United Is Losing Money Because of Basic Economy, Will Keep Doing It Anyway

I’ve consistently written that you don’t make money by offering a product that is worse than your competitors at the same or higher price. The business model of airlines who think otherwise is broken.

When United rolled out Basic Economy — no advance seat assignments, and for customers without frequent flyer status or the airline’s co-brand credit card no full-sized carry on either — I said that United had a problem.

  • Basic economy isn’t a new lower fare.
  • It’s new restrictions on the lowest fare.
  • It makes the airline’s offering undesirable. That’s the point — hoping that customers will spend more money to avoid these restrictions.
  • But it just means that Southwest, JetBlue, Alaska and even Delta (which lacks the carry on bag restriction) are a better deal.
  • So customers will book on other airlines instead.

Back in July United admitted they were losing business because of Basic Economy. Customers were choosing to fly other airlines instead of United because of the restrictions. It was obvious that was going to happen. Why pay the same price to United and be denied a carry on bag when Southwest will sell you a ticket at the same price and not charge for checked bags even?

At the time United said that this was temporary. The miracle drug that was supposed to add a billion dollars to their bottom line wasn’t doing that. However as soon as American Airlines gave up their competitive advantage by introducing their own Basic Economy fares across the domestic route network the gap would close and customers would:

  1. stick with United
  2. pay more to avoid United’s Basic Economy

American did exactly that yesterday so it’s too early to tell what effect that will have on United. It limits the options customers have .. down to Southwest (which carries more domestic passengers than any other airline), Delta (which is larger than United), JetBlue and Alaska.

I’ve been in meetings all day so wasn’t able to dial into the Cowen & Company presentations the airlines were giving today, but Edward Russell shared some key insights on Twitter.

United is admitting is that they actually lost money because of Basic Economy. United revealed that the “incremental revenue from buy-up” was “more than offset by share loss” to airlines without a Basic Economy offering.

Not only did customers behave rationally and not book United, the loss of customers cost United more than the revenue gains from Basic Economy.

Basic Economy is meant to be a complicated fare increase.

  • The most price sensitive customers will get less at the same price

  • Customers who can’t bear how unpleasant travel would be under Basic Economy will spend more

They can raise price on some customers without losing the business of other customers. But that only works if most of the airlines go along in lock step. Scott Kirby developed the draconian Basic Economy restrictions at American, and when he became President of United he revamped their offerings to be similar and more restrictive than Delta’s. You don’t need collusion when you have one person developing the products for two of the three biggest competitors.

Whether or not it will ultimately work depends on the extent to which customers are aware of their options. So far they have been, but United thinks intelligent customers won’t be a problem now that American has followed suit.

United has done some really stupid things with Basic Economy. They rolled it out in all markets regardless of whom they were competing against. They were trying to squeeze $900 full fare passengers for an extra $20 under threat of a middle seat in back and no carry on bag (therefore losing their luggage). They’re learning some lessons and think that will stop the bleeding, and ultimately think their strategy of giving customers less for the same amount of money will mean profit.

Update: United says Basic Economy is responsible for 100 basis points of revenue decline how no one is getting fired for this material and self-inflicted loss astonishes.

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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  1. @Gary
    Gary, I don’t understand, Andrew was so clear and on point about the equilibrium of things, and the curve, and blah blah blah, so I am sure you are wrong and you don’t know anything, I mean he was so convincing and sounded so smart……
    I strongly suggest you go back to your sources and tell them they are wrong, otherwise Andrew (aka Einstein) will be very upset

  2. Way to bury the lede! They’re rolling this back big time so it basically is there to compete where Spirit is selling $35 tickets. That I always understood. I never got the “elite” tax on a $200+ ticket.

  3. Again the perfect metaphor for the US itself where over and over we;ve been completely ruined by Voodoo Economics where the henchpigs of the rich sold ignorant fools that “all boats would rise” if we’d only cut the taxes on the rich once again, always leading to financial collapse and calamitous recession or depression. This so awestruck the world after Bush that they began teaching in their schools that the preening morbidly obese US redneck bully is easily the stupidest creature on the planet, more dangerous than terrorists with their vile warlike prejudices, and destroyers of civilization. Research has shown that this stupendously ignorant 1/3 still believe they’re in line to get rich (or already rich at $50k year) if they’ll just cut the taxes for the rich more and do what the richest tell them to do because they’re obviously blessed by God and all-knowing. More than 80% believed everyone got the same $500 tax cut check that they got under Bush, ignoring the $150,000+ cuts the rich pocketed which is what wrecked us, along with their fat bully wars that unleashed endless terrorism. Now they’re going to do it all over again, nation-ending stupidity doubling down.

    So why would Untied not think they can buffalo these stupidest people on the planet, when the most generous thing that can be said of them is they’re not paying attention?

  4. Hey United. Wanna take ove the market and make millions. Gimme the same no frills, no surprise fees, no luggage charge , no insane changes fees as Southwest. Copy their model and in less than 3 years you’ll be miles above and busier than you are now.

  5. Incidentally, Southwest revised their PRASM guidance upward in view of United’s significant downward revision today. Of course, UAL is going to suggest geopolitical issues and international (China, Atlantic, Korea, etc.) are to blame for the lion’s share, but rarely do we see such a direct, immediate correlation between one airline’s customer-unfriendly policies driving away business and another carrier (without such restrictions) quite clearly poaching a significant volume of passengers and revenue.

    For all of the talk about United ‘bleeding elites’ during the 2013-2016 timeframe, and PRASM underperformance to Delta, et al., this may be the most quantifiable, rapid shift in consumer air travel buying patterns. It’s quite remarkable, IMO. Passengers clearly see right through the facade.

  6. Why didn’t you write anything about their rollback of Basic rconomy? Why aren’t you telling the full story?

  7. Greed is the downfall of so many “smart” people. It amazes me that United hired this moron and that the board tolerates someone who is so far out of touch with the customer base. I am a million miler who spend years as a 1K, and if they don’t think I am worth their time and trouble I am sure that a lot of other airlines will.

  8. Southwest isn’t always a better option.

    For me: Being able to choose an aisle seat is important if I’m flying in coach. I weightlift, my shoulders are overly broad, and I’ll pay the fee. Southwest is a feeding frenzy based on boarding group, and whomever wants to stand in line. I remember one flight I was in their top boarding group – 2nd person to board the plane, and there were already 20 people on-board because it connected there. (Who naturally grabbed all the best seats) I already get a free checked bag and carry-on with my United card, and I fly mostly out of Newark – Making Southwest nearly always a worse option.

    I hate the idea of “Basic Economy.” However, as all the other airlines compete in their race to the bottom – The CEO may be correct in terms of them eventually making more money. The flip side, is that it also makes people like myself look at airlines he would NEVER have considered flying 3-4 years ago. Like my recent Allegiant flight. (Would absolutely fly them again, if it’s cheaper then United.) I look at Europe’s domestic network, which is absolutely dominated by low-cost carriers, and can’t help but think, that is where we are going to end up. Us folks who will pay a premium for Business Class or above are NOT the norm. Especially when a person can fly to Norway and London for less money, then to Key West, Florida.

  9. “But it just means that Southwest, JetBlue, Alaska and even Delta (which lacks the carry on bag restriction) are a better deal.”

    Hello darling. It’s means that spirit is better then united for non-connecting flights as well!!!!!!

    Flew MIA to EWR on united
    EWR to FLL on spirit
    Spirit was better !!!
    On united :
    I was running late and was NOT able to head strait to the gate with my person item because u can’t check in online and do the mobile boarding pass or print at gloomy one I had to run to the kiosk and wait for the employee to come over and put in their code after I put my locator number in because it was a basic economy fare. This was after they gave my personal item ” the look”. I was given group 5 boarding and my middle seat in the back
    Big deal I got a coffee and a
    Stroopwaffle

    On spirit:
    Checked in the morning of and printed my boarding pass. Again I was running late but was able to head strait to the security check point and gate since I had my at home printed boarding pass My seat given was a window in row 7
    Since there is no first class cabin and hardly anyone pays for seats your chances of an up front seat the day of departure is much better!
    I was given group 3 boarding
    I brought my own Chex mix and purchased a $2.00 bottle of water
    Oh and nobody stared me down or my personal item

    Never again on united. They are just miserable !!!!!!

  10. Plus I got zero.
    0 miles for my N class fare
    I normal credit these G class fares to Singapore but didn’t realized united changed them to N class which earns zilch
    I didn’t bother contacting united
    They would only give me 200 miles on their metal anyway.
    I would have to fly them 62 times to get a free one way
    No thank u !!!

  11. I still feel Basic Economy has its place, its just the airlines have looked at it wrong outside of the spirit/allegiant/norwegian routes, etc. They should honestly be using it to innovate, use it as a tool to regulate overhead bin space on the plane to help improve operational efficiency (That makes reasonable sense and they already have the algorithms to do it since they make announcements during boarding anyway).

  12. Mangar, didn’t you just support the point that Basic Economy (BE) is driving you *away* from Untied? While SW isn’t a better option, you sometimes choose Allegiant because you get an acceptable level of non-BE service at a better price.

    So essentially BE just took a dedicated UA flier and made you someone who is now forcing UA to compete on price, even though you *don’t* buy BE fares. And you’re not alone, since UA just conceded that point today. More people are willing to fly Southwest, JetBlue, Spirit, Allegiant, or whoever else when UA decides to compete on price and not routes, convenience, product, service, etc. Plus, pointing out just how crappy your service can be is basically free advertising for every other competitor.

    That’s why BE is probably a long-term loser for UA. It’s not going to get better, unless major airlines force the LCCs out of business (and SW doesn’t make enough money for major expansion). There are examples of this across the business landscape: Target couldn’t beat Walmart on price so they changed to discount “designer”; major hotels can’t beat cheap chains on price so they create their own lines of low cost hotels and differentiate brands. I think UA, and then Delta (maybe those guys first), and then AA will catch on that people fly them not because they’re dirt cheap but because they offer a better service for myriad reasons.

  13. Classic Kirby.

    While the spreadsheet will show how much can be made, it’s harder to show the potential lost revenue from the fallout. Might as well try it.

    This guy doesn’t learn and the industry loves him.

  14. the point is, they tried something, failed,. learn their lesson, and are moving on. they way this is written does not tell that story, you just continue to fault them and berate them. Yes you hate every airline, but sometimes companies / people make mistakes, fix themselves, and move forward. give credit where credit is due

  15. Yeah, just goes to prove that if Scott Kirby had a “Real Housewives” tagline it probably would be: “Gleefully mismanaging and destroying any semblance of humanity for fare paying passengers by cramming all but a few wealthy, cosseted folks into ridiculously small seats, taking away legroom and everything else that makes for a reasonably pleasant experience yet calling it ‘passenger pleasing choices, options and improvements that gives fliers only what they want’ one airline at a time!!!”

    So glad to see BE flailing…here’s hoping this bs continues to FAIL!

  16. Basic Economy is pure genius when it comes to competing head-to-head with ultra low cost carriers (it’s truly a “Frontier killer” — as evidenced by the delay of their IPO), but remains a risky proposition for a legacy airline to offer when there is no such competition. Obviously, if everyone matches this fare structure, it’s probably evil genius: the airline equivalent of a “resort fee.” But if your competitors don’t match, most travelers are unlikely to choose Basic Economy when a competing airline has “normal coach” available at or near the same price.
    I think the jury is still out what will happen to Basic Economy. As a traveler, I hope it’s limited to Spirit and Frontier routes. I think that’s the most likely eventual outcome, but it is by no means certain. AA is rolling out BE throughout its domestic system, and if DL matches — and if that doesn’t cause a mass exodus to Southwest and Jetblue — Americans will likely have to get used to this sucky and confusing product.

  17. What’s worse is that AA still mindlessly followed along and implemented their Basic Economy plan despite the warnings and eventual impact to UA.

    AA saw the effects on UA and still proceeded to follow Scott Kirby’s bad idea. If you’re going to drum out Scott Kirby from the industry, punt out Doug and the rest of the US Airways cancer as well.

    To repeat, there will be documentaries in the future that will show how destructive a small group from US Airways was to the US airline industry.

  18. According to flyertalk thread on BE in the AA forum, chase ultimate and Citi typ can only book BE if going in coach. What a snafu if true.

  19. Gary: Glad you accepted what i said yesterday:

    “Andrew says:
    September 5, 2017 at 2:09 pm
    Gary: ECON 101. The seller sells all product for what the market will bear. Competition forces fares down to marginal cost. Basic Economy is cheaper to deliver. Ergo, the equilibrium price in a competitive market is low than ‘regular’ coach.”

    Today’s call was United in the throws of coming to terms with customers switching. Competition is forcing the price of Basic Economy down to cost.

  20. Glad Kirby is gone from AA. I noticed today of all days that Basic Economy from DFW to MSY was MORE $$$ than Main Cabin on a couple of flights. Interesting!

  21. Andrew – accepted it? I refuted it in the context in which you were offering it. Don’t try to teach me econ 101… basic economy isn’t cheaper to deliver… and it was a giant cluster for united, they say it cost them about $90 million in revenue in the last few months

  22. @Jason — they tried something and learned their lesson? they blew $90 million. and it was 100% foreseeable, obvious even (in fact I predicted it here). learned their lesson? we’ll see. maybe. southwest raised its revenue guidance.

    give credit where credit are due, on the day they acknowledged losing almost a hundred million dollars due to their own stupidity, are you serious?

  23. @Andrew
    trying to decide if you are just an idiot, a big baby or an airline employee…
    My money is on ALL ABOVE

  24. @Gary: How does a product that contains less, cost more? And if it costs more, as you claim, then why do they make more profit by pricing it lower? Right now you have a basic accounting identity problem.

    Your claim that Basic Economy costs more is completely unsupported by any facts. You need to produce some or admit that it is simply wrong.

    There is a defensible argument:

    ECON 101. The seller sells all product for what the market will bear. Competition forces fares down to marginal cost. Basic Economy is cheaper to deliver. Ergo, the equilibrium price in a competitive market is low than ‘regular’ coach.”

  25. Here’s hoping Jetblue goes NO FURTHER down the road to sewer than it has since Wall Street sent its former CEO, Dave Barger, packing and replaced him with someone willing to lower that airline’s standards a little bit here, a little bit there, until now where after originally being promised its new A321s would see the “Core” seats’ row pitch decreased by only ONE inch from 34″ to 33″ as the ‘trade-off’ for upgraded LiveTV featuring 100 channels instead of just 36 on newer, larger and higher resolution screens than the dated ones on their A320s, the airline has gone back on its word where now the “Core” (or those WITHOUT Mint cabins) A321s have 32″ pitch in the “Core” rows by adding ten more seats to cram in 200 passengers when they said difference of one LESS inch pitch per row on the new A321s would be negligible and more than offset by other improvements. Yeah, right…lied to and bait & switch deceit exists at Jetblue, too…

    That and the stealth increase of the first checked bag fee from a flat $15 each way for the Blue Plus tier to variable/”dynamic” (don’t get me started on this evil fraudulence) pricing upwards of at least $23 each way shows that even Jetblue is at risk of going to the dogs…

    Anyhow, here’s hoping Jetblue slides NO FURTHER down to crap than the dribs and drabs seen heading towards joining the race to the bottom that United, American and others have taken at Wall Street’s behest to wildly inflate stock buybacks that diverts resources from investing in delivering a better product, buying new planes, or improving facilities that benefits passengers to simply being wasted on lining the already obscenely rich who seldom, if ever, have to put up with the abuses and degradations that the rest of us do whenever we fly.

    Because, as this epic fail of BE at United shows, if there are other, and better managed airlines out there offering an overall vastly superior product, despite the many, many years of bs blaming passengers for making flying awful and bringing this on ourselves, the facts, as shown by United’s admission that BE is not living up to forecasted models and expectations of consumer behavior, proves otherwise — and fliers, once properly informed of their options and given a real choice in markets with meaningful competition, will choose fly airlines that offer more value for their dollars, and who seem to understand the importance of their overall brand instead of simply branding their fares as a means to disguise fare increases by making flying as miserable as possible to expand ancillary fees far beyond what they really, and realistically, should be.

    Yes, Virginia, some airlines ARE better than others…and they make money, too, without abusing their passengers, imposing a guantlet of ridiculous fees, or shrinking their seats and row pitch to sizes that better resemble the desks and chairs seen in nursery schools than what’s necessary and appropriate for most passengers over the age of eight.

    Jetblue (even in its diminished form), Southwest, Alaska and Virgin America are better overall, and although each have their own strengths and weaknesses that some may prefer to include in their decisions, are vastly superior than United or American for most coach fliers. Period.

    Delta is less offensive than United or American in several ways, including allowing carry-ons for their BE fares, but also in other frequently overlooked ways such as no $25 fee to book flights over the phone, and deciding to NOT stuff their 777s with ten seats abreast in the upcoming cabin refresh.

    But wouldn’t be even more spectacular and out of the box if Delta completely renounced the race to the bottom philosophy as the road to riches, and instead sought to emulate what the market is, in fact, proving by United’s admission that BE isn’t fulfilling expectations, that fliers WILL choose airlines like Jetblue, Southwest or Alaska that are better and have NOT rushed headlong into the race to the bottom chasing the ULCCs the way United and American have?

    But a big thanks definitely goes out to United, who, unwittingly, has now laid bare once and for all to see the fiction that better airlines with better products and more amenities are doomed/destined to fail.

    This “story”‘ was never really true despite the relentless efforts made to insist it was.

    Airlines like Jetblue or Alaska were conc

  26. If United offered me basic economy for $100 and regular economy for $150, and the only competition on the route was Jet Blue at $150 for its economy, I would fly Jet Blue. If United offered me basic economy for $100 and regular economy for $150, and the only competition on the route was Spirit at $100 for its economy, I would fly Spirit. The mere existence of basic economy at United drives me to other airlines at both the high end and the low end. Scott Kirby has no idea much ANGER toward United has resulted from his actions.

  27. All this means to me is I may as well fly the cheapest airlines, instead of the old reliable that I have miles at, and suffer in silence to fun places served by low cost carriers for few dollars.

    No reason to sit in back of plane in discomfort on united and american when I can fly allegiant to some places i like to go for less with BETTER service and comfort. United is just repeating their loosing TED experience but doing at the back of all their mainline planes. They will lose passengers in droves to airlines who do it just a bit better on certain routes.

    What once may have been marginally profitable routes for the legacies will now be losers overall on more routes and other flights, with confused, unhappy and increasingly grumpy customers. See how they train their staff to cope with that group of fliers, who won’t or can’t or didn’t know, they needed to buy up. Dynamically price that experience losers!

  28. @ VX_Flier “Documentaries in the future that will show how destructive a small group from US Airways was to the US airline industry.”

    You do realize that “small group from US Airways” (actually America West) are almost single-handedly responsible for the entire consolidation of the USA airline industry which has resulted in tens of billions of dollars in profits for shareholders and, massive pay increases for airline employees — while actually lowering the real cost of airline tickets (including bag fees)?

    So far, Scott Kirby’s experiment with Basic Economy has cost United 1 percent of revenue for one quarter. It remains to be see what happens with this experiment in the future.

    I’d say his reputation is still pretty solid. 🙂

  29. More evidence that the Ryanair model is the one (at least for short flights):

    “The two airlines currently flying the C Series—Swiss and Air Baltic—say most coach passengers won’t pay higher fares for comfy cabins. For a small fare difference, they’ll still pick less-comfortable airplanes. ”

    https://www.wsj.com/articles/the-comfortable-new-planes-airlines-think-you-dont-want-1504710035?mod=trending_now_1

    The WSJ article puts it in such clear terms that even Dimwit Doug should be able to follow it.

  30. As an ex-finance guy myself, it’s astonishing to read these articles from you. As a customer of air travel, it’s astonishing to witness airlines think people are that dumb. It’s is considerable eye opening to watch airlines throw good money after bad strategies and then double down as if somehow something in the water will change the results.

    Although, after reading that book on the airlines, I suppose it makes sense when decision making is so centralized to a few key people that can rationalize away what strategy they are dead set on and their underlings just follow their marching orders. Starting to sound like Scott wasn’t a good hire; and their CEO pick isn’t going to be the “outside” saving grace they thought he would be.

  31. I wonder why United mentions only losing share to “legacy” carriers? Does that now encompass Southwest/Virgin/JB, are they in denial that people switch to those carriers, or are they true that people aren’t shifting to those two (which seems surprising)?

  32. @iahphx said – “You do realize that “small group from US Airways” (actually America West) are almost single-handedly responsible for the entire consolidation of the USA airline industry which has resulted in tens of billions of dollars in profits for shareholders and, massive pay increases for airline employees — while actually lowering the real cost of airline tickets (including bag fees)?”

    I’m not sure if this is sarcasm or your opinion. So I’ll just go with your opinion for now.

    Are you implying that this group’s objective for consolidation of the US airline industry was a good thing for consumer choices, competition and how airlines treat customers?

    I’m sorry, I don’t agree with you. And I don’t think the majority of people here would agree with you either.

  33. @VX_Flyer: Definately a mixed record. IAHPHX (Hugh Philly?) omits the effect of Chapter 11 by ‘The Chapter 11 Three’ on their profits. They left billions in pension liabilities and debt unpaid by them and paid by the taxpayer or pension fund participants. That windfall should be recouped.

    Two pieces of legislation we need:
    1) At the 20 largest US airports no airline should be allowed to have more then one-third of the takeoffs. This would obviously be phased in (over 2-3 years);

    2) PGGC legislation would be overhauled to prevent companies ‘putting’ their pension liabilities on the body. This is a huge boondoggle (corporate welfare);

    If the current administration would do this rather than kowtow to the bleating of The Chapter 11 Three about foreign competition, U.S. airline consumers would be much better off.

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