As Alaska Completes Their Merger, Expect Basic Economy & Other Unfriendly Changes

Mergers create a brief window where customers are largely protected from devaluations. Airlines are distracted by merger integration, and don’t want to make customers feel like the merger will be bad for them right away. Once American Airlines moved to a single reservation system in October 2015 we learned about a gutting of AAdvantage the next month both for elite status qualification and benefits and for their redemption chart, and then the rollout of basic economy the next year.

Alaska Airlines right now has by far the most lucrative US airline frequent flyer program. Their award chart is far more attractive than that of their competitors. And they’re a better airline to fly. That may change.

When United Airlines first rolled out Basic Economy they lost about $100 million in a span of a few months. They were confident once other airlines went along they would stop losing money. In the meantime customers could get a better deal at the same price booking a different airline. American Airlines dutifully goes along with whatever is in the best interests of their competitors.

In the U.S. today Southwest Airlines, jetBlue, and Alaska don’t offer Basic Economy fares. They offer customers better value at their lowest prices.

However Alaska Airlines told investors that as they push forward integrating Virgin America, they’ll be looking at Basic Economy too. Here’s Andrew Harrison, Alaska’s Executive Vice President and Chief Commercial Officer,

[W]ith a single reservation system, we will be able to address up sell and segmentation opportunities which the legacy carriers are executing on today and that we have not been able to participate in. There are a number of ways for us to participate. Basic economy is just one of those, fare families and ancillary bundles are others.

Alaska thinks that right now they’re leaving $100 million on the table. It’s going to take some time, and they say they don’t know what their version of basic economy is going to be like. It may not be identical to what United and American are doing (denying full sized carry on bags for instance or in United’s case refusing online check-in for basic economy passengers who aren’t checking bags).

However Shane Tackett, Alaska’s Senior Vice President, Revenue and E-commerce is ‘looking forward to’ telling investors what /basic economy at Alaska will look like.

I think that Andrew mentioned segmentation, obviously, basic of sort of where everybody else has gone. We have modeled the impact. Andrew just mentioned, we think it’s north of $100 million once it’s fully out and running and sort of optimized, which that would take some time. I would just say, other airlines, I think, it took a year or more to get to market and sort of fully roll it out to every, their network. I think some of them are still expanding it now into international.

And I think we’ll go faster than that. We certainly are going to be motivated to be faster than that, but it’s not something that’s going to hit like Q2, as an example. And I’ll just say we haven’t decided on what this would look like for us. And it could be something that’s like basic, we tend We tend to not do me-toos of sort of the network carriers. Our business is little bit different. It usually doesn’t need the same product set. So we’re looking forward to being able to talk with you guys in the future call about what this might look like for us.

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. I am a huge fan of AS and a top tier with them,
    I hope and believe they will not do anything even remotely close to what the 3 stooges are doing since their management is not polluted with a-holes and alcoholics like kirby and parker, and certainly I think they recognize their FF program is top and probably will not touch that either

  2. Gary, thanks for this interesting information. I left United because of poor service and product (after 2 million miles). I’m leaving Delta because of a poor award program. I really like Virgin America and was very disappointed by the take-over. However, it is my plan to use Alaska when I can. I hope they don’t devalue their product. Already first class will be three rows in the same space as two on Virgin. On the coast to coasts they will compete with Delta One and PS service from United. These are terrific flights. I hope Alaska will realize that they need better accommodations, cuisine, service on these flights. Also, of interest: I believe that Alaska is not putting much money into Virgin America during this transition. On a recent JFK-SFO flight their terrific first class seats did not work properly, there were no blankets and pillows (7:00 a.m. flight), and the food was less than par.

  3. Let’s hope not. They have a good airline with better service than the others. I like the new Premium Economy with 4″ extra leg room and free drinks for only $89 transcon (I’m flying it on the longest route in the nation FLL-SEA soon) or $35 SEA-LAX.

    They’ve always reserved the front of the plane for status and full fare passengers but I don’t mind because their new Premium class enticed me with the reasonable price. I don’t know why they’d go Basic Economy when they seem to guard jealously their competitive advantage with Miles, low fares and purposefully friendlier service, while the others are so greedy they don’t even pause to consider it, and it shows.

    The strangest thing is that they’re national and named Alaska. That’s disjointed branding. People flew Air Florida to Florida. It’s more pronounced than Southwest but they must think it will soon be as ignored as the misnomer that Southwest is.

  4. Complain all you want, but if UA can offer a transcon fare that’s, say, $80 cheaper in Basic Economy, Alaska is going to lose money by not offering that. They really have no choice.

  5. Going after that $100MM by offering BE (and taking a hammer to their generally positive brand equity) will be a great example of pennywise, pound foolish

  6. @UA-NYC — “Brand equity” sounds great until you lose way more money than you gain in brand image. Like take a hotel whose competitors start implementing “resort fees.” You, reasonably, think that “resort fees” are deceptive. You want to stay above that nonsense. But you start losing sales to your competitors when your customers start believing they’re rates are more attractive than yours. And this is why almost all hotels match resort fees.

  7. It’s a downward death spiral for customer experience. What we need is more competition. Open up the airspace to foreign airlines!

  8. Beyond Basic Economy, post-merger Alaska Air Group needs to look at their premium product for TRANSCON flights.

    As all their major competitors (American, Delta, JetBlue and United) offer lie-flat first class flights on some of those routes (and continually expanding that service.) Hawaii is also a market getting some lie-flat love.

    How will Alaska Airlines address that goes hand in hand with the Basic Economy considerations.

  9. The New Merged Alaska will have no choice but Change and realign their FFP. Alaska cannot afford to be ‘overly generous’ with the perks in comparison to the Legacy Three or Southwest because Alaska does NOT have the Size of Any one of those Carriers or the Network to support such lavish giveaways. People want to Rave about how fabulous Virgin was but they sure as hell didn’t make Any Money over the years as an independent and their Fanbase was very limited geographically. Alaska will have a Huge Target on their back as the integration unfolds being vigorously attacked from all Four of the Bigger Carriers (Delta in SEA/PDX/LAX) United (SFO/LAX) American (LAX) and Southwest (the Entire West Coast)….and if You think otherwise You may need to enroll in Business101. I can understand Why Alaska had to make a move on Virgin America to keep it out of the hands of jetBlue (who more than likely would have Purchased it) but They OVERPAID for VA and are up against Some SERIOUS Competition that will NOT Play Nice when the opportunity arises. Delta has Always been a ruthless competitor and would Love to Destroy Alaska, United will make SFO an absolute Bloodbath for them and Southwest will defend their West Coast stronghold and has deep pockets to Outwit/Outplay Alaska Any time,Any Place. For You Elites who think Alaska will continue to be Generous…..Get a Clue…..Things will NOT get better, they will be readjusted like EVERY Other Merger. I have always been a fan of Alaska but I am NOT optimistic about them going forward….Intense Competition,Limited fleet to match Competition and a Route System that is just too damn Regional to be an alternative threat unless You live on the West Coast. Fares may go down in the short term but I see a weakened Alaska Airlines that will need to refocus on what they can sustain over time. The Big Four will NOT just watch from the Sidelines.

  10. @iahphx – we will agree to disagree. If Alaska start to just mimic the US3 they will turn into just another commodity option. 2017 joint revenues w/VX were ~$8B, give or take. $100MM is barely 1% of that. Chase every single marginal dollar when you don’t have the scale of other competitors and impinge on what you stand for, and watch the erosion start quickly.

  11. Greg,
    There is no way you can fly SEA/LAX in premium economy for $35. We fly this route 2-3 x month and even with status, this is not possible. Back in Y, this is not a even close to the fare.
    Misleading others with this information. Perhaps, you were able to use Discount codes?

  12. I agree with UA-NYC. Profits are not the whole picture. If Alaska guts the frequent flyer program, introduces BE, and generally downgrades customer experience, they will have trouble competing with the Big Three and their much larger footprints. In fact, they may have trouble even defending their base in Seattle.

  13. Similar experience to the one David had. I’ve been Gold with VX for the last 2 years and have noticed a significant drop off in service since January. Recently flew first class from ORD to SFO – major drop off in quality from a food standpoint and my seat was not working properly.

  14. And yes, @RF has the real answer to our big 3 domestic airlines debacle. Just let one of the ME3 (Emirates?) or one of the Premium Asian carriers (Singapore?) compete domestically and watch how fast “I don’t give a shit about the customer or my employees” attitude changes. The business model of “how much can be stuffed in the pockets of the top level executives of the company and the rest to shareholders” at the expense of their customers and employees, would soon change to “ how to survive on the unemployment line”. Just imagine the new United States airline market consisting of Emirates and Singapore serving domestic and worldwide routes and their supporting, feeder networks, consisting of Southwest, jetBlue, Alaska, and Hawaiian.

  15. I disagree with all this negativity. I think Alaskan will be able to thread the needle and keep their reputation, FF program and profits intact. Delta has been attacking them for 2 years in Seattle and they managed to hold on. Alaskan’s MO has always been to be different. The big 3 are not different from each other. Will things change? Probably, because that is what has happened with every airline merger. But, I would not throw in the towel yet. Besides there has been years of peaceful co-existence. The big 3 love their profits and putting Alaskan out of business,…. well Alaskan will still have less than a 10% market share, after the merger!

  16. Alaska’s FF program is an increasingly important differentiator. Alaska would be foolish to abandon that advantage. In fact, Alaska should run an ad campaign touting itself as the only major airline that credits you one mile for every mile you fly. It would work just like Southwest’s Bags Fly Free ads to win over customers upset at the cutbacks by other airlines.

  17. @Pat I think Greg is referring to the add on charge (above the regular fare) to get premium economy. Not sure how PE tickets are sold on other airlines but on AS the regular seat is purchased and then there is the option to upgrade to PE as you finish the res.

  18. @nsx, @rob — I think you’re both right. Alaska will continue to have a better-than-average ff program. That’s why spunky “upstarts” do. They need to. The biggest airlines have NEVER had the best ff programs. They don’t need to.

    I also agree with Rob’s comments about Alaska’s future. Their strategic position is not wonderful. But they’ve always managed to outperform. Maybe they still can. I’m not a shareholder, but I do respect the way they’ve managed their company.

  19. Agree with JohnB. I see the glass half full, as the COO said they won’t introduce BE in Q2. So anything else is at least 6 months off. Doubt we will see too many changes in FF program immediately following VX -> AS point conversion (which occurs in a few days). AS now has a dominant position on West Coast which will make it easier to battle WN and UA. I find AS fares are often lower than WN so they don’t have to worry about being undercut. And they are already making $$$ from selling assigned seats (as did VX).

  20. Uh I’m pretty sure AA and UA were both the two biggest airlines and also had the two best FF programs for many, many years, prior to revenue-based mileage earning

  21. @Pat –

    I just bought a flight SEA-SNA early March and paid exactly $35 for Premium Economy with the 4″ leg pitch and free drinks. I had paid $89 for it on a flight the week before FLL-SEA transcon.

    Base Fare and Surcharges
    $68.84
    Taxes and Other Fees
    $19.46
    Per person total
    $88.30
    Total charges for air travel
    USD $88.30
    View all taxes, fees and charges
    Summary of additional item charges
    Seat upgrade purchases
    1 seat
    $32.56
    Tax
    $2.44
    Total
    $35.00
    Total charges for seat upgrades
    $35.00
    Total charges for additional items
    USD $35.00

    Look it up yourself, but don’t say someone is misleading like you’re some fat ignorant Trumpanzee smearing intelligent people because you’re too stupid to search for yourself.

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