Delta: Exaggerating Basic Economy Revenue Gains While Hurting Their Best Customers

Delta says their basic economy fares generated $20 million in incremental revenue during the first quarter.

Delta reported today that its new Basic Economy fares, which offer lower prices, no ticket changes, and seat assignments only after check-in, generated $20 million in incremental revenue in the first quarter, and the airline plans to expand the service to new U.S. markets.

On the one hand, it’s not that much in the context of $5.5 billion in domestic revenue for the quarter (so far these fares are only in domestic markets). If true, of course, since domestic revenue was up only 1.4% basic economy would account for a quarter of the increase in year-over-year first quarter revenue.

However, the figure is likely to be grossly exaggerated based on faulty assumptions.

Still, other airlines — some of which are already preparing to follow down the road of stripping away assigned seats and elite upgrades from the cheapest fares — will be listening and take the claim at face value.

There’s not actually any incremental revenue that’s attributable to passengers actually flying on these fares. The fares aren’t cheaper than what Delta used to offer. They used to match competitor fares while still offering assigned seats in advance. The act of taking away assigned seats doesn’t in and of itself generate incremental revenue.

Actual incremental revenue would be in the form of:

  • Unused tickets, minus Delta’s standard change fee. These tickets do not allow changes of any kind, so if unused the value is completely lost. So they can count revenue from passengers who bought a ticket and then didn’t travel as incremental, whereas in the past they’d have captured only a $200 change fee. [But then these fares are usually on the very inexpensive side anyway, so the incremental revenue here will be small.]

  • Upsell revenue from passengers choosing to buy more expensive tickets that allow seat assignments and elite upgrades. This is the biggest area of incremental revenue, getting the same customers to pay more. Although lost revenue has to be accounted for as well from passengers who no longer choose Delta because its value proposition has less of a spread compared to ultra low cost carriers than before. It’s not enough to simply add up the upsells.

If Delta is claiming an annualized $80 million in revenue off of these fares then numbers have lost meaning.

Delta Led the Way in Legacy Airlines Offering 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 and American Plan to Follow This Year

United has told investors not only that they are going to copy Delta in offering Basic Economy fares, but that they’re going to limit elite benefits on those fares.

They see (3) customer types and three benefit types, and it seems illogical to them that all three customers get the same ‘stuff’.

What they fail to recognize here is that there may be three types of fares in their conceptual model, but that doesn’t mean there are three types of customers.

Business travelers are leisure travelers. The person who buys a full fare ticket at the last minute for work also buys a weekend getaway with the family. They’re the same valuable customer. And you earn their loyalty based on how they’re treated every single time they walk into the airport and onto one of your planes. In fact, how you treat them when they’re with their family may be even more important. Abuse them during the week, but treat them right with a partner, with their kids, make their life easier and make them a hero and you’ve won them.

Going forward, if you buy the cheapest fares United wants you to have ‘segmented expectations’.

“Premier benefits” won’t apply to “entry level fares” although United hasn’t said which Premier benefits.

American also plans to roll out these fares while limiting elite benefits. They’ve said they believe their elite customers will give them more revenue to be eligible to upgrade. They’re asking customers to play a lottery, because of course elites whose upgrades do not clear won’t get refunded the difference of the higher fare they had to buy.

American has said that 87% of customers fly the airline 1 time per year or less, and represent 50% of the airline’s revenue. That means more frequent flyers are only 13% of customers but contribute an outsized 50% of revenue. So it’s a real gamble to sell an important customer a pricey ticket one day, and then the next when they buy the cheapest fare to make it clear to them their business doesn’t matter.

Basic Economy is a Fine Idea if Done Right

Legacy airlines still offer more legroom than Spirit even at the same fare, and don’t charge for carry on bags. So they’re a better value. And they offer miles which are more valuable than Spirit’s (though not very many under the new revenue-based earning model).

There’s nothing inherently wrong with offering less than an airline used to offer, and charging more for certain things that used to be a part of the base fare, as long as it’s clear upfront that’s what they’re doing. And Delta makes it abundantly clear. United and American, when they follow suit, will need to follow Delta’s example on this.

Telling your most valuable customers that they are only valuable on certain days when buying certain fares — rather than every time they step onto one of your planes — is a bad idea. It undercuts the very notion of loyalty.

Airlines have succeeded in turning commodity products into differentiated products, into instill a brand preference into the customers who spend the most and most frequently. They’ve succeeded in making lucrative customers relatively price insensitive.

Treat those same customers badly on an occasional discount trip and you make price the most important factor in their buying decision again. And that’s not in the interest of the business. And it’s not in the interest of the business to pretend the initiative is even more successful than it can possibly really be. That will only lead to counterproductive decision-making.

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. Very similar to the way all wealth was shifted out of the middle class and into the top 2%, decimating the middle so that there is now only poor and upper-middle. All of it was based on lies which the mainstream press never checked because they’re part of the corporations whose taxes were ended as part of the deal – hush money.

    Those who don’t see how this leads directly to Bernie Sanders going to the Vatican to plead for divine intervention as the last gasp before an actual revolution, are either hogs at the greed trough or part of the dumbed down masses who eagerly voted away their entire middle class just to get their racial and other hate ya-ya’s off.

    Delta should run ads touting these great benefits for consumers on Faux News, where ignorance and lies have their home.

  2. @Gary –

    An outstanding article driving at the heart of spin and reality, disguised behind Delta’s almost fanatical desire towards wooing Wall Street investment houses…but a house built of cards eventually collapses. It is obvious than Ed & Glen intend on stacking as many of these “faux” factoid cards onto the organization until it collapses under its own arrogance and single-minded obsession with chasing a dollar.

  3. Spot on Gary – you need to get on National TV to put this message out.

    Typo in first line of 3rd last paragraph – “days” not “deays”

  4. Maybe the real goal here is to move away from loyalty programs altogether. The loss of privileges is standard practice now. I left Delta back in 2009 and have no regrets. Hopefully AA won’t follow suit for once. Great article, Gary.

  5. I wonder what Seth (Wandering Aramean) would say about all this.

    It’s the role of a CEO to steer a company on macro trends, and this does seem like an ill-informed direction to take. It’s great for the airlines that seats are selling now, that banks are still paying for miles despite declining value, and that fuel is cheap.

    Change any one of those factors and I wonder if leadership will be introspective enough to see that they’re commoditizing their industry. (I assume that’s difficult to suss out when your business is succeeding in spite of its poorly designed loyalty scheme.) Even if leadership does someday recognize trouble, how do they get the genie back into the bottle?

  6. Semi-related: KE is using their 787-8i for late spring/summer seasonal to Atlanta and Vancouver, then Hong Kong and Singapore later on (late summer/fall).

  7. As a UA 1K, I will be negatively impacted by the introduction of frill-less “basic economy” fares. That said, from a business perspective, I see nothing wrong with UA offering them and restricting my elite benefits. First, these fares definitely should NOT be upgradable. We all know that 99% of the time, there are more names on the upgrade list than there are seats. If you want to pay $59, you sit in coach. Who could complain about that?

    I do think it would be a nice gesture to offer high elites economy plus (perhaps restricted to date of departure?), but reasonable people could disagree about this. It would also make sense not to offer 1Ks free food on these very cheap fares.

    It’s important to understand that these aren’t fares UA or the other legacy airlines WANT to offer. They really don’t fit their business model. But since the vast majority of customers buy on price, they have little choice but to complete with the no-frills airlines. If you buy a no-frills cheapo ticket, you have little grounds to complain about getting no-frills service. I don’t see if being a heck of a lot different than if a frequent restaurant patron paid for hamburger and got hamburger — instead of the prime rib they would have preferred.

  8. “If Delta is claiming an annualized $320 million in revenue off of these fares then numbers have lost meaning.”

    Umm- no- $20M quarterly annualised would be $80M of revenue, which even you would agree with, as there is no claim of incremental revenue.

    Also, if domestic revenue for the quarter was $5.5B, $20M would represent 0.36% of revenue, or about 1/4 of the growth, if it was really incremental. I agree with you that most of it was probably substitutionary, but bottom line, if revenue grew when Delta introduced a lower revenue product, they will probably continue to do more of it.

    Finally, @Greg- nope, Delta cutting benefits for frequent fliers buying cheap tickets ain’t anything to do with the concentration of wealth in the US. It’s this kind of hyperbole from people that “feel the Bern” that really turns me off, even though I think his basic message is right.

  9. Good analysis, unfortunately you rationale is only going to resonate with brave and true leadership on the airline side and with conscious traveling consumers. Alas, there is very few of both. Those travelers that should be yelling I’m not my fare will suck it up because they are so consumed by other things they fail or are so weak as to not exercise their consumption power and are little more than drones consuming. They will talk about frequency and the random exception they got or the fact that switching requires the extra effort of being slightly uncomfortable for a few flights. The airlines will rightly bank on the fact the ones they care most about keeping I’ll take the restrictions and shrug it off expecting that someone else will fight it until it becomes the norm.

    You will find no corporate leader who will fight for proper analysis that leads them to oppose or be counter to the first movers approach and in this case it’s Delta. Partly because Wall Street doesn’t do any analysis itself so delta’s story is now gospel, you don’t want to be the leader who goes no that’s wrong I’m doing it this way. You get no immediate reward for it and likely will get punished by Wall Street. There are not many of any Jeff Bezos in many public companies let alone the airline industry, they are all lemmings they will follow each other even if it is off a cliff.

    I do think this move by legacies means that a good travel manager should develop a program that drives, and facilitates travelers to fully utilize Spirit and Southwest. Why use the new imitators when the very good originals are around, at least with Spirit you fully are aware and with south west you get a different but clear product and costs. The costs of seat selection etc can be managed as an allowance going forward.

  10. The race to bottom driver is Spirit, Southwest no longer leads on lower fares as I’ve watched in absolute disbelief the ridiculously high fares that have replaced previously great deals. A year ago for example when they were filling out the DAL nonstop schedule after the Wright amendment ended restrictions on their home airport, nonstop prices almost everywhere were driven down under $100. Now the prices are sky high with few deals found, and only if you shop 5-6 times a day and get up in the middle of the night! Some of the fares are so ridiculously high $300-500 one way that they’ve literally forfeited any low fare airline claim. Frankly many of the fares which were once low are ridiculously high the the point they’re not even competitive. Do they think the free bag makes up for this?

    I find this similar to Walmart suddenly charging May Company prices and is surely driving the Southwest (Walmart) crowd to Spirit. SW selling points then are only refundability which is meaningful to some, free internet, and bags. They are no longer a low fare airline.

  11. As a Delta 360 and mid-tier elite on AA and UA with well over $100k airline spend this year, I wanted to applaud when I read Gary’s underlined point that business travelers ARE leisure travelers.

    For work I fly high-fare business class internationally, so status really doesn’t matter. I care about the perks and miles when I am on my own dime and flying with my wife and 4 kids for vacation or weekend trips. If I am throwing an airline a ton of money during the week, what I want in return is a nice experience when traveling with the family and paying as little as possible. Delta seems to understand this and regularly upgrades us and waives change fees for our personal travel. If they start making my personal travel more expensive and less pleasant, I will stop giving them the high-fare international revenue since I am not a hub captive.

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