economy to economy, but I’m not paying $100 each way more. I think, QR is competing with Emirates and to a lesser extent Etihad and Gulf/Oman Air (especially for Europe to Asia routes) and they can’t go overboard without losing customers.

  21. “consumers get more channels which are worth more to them than what they have to pay” — That’s one description of bundling. Another is that bundling transfers more of the potential surplus to the producers, instead of the consumers.

  22. @Jake. Why not? La Compagnie makes it work. And are actually adding Milan from New York and Tel Aviv from Paris. Gotta give them credit as well for surviving being completely shut down for a year.

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