Basic Economy Fares Don’t Lower Ticket Prices, They Increase Ticket Prices

When Delta started testing ‘Basic Economy’ fares in 2012 the idea was to compete with the ultra low cost carriers — they already had to match price, so they wanted to be able to offer a product that was closer to the limited service Spirit provided, in hopes that customers would buy up to more expensive fares for more services like pre-assigned seats.

Basic Economy fares are no longer just about competing with the ultra low cost carriers like Spirit, Allegiant, and Frontier though. At its recent investor day event we learned that Delta’s Basic Economy fares have spread to 38% of its markets — and growing.

When United announced its own Basic Economy fares that go on sale this month — and take the concept even farther, because United will keep customers who buy these tickets and do not have elite status or their co-brand credit card from bringing on a full size carry on — I made it clear that these offerings would not mean lower prices.

Airlines think customers will pay more for things that they get as part of their fare today. So this isn’t a win for customers.

  1. This isn’t about offering you lower fares. The major carriers have already largely been matching the lowest fares in the market.

  2. Basic economy is a way of moving some passengers who buy those fares today to buy more expensive fares instead.

Rather than being a way to offer lower fares, Basic Economy fares are meant to increase the revenue airlines earn from each seat. Today the major airlines match the lowest fares offered by Spirit and others, but in the case of United and American they’ve still offered pre-assigned seats and in the case of Delta and American there’s not yet any announcement about charging for or banning full sized carry ons.

Think I’m wrong? We’ve got a natural experiment as Basic Economy fares enter new markets. porori reports new Delta Basic Economy fares in the market they buy tickets for the most. Prices didn’t go down.

I usually paid $350 RT (econ fare X)

However, this past week, it seems like delta just added basic economy to my route, which is fine.

You’d think that they would place the price tag somewhere south of $350 for those basic economy seats but no! instead, they are charging $350(what used to be the cheapest regular economy fare) for it and if you wanted to get regular economy seat, you better pay $30 more now($380)(econ fare X).

United, Delta, and American are still better deals than Spirit at the lowest (Basic Economy) price because there’s more legroom and complimentary soft drinks and sometimes (very) modest snacks. Plus their miles are worth more, devaluations notwithstanding.

But if they can come closer to matching the product offered by Spirit when matching price, they don’t have to ‘give away’ things like seat assignments or in United’s case carry on space.

United says they expect to generate an additional $150 million a year from segmenting out Basic Economy fares by 2018.

While I think that Delta’s reporting methodology overstates their results, they claim $80 million a year in increased revenue from these fares already and growing — not lower revenue — a few dollars at a time.

A Detroit – Los Angeles roundtrip may cost $60 more to avoid Basic Economy fares.

An Atlanta – Orlando roundtrip may cost $15 more to avoid Basic Economy fares.

Soon enough we’ll learn what American Airlines has in store for Basic Economy. So far though customers traveling on Basic Economy fares will not be charged to use the lavatory, though people have complained that seemed to the direction airlines are headed for the past 30 years:

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 »

More articles by Gary Leff »

Pingbacks

  1. […] Posted by Pleb Status The fare would need to be substantially cheaper to make it worthwhile. Basic Economy Fares Don't Lower Ticket Prices, They Increase Ticket Prices – View from the Wing Originally Posted by Pleb Status I hope this does not give our airlines any ideas. On […]

Comments

  1. Basic Economy? They should just call it low class. I think that’s what they called it on Soul Plane. They even had coin-operated overhead bins.

  2. I think one major matter this article overlooks is that a lot of travelers (myself included) shun airlines like Spirit, Frontier, etc….because of the simply awful service that they provide. Yes, Spirit and Frontier are great for people who don’t mind paying rock-bottom prices for hit-or-miss service- and usually, the flights are on time, and they don’t lose your luggage.

    But when flights are cancelled, and luggage is lost…they money you have saved on a ULLC evaporates. It’s replaced by the hours and hours of aggravation you have to deal with to get where you need to go, and find your luggage.

    Perfect they are not. But I will gladly pay more for a legacy carrier than I will for Spirit or Frontier.

  3. @Gary – Now, now; this article is a bit misleading. Y- fares are NOT cheaper when introduced today because they’re already price matching LCC’s. However, the prices ARE cheaper compared to before the legacy carriers were competing with LCC’s. I think it’s safe to say that the legacy carriers always intended to begin matching the LCC products as well (unbundled seat selection, for example). And the LCC model is proven to lower prices; I doubt anyone would argue with that.

    So, to say basic economy fares “don’t lower ticket prices” is, in my view, misleading. What’s happening is that the legacy carriers are *finally* offering what they always intended, and LCC’s are *finally* driving business innovation in the marketplace by forcing the hands of the legacy carriers.

    Essentially, Economy Basic dropped prices 3 years ago, and Delta is finally segmenting the market the way that they’d wanted to back then. I’m only surprised it took this long. It’s been nice in the interim!

  4. I was too mean with the above (not enough sleep today and I’m grumpy…*grumble*). Still, I believe the point still stands regarding Y- tickets lowering the floor on ticket prices, but that it happened years ago.

  5. The airlines would totes suck nutbags, except now nutbags cost $3. Insane. I am not sure how the airlines miss their mark as often as they do and still stay in business.

  6. Emirates did the same. They offer a basic fare where no seat reservation is included. If you then buy a seat reservation the price comes closely to the usual rate. But without having miles earned.

  7. jamesb hit it right on the head – go talk to Kirby, he would never have matched Spirit fares starting in 2015 if basic economy had not been in the pipeline. It’s not feasible for them to price match them with a superior product and higher cost structure. So you should be comparing basic economy fares to economy fares 2 years ago (in which case they are on average ~13% lower), not to what economy fares are today (because the low economy fares today would never have happened had basic economy not been in the pipeline).

  8. American was matching Spirit prices before 2015 though of course Spirit’s attack on Dallas grew in recent years, they weren’t going to ignore that growth, and if you listen to Kirby he says that it has been profitable to sell tickets at Spirit prices under the current fare structures.

    Besides the decision to match the lowest fares in the market in 2012 or 2014 is completely independent from what your fare structure is going to look like come 2017 and beyond.

  9. I should have been more specific, American was not matching Spirit at the same level pre-2015 (blanket fare matching, seeing $40 walk up fares). So we’re seeing them leave the blanket on (in fairness they’ve eased a bit), just rebranded as basic economy. Otherwise without basic economy we’d still see some matched fares akin to 2013/2014, but not nearly in the same magnitude as is present today and as close in as they are today.

    And yes Kirby has said on earnings calls that it’s profitable from the perspective of “your marginal seat has 0 marginal costs so selling the ticket is net good for profits” but you’ll also hear them regularly discuss that they have indeed diluted the fare environment with all their matching and left money on the table – basic economy gives them the ability to fence off dilution (hence why its revenue accretive) while allowing them to keep the same level of pressure on ULCCs. A level of pressure that could not be sustained without basic economy because of the dilution.

    And if i understand your last sentence correctly, I disagree – I believe it is relevant to compare it to what the fare structure was 2 years ago and not just where we go from here relative to today – Garuda Indonesia ran a 90% off mileage award sale a few weeks back – and now it’s gone. No one the day after said “Garuda increased mileage award costs 10x!”. Instead they realize that the promotion was temporary and benchmark award prices relative to what it was in the normalized environment. It’s the same thing with airline prices. ULCC matching may not be branded as a promo, but these management teams never thought full economy tickets should be sold at $40 forever and viewed it as a temporary solution as they got their basic economy IT working.

  10. Minor typo (or possible bad word choice)
    The first word of the paragraph below the second photo (of the United plane at the gate) should be Think (not Thing)

  11. @pk We AGREE that the airlines see basic economy as a tool to get customers to pay more money than just the cheapest fares. That’s the point of my post.

    Where we disagree is that American was selling cheap fares 2 years ago because in the future they were going to change their pricing strategy. They sold cheap fares 2 years ago because it was more profitable than not selling those fares. But they also wanted to figure out a way to earn even more.

    My only point here is that Basic Economy is not giving consumers some sort of new, cheaper fare that they don’t already have which is how much of the journalism has portrayed the move.

  12. As a price-triggered traveler with elite status, I think this sucks the most for me, but it does make sense for the airlines and it is a brilliant way to segment the market.

    Firstly I think in most cases DL hasn’t been “matching” Spirit prices, as I still saw some $20 – $50 premium in competing routes (DL Basic Econ vs Spirit) when I was booking tickets. AA and UA will introduce BE to match prices with DL, and to reduce the premiums towards Spirit to a point to sufficiently convert those leisure travelers. I think the average BE fare is still going down as long as fuel is still cheap.

    However, the worst thing that’s going to happen for travelers is that those “amazing deals” or “mistake fares” most of the travel blogs talk about – is eventually going to appear purely in Basic Economy form. If you are ever motivated to travel by a $50 ticket to Miami, a $100 ticket to the west coast, a $400RT ticket to Europe and Asia, you’ll find that you’ll no longer have any fringe benefits at all – upgrades, preferred seats, EQMs. Worst is coming for those elite travelers just a little short the of the highest status at the end of the year, and picked up a $500 MR trip to Asia in the hope to get enough EQM while still staying in business cabin by spending their global upgrade certificate… Good luck!

  13. Obviously it doesn’t lower prices. These are businesses and they aren’t going to do anything that isn’t profitable for them.

  14. In the comments, some say this isn’t a fair comparison and price matching the ULCC wasn’t sustainable (although they only did that to a limited extent), but if that’s the case, how have the full-service airlines been profitable the last couple of years? Sorry, but they have been very profitable, so lack of sustainability is an argument I don’t buy. The airlines have restructured, streamlined, created add-ons, etc for profitability. This is simply another way to increase profit. The only advantage to this is perhaps it will be easier to find room in the overhead bins if you pay more, have status, etc.

Leave a Reply

Your email address will not be published. Required fields are marked *