The President of American Airlines Doesn’t Understand the Economics of Basic Economy Fares

The Associated Press‘s David Koenig asks American Airlines President Robert Isom about Basic Economy.

Q: How is Basic Economy doing?

A: We’ve had Basic Economy out since the beginning of the year but really only since the end of the summer in full force. We’ve seen about 50 percent of the customers that are presented with the Basic opportunity fare are choosing to buy up. That’s really good news for us. That is all improved revenue for us.

Now first of you should should be skeptical of the 50% number with respect to how many customers buy up to avoid Basic Economy.

  • United and American report the same number
  • It’s a round number
  • And they keep repeating it, the number never changes

So either they’re not measuring this carefully and often or they’re playing loose with the data. The third option — that both United and American have been consistently seeing the same exact performance, unwavering over time, seems by far the least likely.

It’s also unclear what “customers that are presented with Basic” means and how much work that’s doing in getting to the 50% figure. Customers are ‘presented’ with Basic Economy on online travel agency sites, but the restrictions are far less prominent. Are those counted? It wouldn’t be safe to generalize that 50% of all passengers (at least on flights where Basic Economy is an option for sale) buy up.

What about cases where the choice is made for the passenger, such as when booking through Concur or a similar tool set not to display Basic Economy at all? That’s extra revenue to the airline (netting out corporate discounts or rebates) but unclear if we draw the same conclusion about behavior.

Finally, Isom’s claim that “that is all improved revenue for us” — that offering basic economy and having 50% of people spend more to avoid their restrictions — is all net gain is demonstrably false.

As we know from United’s early stumble losing about $100 million on the roll out of their basic economy fares customers can and do book away from major airlines offering such a restrictive and inferior product. For isntance, Southwest Airlines is the largest carrier of domestic passengers in the country and their fares do not limit the ability to bring a carry on bag onboard (they don’t even charge for checked bags).

At the same price point Southwest, Alaska, and JetBlue offer a better product (and Delta, too, since their version of Basic Economy doesn’t have the carry on restriction). So customers choose to buy from one of those airlines instead.

That’s revenue loss not ‘all improved revenue’ though how it nets out is an empirical question — one that, given the rounded 50% number we keep hearing from both American and United, one wonders if they’re primed to honestly measure or if they’re simply going to pre-suppose the answer the want to see.

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. @Gary
    and now Gary, you will hear from IAHPHX on how you are wrong…
    drumroll to IAHPHX stupid comments in 3…2….1…
    I seriously doubt 50% buy up, as most leisure travelers buy the cheapest and are not aware of basic crap restrictions, and those who know exclude those airlines completely in searches

  2. Lol I travel solo, don’t mind sitting at the back, have cobrands that would allow me to bring a carry on. Thanks but no thanks, I’m not gonna buy up.

  3. Other specific things to poke holes in the argument:
    1) We still often see massive gaps between Basic and Regular Economy, like hundreds of dollars. While we don’t know how often someone is “buying up” it would seem like these situations are in the wrong 50%.
    2) We still see circumstances where the difference between Basic and Regular is negligible – this data would be genuinely interesting to me, as it would help build a WTP curve for Basic vs. Regular.
    3) We still see stupid instances where Basic is more expensive than Regular – do they count this as a “buy up” when its actually a buy-down?

  4. Responding to my own comment:

    Just realized something that probably let’s them manipulate the stats – would not be surprised if the 50% is actually something like “offered Basic Economy and chose Regular Economy on any other flight or routing for the same itinerary being searched.”

    Quick example on United : DEN-SFO on UA, travel oneway on Dec 22. The first three flights of the day have a Basic at $109 and a Regular at $99, and the 12pm and 2pm have a $2 increase for Regular over Basic. Since they have no idea to validate which flight or time of day I actually intend on traveling, they can claim that I’ve been presented with Basic Economy but bought up something more expensive. They could even make this claim if I bought an F ticket.

    It’s all utter garbage.

  5. Hum…alternate reality and counting on uneducated, ignorant imbeciles to believe their lies…where do we see this repeatedly?

    Oh yes, it’s the trump/republican way of doing business. If it’s working for them why can’t it work for american?

  6. Saying that the President of AA doesn’t understand the economics of Basic Economy Fares would be dumber than Robert Isom saying that Gary Leff doesn’t understand the appeal of frequent flyer credit card bonus sign-ups to his readership. It’s just an idiotic statement, and unworthy of anyone who claims to be a “thought leader in travel.”

    Anyone can question just how much money the major airlines are making on Basic Economy, but I am 100% certain that it is a product that’s here to stay. At least as long as there are ultra low cost carriers still in business in the USA. It’s an incredibly effective business strategy for dealing with such competition. because it gives the majors the opportunity to offer similar fares to price-sensitive consumers but also generate the “ancillary revenue” necessary to publish these fares. Nobody makes money with $59 fares. And I can assure you that if passengers are booking WN for $59 instead of Basic Economy, WN is losing money on those fares because their model is almost completely devoid of ancillary revenue opportunities.

    I do think we will see more sophistication in the way Basic Economy is priced. The same data strategies that currently enable the airlines to sell basically every seat on an airplane at different price points will be deployed to predict the profit-maximizing price differential between regular economy and basic. Give it a year or so.

  7. Even more simple:
    “50 percent (,,,) are choosing to buy up. That’s really good news for us.”
    Really?
    What about the other 50% that don’t buy up?
    Aren’t they paying LESS than regular?
    Isn’t that a revenue loss?

  8. @Gary
    see Gary? I told you…2 hrs and we have the verbal diarrhea from IAHPHX
    If only he would tell us who’s bit@ch is he (UA or AA?) the puzzle would be complete

  9. Trumponomics: cluelessy and maliciously gouge consumers while promising redneck morons you are going to bring their jobs back and make life miserable for minorities who aren’t fat and pasty white.

    My God are these bucaneer capitalists hanging on a backlash when Buford realizes he’s been conned. Suddenly the budget gets balanced when you charge billionaires a surcharge for putting up with their Marie Antoinette hijacking of the political system. But their big money bet is that Buford and his third are too dumb as rocks to every wise up. So we wait for the other 2/3 to care enough to save their country, written off by the rest of the world as killed by stupid.

  10. American and United think we are all dumb asses. I’m waiting to see real economy fares in the US similar to European basic economy airlines. Do I hear 700-1000 mile flights for $35 to $50 plus checked bag fees (carry-on is FREE) and the option to select a seat in advance for a $10 fee?
    Easyjet and Ryanair will smoke their butts! Oh yes but they are subsidized will be their next excuse for their inefficiencies.

  11. Quite honestly I don’t know why more people look into earning elite status on Frontier? They actually UNDERSTAND the merchandising concept, and that status should override most restrictions, not that elites should have to PAY MORE to use their earned benefits just to avoid being miserable! Having been a 10 year EXP on AA I’m finding myself flying F9 more and more as an elite, and paying great prices that include a carry on and MANAGED EXPECTATIONS like seating choice. I will likely not requalify for EXP for 2019 because I’m actively avoiding the garbage basic economy fares and voting with my wallet.

  12. But actually, I have bought up 100% of the time when faced with basic economy on American, with two caveats: (1) Still Executive Platinum and I want my benefits. (2) Both times, it took me a week longer to buy my tickets when faced with the basic economy choice, looking at other alternatives.

    I will bet that many people just book with other airlines when faced with the basic economy choice and there is now way to measure how many do that.

  13. I believe it sounds nicer to say AA doesn’t understand the economics behind it, than say “AA is lying about net outcomes of travelers who are presented with basic economy. ” I believe the pricing technique is the definition of bait and switch. Should be handled as a rebate/incentive by gate agent (either end) if they were being honest about it. Not a penalty to take a carry on. I demanded that my sister fly Southwest for Christmas because she’s the worst travel booker in the world. She’d get burned by this scam on the majors without doubt.

  14. I always look for Southwest and Alaska first, only consider the three stooges when I have no choice. Basic Economy is part of it – the whole concept of “We’re going to make our product so bad we can collect extra from people to avoid it.” I agree with Gary. Whatever the 50% means, it isn’t taking into account people who never show up at their website in the first place, or who see this garbage and decide to move on rather than buying at all.

  15. sorry, but I totally Agree with IAH-PHX on the Issue. The Day Mr. Leff knows more than the Sitting President of An Airline and has a TITLE to Prove It…… You are nothing more than a Cynic and are a Blowbag under the guise of Consumer Advocate. If You don’t like PE…… Don’t Buy It, PERIOD!

  16. @Reese I believe the presumption that the sitting President of an airline must be correct on basic economy went away when United lost $100 million with their roll out.

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