Delta, United, and American have been called “legacy” airlines (since they pre-date airline deregulation) and also “full service” airlines even though they charge most passengers now for things like checked bags and change fees in my professional lifetime have gone up eight-fold. But even as they’re finding themselves more profitable than ever, they’re working to shift their business model to provide less value to the customer at the same price point.
The airline industry is such a strange beast. In most businesses, competition forces companies to deliver more and more value to the customer.
I actually see the domestic airline industry as competitive — in addition to Delta, American and United you’ve got Southwest as a major player. Alaska Airlines has the greatest operating margins. And clearly the ultra low cost carriers are dictating terms.
While there are barriers to entry in the form of regulatory approvals, there’s no shortage of planes and pilots can be hired away from low paying regionals. Some airports have limited slots and gates, but most do not.
If you want to see greater competition in this industry, there’s really only one way to do it. Whining about past mergers, what you wish the government didn’t approve, doesn’t get you anywhere. Allowing foreign ownership of US airlines does. Let Singapore Airlines, Ryanair, and Etihad invest in and majority control US carriers.
Delta Led the Way With Less
Delta introduced ‘basic economy’ fares to compete against Spirit Airlines where Spirit is offering super low fares on non-stop routes Delta is flying. The idea was that Delta offered more legroom, complimentary beverages, and other things that Spirit either didn’t offer or sold for a fee. So they introduced fares that stripped out things like advance seat assignments and used those fares when matching Spirit’s prices. Customers could spend more to get more, or spend less and get something akin to Spirit but still with better legroom and free carry on bags.
Elites don’t get upgrades on these fares. With Delta there’s a minimum revenue requirement on an individual trip for elite benefits, not just minimum revenue across the year to earn status. Delta has minimum revenue requirements for elite status, so presumably customers fly on these fares are doing so only occasionally. Delta sees the customers as profitable enough to reward — just not all the time.
Delta’s elite frequent flyers need to shout from the rooftops, “I am not my fare.” I am a valued customer, or I am not, and how welcome I’m made to feel should not change between Tuesday on a full fare and Thursday on a discount one when I’m buying a ticket pretty much every week. For the rest of customers though Delta is (for the most part) probably doing what they ought to do. It’s totally fair to sell airfares this way, as long as customers know what they’re getting. It only becomes a problem with systems that default to the lowest fare, don’t flag extra restrictions, and especially with systems that business travelers are forced by their employers to use, that make it harder to buy up.
Although these fares are spreading and are no longer limited to markets where Delta competes with Spirit or other ultra low cost carriers — and they’re talking about expanding the use of these fares to international routes, too. So Delta plans to give you less on more routes going forward.
United Promises to Copy By the End of the Year
United re-iterated that they’ll introduce similar fares in the second half of 2016.
Not to be left behind, United Chief Revenue Officer Jim Compton said this week that the Chicago-based carrier will introduce an “entry-level fare” that will be directed at “price-sensitive customers.” The new fare category will be available in the second half of this year.
American Told Us They’re Doing It, But Has Been Quiet on How
In American’s third quarter earnings call, they said they planned to follow suit with their own version of basic economy fares.
And American clearly suggested frequent flyers will need to ‘buy up’ to get at least some of their benefits. Airline President Scott Kirby said “we are going to go to a product that is different” sometime in 2016; that “it will allow us to compete with the ultra low cost carriers” and it will allow “our customers who want a better product and better seats on the airplane” to have the choice not to purchase that product.
So whether it’s having to buy something other than the cheapest fare to be eligible for upgrades or premium seats, we should find out during 2016 what’s going to be taken away.
The process to get there is a challenging one. American needs to assign certain fare classes to basic economy to manage the inventory for these fares. At the same time they’re assigning new fare classes to the premium economy product they’re introducing. And they’re actually out of letters (in the 26 letter alphabet). “B” fares are no longer cheaper full fare products, they appear to be reserved now for premium economy. They’ll need at least 2 premium economy fare buckets for sale, maybe three. And what about awards and upgrades?
(Cranky Flier thinks that the removal of B fares is for Basic Economy, my guess is it’s for premium economy but all part of the same project nonetheless.)
American could just call Q or S fares (deep discount economy) Basic Economy, but they may not want to pull the trigger until they’ve got the realignment plan in place for all of their class codes.