Delta had Song. United had TED. (On the West Coast they also had Shuttle by United.) US Airways had MetroJet. Consultants, especially McKinsey, were peddling the same idea to major airlines in exchange for big fees. In order to compete they needed to start low cost carriers inside their carrier, and those new airlines would fly leisure routes. They’d offer lower fares. And in the case of Song they’d even offer a better product than mainline.
Gradually the attempts faltered, and each of the airline-within-an-airline concepts was killed.
Via Wikimedia Commons, credit: Choster
Now the threat isn’t an earlier iteration of Frontier (United’s TED launched out of Denver countering Frontier), Southwest or jetBlue but Spirit, (new) Frontier, and Allegiant. Delta was first out of the gate with Basic Economy fares, a way to match pricing with the ultra low cost carriers without offering a better product, hoping that customers would buy up to more expensive fares for a better product.
Taking the idea further, if Basic Economy was good against the ultra low cost carriers why wouldn’t it be good always and everywhere? While likely overstated, a year ago Delta was claiming that basic economy was worth $80 million to their bottom line.
But the ultra low cost carrier model itself is stalling. Spirit is complaining about low airfares. A recent Airline Weekly‘s lead story this week was, “Ultra-worried: Is the ultra-LCC business model running into trouble?”
Just like the conventional wisdom was that legacy airlines needed separate low cost carriers, the conventional wisdom became that they needed to make their products worse — so bad in fact that customers would be willing to spend more to avoid those stripped down products.
However while Delta was the first out of the gate with this and continues with the strategy,
- They’re on record saying the potential isn’t nearly what United and American expect
- They’ve so far been unwilling to make the product as miserable as United and American (they still allow customers to bring on a carry on bag)
United admits they’re losing business because of basic economy. American hasn’t fully rolled out its Basic Economy yet, and Southwest, JetBlue, and Alaska all offer better products at their lowest fare. They believe once American dutifully continues to play the greater fool they’ll be fine.
But Southwest carries more domestic passengers than anyone else. Southwest, Alaska, and JetBlue all had higher operating margins in the second quarter than United, Delta, and American.
Yet American beat analyst expectations and earned nearly a billion dollars in the second quarter without having rolled out Basic Economy, why would they want to continue to dumb down their product and eliminate their competitive advantage over United while becoming more like Spirit and Allegiant — when Spirit’s and Allegiant’s margins are declining year-over-year more than the industry’s average, and Frontier has delayed its IPO?
We shouldn’t regulate seat sizes. We should educate customers. There are choices, and when customers know what their options are that not all airlines are the same they’ll choose better value rather than worse value.
Surveys may say that customers overall won’t spend more to get a better product, they choose the lower price. But an educated consumer will choose the better product at the same price — which is what the largest domestic airline, and competitors on both the East and West Coasts, offer.
In nearly every other industry companies strive to make money by delivering greater value at a lower price. Here the airlines are striving to provide less value in order to raise prices.