Delta was the first major airline to offer ‘Basic Economy’ — highly restrictive fares that initially were offered where the airline competed with ultra low cost carriers. They’d match Spirit’s low fares, but with restrictions. That way customers who were more interested in comforts than price would still pay more.
United copied Delta but with a twist. Their basic economy fares would’t allow customers to bring on a full-sized carry on bag (at least at Spirit you can pay to do so). United rolled out their fares and initially lost about $100 million — because instead of buying up to more expensive fares, and giving United more money, customers chose to book other airlines instead.
They stuck with the plan, though, knowing that American Airlines would continue to play the Greater Fool, giving up their product advantage over United by rolling out the same basic economy fares with similar restrictions.
Customers still had Southwest, Alaska, and jetBlue to choose from. But United’s bet was American following suit would be enough.
It’s a tough industry to stand alone in, and pressure from financial analysts is fierce. Alaska, completing its merger with Virgin America, now says they’re considering Basic Economy too.
- Basic economy no longer has anything to do with low cost carriers, the major US airlines offer it on routes without low cost carrier competition
- It’s a strategy to make the product worse, so that customers will spend more to avoid it
- That makes airlines without basic economy fares a better value at the same price
- However if it works it’s a price increase, a way to raise fares (to the non-Basic Economy fare) without losing the most price sensitive customers.
Now jetBlue is looking at Basic Economy, too. As reported by Airline Weekly (subscription only) they revealed in a presentation at a Barclays event in Miami that they’re
closely studying the implications of basic economy fares that the Big Three are now offering—no plans to follow suit right now, but it could quickly do so if it deemed worthwhile. JetBlue, meanwhile, emphasized its years of experiencing competing against ultra-LCCs, matching their prices selectively.
That would leave Southwest as the only airline offering greater value at the lowest fares. All Southwest fares continue to be changeable without penalty and they continue to offer checked bags free.
They don’t even need to charge for seat assignments, they netted $358 million last year selling ‘early bird check-in’.
Southwest, fortunately, is the largest carrier of U.S. domestic passengers. They’re not as big an airline as American, Delta, or United but domestically they’re bigger than each of them. And Southwest’s performance suggests that the stock market prefers airlines that treat customers well.