Business Journal: Basic Economy at United Has Become a Circus

United discovered with Basic Economy that when you offer an inferior product at the same price, customers will choose your competitors. They lost about $100 million thanks to an own goal that was so thoroughly predictable that I predicted it here.

Ultimately you make money by offering consumers a better product at a lower price, not by trying to offer a worse product that’s so bad that consumers will pay more to avoid it.

United is still pursuing basic economy aggressively but has rolled it back from initially offering it as an option on all fares (a walkup $800 customer would still be asked for an extra $20 for a seat assignment) and in all domestic markets.


United Boarding, San Francisco

Originally United’s plan wasn’t as draconian as no full-sized carry on bags on basic economy fares. That’s what American is doing, but it isn’t what Delta has done for the last several years. Contra United President Scott Kirby Delta knows Basic Economy isn’t a billion dollar idea.

When United hired American’s President as its President, Kirby put the breaks on United’s Basic Economy plan and retooled it to be harsher along the lines he had planned for American Airlines. That’s why the offerings from both United and American are so similar.

A new piece from the Chicago Business Journal claims the real reason United is rolling back basic economy is because it sucks, not because United was losing money. What the piece misses is that it isn’t either-or, United was losing money because the product sucks and their competitors have been offering customers a better deal at the same price.

Nonetheless, the piece shares dissatisfaction within the airline over basic economy.

Sources say customer service agents sometimes have had trouble communicating with Basic Economy passengers who don’t speak English.

Some Basic Economy passengers also arrive at the gate with more than the one piece of luggage they are permitted, but without sufficient funds to pay to gate-check the bags or to cover the penalty fee for getting to the gate with more than the allowed one small carry-on.

…Couples and families with small children flying Basic Economy are another big problem. They have not always responded well to the news they may not be able to be seated together, depending on what seats are left after passengers with less restrictive fares are checked-in and boarded.

Flight attendants also have been left with the unenviable task of sometimes asking passengers already seated if they would move to a possibly less desirable seat to accommodate couples or families flying Basic Economy who think they need to be seated together.

“It’s become a circus,” said one source.

…Insiders at United say the airline’s president, Scott Kirby, was the one pushing hardest for the introduction of Basic Economy at the Chicago-based airline. And he is the executive they blame most for the problems of the past several months tied to the Basic Economy rollout.

“He’s (Kirby) bringing us down to the level of Spirit Airlines with these fares,” noted one flight attendant.


United Boarding, Denver

What remains to be seen is whether United’s bet — that once American again played the greater fool and gave up its product advantage by rolling out basic economy broadly — their basic economy gambit would work and turn profitable, or whether competition from Southwest (the largest domestic airline), JetBlue, and Alaska would keep basic economy a loser.

(HT: Points Fitness)

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. Yeah… yeah… yeah… we get it. Higher price worst service. Then again, if its so bad, why people still fly united? Why they still make profits?

    Maybe its you guys frequent flyer and travel bloggers who are in the wrong side of the fence….. ever thought about that?

  2. James they still “make profits” because 1) the industry is an oligopoly and 2) oil is cheap, service levels be damned

  3. @Gary
    You win some, you lose some. As long as net income still positives, it doesn’t matter which area were in the red.

    @ua-nyc
    Uhm… whatever the reason(s), profit is profit. And why would they care about service level, if there’s no competition?

  4. @James, the question is not “are they profitable,” but “does this contribute to profitability?” Checked bag fees do contribute. The early results are that Basic Economy detracts from profitability. Companies want to be more profitable, not less profitable.

  5. “You win some, you lose some. As long as net income still positives, it doesn’t matter which area were in the red”

    I’d give my left nut to be a fly on the wall to see @James at work in the boardroom!!! Pass the popcorn please!

  6. I don’t know why the US3 are so stupid at marketing and product strategy. These fares have taken an enormous amount of heat for their draconian product offering, and the airlines only have themselves to blame. If anything, they should’ve consulted their frequent flyer folks to learn how to spin this as a net-positive development. Face it, they are pros at making devaluations look palatable when the reality is the opposite. The US3 (really only AA and UA) should have inserted SOMETHING positive in the roll-out, maybe being the first group to board after first class since they can’t have a carry-on, SOMETHING.

  7. I have been flying Delta more since BE rolled out, that’s for sure. And this is in IAH a where I inevitably need to connect in MSP, SLC, ATL, etc in order to get where I’m going. Even wohout taking into account BE, UA is just too expensive out of IAH. I haven’t seen a G fare on he routes I take on UA since June and even K fares are hard to find.

    I hope United fires he hell out of Scott Kirby. That guy is truly a cancer to the airline industry. It’s nice to see that his nefarious plans are finally blowing up on him. He ruined US Airways, he ruined AA, and now he’s ruining United.

  8. @Michael
    No, you are wrong. Contribution doesn’t have to be straightforward, and not everybody is keen on early results. This is a corporation, with strategic policy. Not all aims are for short term.

    @willy
    Lol. You seem like average redneck on the street, acting like knows everything while actually knows nothing. Typical bigmouth hillbilly. Lol

  9. American is going into the same hole.

    Yesterday I would have gladly paid $100 each way to bounce between 2 close cities in Florida on the same day for a personal appointment.

    Basic econ was $70 and econ was $155. I just used miles. If I could not use miles I would have driven.

    As an exec plat for 20 years (and concierge key for the last 3), there is no value added to buy basic econ, and it insults me that American thinks I’m too stupid to see that they are jacking up the prices while trying to spin the story.

    JetBlue is now also a good alternative for me out of FLL. I matched my status to their mosaic and will take my first business trip to the northeast on them. In the past I would have flown American.

  10. @ James, I admit you *could* be right if they have a strategic vision that shows that this can eventually be profitable and that losing some money on Basic Economy might happen in the short run. That said, in an environment where public companies have to meet earnings targets every quarter, we’re generally not looking at a bunch of patient companies. And since this is operational income, it’s different than something like buying an airplance or adding wi-fi in that the costs are capitalized over many years. This hurts now.

  11. Even with such a vision they made the obvious blunder of rolling it out too early. It’s got to be one helluva vision to be worth lighting $100 million on fire before even knowing if it’ll work.

    In any case the bet now is that American has made a dumb move giving up its competitive advantage. And that’s enough, that it doesn’t matter than Southwest (and jetBlue and Alaska) still over better value at the same price. And note that Southwest is the largest airline by domestic passengers carried.

  12. I have asked UA to put a link to Southwest next to their Basic Economy box. Firing the fool that came up with this idea would be another’s good step.

  13. As a 2.8-million-mile UA customer, it is sad to see incompetent management take the airline down the Eastern/PanAm path. If UAL felt the need to operate in the low-end market, it should have invested in Spirit instead of canibalizing the already under-performing United Airlines.

  14. This is clearly the end result of the financial boys pushing out the marketing folks and taking over the airlines, while barely giving any lip service towards “Customer Experience.” The market will inevitably react by more tuned-in travelers seeking refuge with Jet Blue and Alaska. As oil prices increase, the US3 will have no choice but for a course correction to mimic Jet Blue and Alaska.

    Everywhere we look, we have witnessed how industry combines have destroyed their competitive vitality; not just obviously airlines, but advertising agencies, health care, etc.

    If the airline financial gurus understood history and the art of benchmarking, they would have learned, or been forced to by their Board protectors, how in 1962 the Canadian National Railway (CNR) created the first true, common sense discount program. Re-positioning itself to be competitive, pro-passenger, the line implemented a very simple “red, white, and blue” fare program to fill its trains on off-peak days and times that bordered the heavier periods. This discount fare concept became so popular that it pushed out the primary competitor, Canadian Pacific Railway (CPR) railway, In the U.S. the Baltimore & Ohio successfully emulated the “Red, White, and Blue” fare concept in the mid-1960s. However, in both Canada and the U.S., even these programs could not compete against the government subsidized airlines and interstates.

  15. “Circus”, according to an unnamed source? That really embellishes your credibility Gary.

    I just heard “one source” say Gary Leff is in Putin’s payroll.

    If you go down to ChickAFila in Austin you can get “one sauce”.

    This is getting even more alarming.

  16. “They lost about $100 million thanks to an own goal that was so thoroughly predictable that I predicted it here.”

    What evidence do you have of that? The link goes to an article that doesn’t contain even the claim, let alone evidence to support it.

  17. @andrew the link shows a slide from United saying they lost money, in the talk the slide is from they explained how much

    and re your ‘circus’ comment re-read the title, it emphasizes this is the claim of the chicago business journal

  18. @Gary: Even the Chicago Business Journal did not claim credit for use of the term ‘circus’ . They quoted, without endorsement, an anonymous source. I am not surprised they didn’t own it, an unidentified source is a source with no credibility.

    On your ongoing rant about United Basic Economy. You are unsupported by any serious financial journalists or financial analysts. The consensus among them appears to be that United had some teething problems setting the fare levels, but that is not, contrary to your stance, the end of the world. See, for example:

    https://www.fool.com/investing/2017/09/10/basic-economy-is-a-bust-for-united-continental-so.aspx

    This article also makes the important point that Delta has made a lot of money out of Basic Economy. So the concept, as I argued earlier, is economically sound. It does not universally raise fares, it moves them to the airline’s demand curve (i.e., it is an attempt to enforce some sophisticated price discrimination).

  19. @a Delta has said used an $80mm number, which makes Kirby’s past claims of a billion dollars sound insane. And Delta isn’t as punitive in its basic economy fare as United, chasing away customers.

    United lost $100mm in a few months on theirs. And the lead of the article you link to is “Basic Economy Is a Bust for United Continental (So Far) A key pillar of United Continental’s $4.8 billion profit improvement plan may be a lot less effective than expected.”

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