They’ve been pressured by investors to go to bag fees, less legroom, and now a fare that’s designed to make the product worse in hopes customers won’t buy it — and will spend more for a higher fare instead.
What strikes me as interesting is the belief that they can just raise fares and make more money. If that were true they’d just raise fares. What’s more nuanced about basic economy is,
- It tries to raise fares on people who are less price sensitive, instead of everyone
- In particular many businesses hide basic economy fares, so airlines can keep competing on price but not for managed business travelers
However we already know that United lost about $100 million when they rolled out basic economy, because other airlines simply offered more value at the same price than United. They doubled down on the strategy. We also know that American has had to relax restrictions on its basic economy fares because customers were booking away, especially onto Delta whose fares were less restrictive.
Southwest Airlines remains the largest domestic carrier. They fly more passengers domestically than anyone else. And not only don’t have they basic economy, they don’t have change fees. And they don’t charge for first or second checked bags. So there’s competition.
Nonetheless everyone believes basic economy works because airline executives keep repeating that it’s true. It was supposed to be a billion dollar idea and yet once implemented the revenue benefits don’t clearly materialize in the financials.
We keep hearing things like 50% of customers buy up to a higher fare, which strikes me as like “73.6% of all statistics are made up.”
- The universe of customers really isn’t defined, are we talking only about customers on the airline’s website?
- And what about customers who do not book on the airline at all because of basic economy, choosing another carrier entirely?
Moreover any time you hear such round numbers, be skeptical. Any time those numbers never seem to change much, be skeptical. Any time multiple airlines report the same number, be skeptical.
Basic economy was described as working at American — and then they changed it because it wasn’t working. Now that they’ve changed it, that’s working too and it’s as if the 50% buy up claim never existed.
According to [Robert] Isom, restricting big bags alienated many customers who would have otherwise booked basic economy; they saw only 20 percent of customers were interested in the fares. After the change, that number jumped to 80 percent.
There’s a group think in airlines, and among airline analysts, and in the feedback loop between them. I do think by the way that since companies generally own a portfolio of airlines, rather than just one, they’re pushing for higher fares which benefits the industry as a whole even if it doesn’t any airline individually. Sometimes investors push an airline to do things that actually hurts its bottom line, since it could boost share prices of the portfolio of assets they hold.