American Admits Basic Economy ‘Underperforms’: Making Your Product Worse Doesn’t Make More Money

American Airlines used to believe that ‘basic economy’ would be worth a billion dollars to the airline. They shifted to talking about segmentation as worth a billion dollars (basic economy, extra legroom coach, premium economy).

The bet was that making the coach product worse would get customers to spend more to avoid it.

United quickly found when they rolled out basic economy that customers booked away choosing other airlines that didn’t yet have basic economy restrictions instead. Those airlines offered more value for the same price. The initial United rollout led to about $100 million in losses.

American has already reduced the most draconian restriction on their basic economy fares: customers can now bring a full sized carry on bag onto the plane. That leaves only United with that restriction.

What American explained is that customers can increasingly see the total cost of their trip for the things they want. So customers who want a carry on bag found Delta’s basic economy fares to be a better value. American Airlines was more expensive than Delta for those customers, so customers were booking away.

In other words, American could not rely on the ignorance of its customers so they had to compete and improve their product.

Meanwhile Southwest Airlines is the largest carrier of domestic passengers. Their fares aren’t displayed through most online booking sites. Customers don’t always see that Southwest has no first or second checked bag fees, no change fees.

We keep hearing that basic economy is a success. American now concedes that despite those proclamations that it has ‘underperformed’.

Understand this in the context of American’s choice of accounting and how they track what constitutes success. Even biased towards claiming victory they have to concede that making your product worse and hoping customers spend more hasn’t been as big a success as they told investors it would be. And they wouldn’t be saying it’s underperforming unless the difference was material.

But fear not, that strategy will somehow work better next year.

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 think BE for mainline carriers has been a dud. It’s a nightmare for their employees trying to police who gets to carry on bags and who doesn’t and it just creates chaos when flights are delayed and or cancelled. For frequent fliers it’s also a royal pain. We have to suffer with planes filled with Spirt and Allegiant customers and flights are often delayed while gate agents argue with customers over what is and what is not allowed onboard. It was a VERY stupid idea to get in the gutter with these bare bones carriers and it just makes the overall flying experience horrendous.

  2. You’ve jumped the shark on this one. The presentation says Basic Economy has “slightly” underperformed. In other words, they made SLIGHTLY less money on this initiative (as opposed to making more money than forecast on other initiates). Which, undoubtedly, explains why they’ve been tweaking the program since this summer. They aren’t saying that the initiative is unprofitable which, of course, is the nonsense you’re spouting.

    BTW, if Basic Economy is such a bad business idea, why is JetBlue adopting it? And why is UA not even relenting on its no-free-carry-on? Are they bad at business too? Sigh.

  3. Questions:
    Why are you obsessed with AA?
    How many times are you going to recycle this story? Is there not a new bandwagon that you jump on?
    Again, why are you obsessed with AA?
    Why not take the time and come up with truly valuable stories?
    #dumb

  4. Many of us are interested in seeing AA improve though don’t expect it too in our lifetime
    So understanding their stupidity may not solve anything as cariiers have always been monkey see monkey do even if it means falling out of the air or drowning
    I like being updated personally thanks Gary!

  5. I feel very guilty. I filled out a survey about a recent aa flight and expounded extensively on why they suck and why I avoid them whenever possible. Fear it will hurt Parker’s feelings.

  6. This makes me think of JetBlue’s new BE announcement. I cringed when I heard that. “Not you too JetBlue.” But it seems like they will still allow one personal and one carry one item. Passengers will still be treated with some level of dignity. Fyew!

  7. I’m curious as to why UA still restricts carry-on bags from their BE fares (except for elite and those with the UA credit card). I thought for sure they would drop the restriction after AA did.

    Any thoughts on this? Is it possible the restriction isn’t hurting them the way it did AA or is it just a matter of time before they drop it too?

  8. @chopsticks,

    The JetBlue of now is NOT the same, customer focused, “Bringing Humanity Back to Flying” / “You Above All” airline that it was during the Neeleman and Barger era, which, btw, dovetails nicely with excessive industry concentration (aka Oligopoly) that has intensified since 2014 when Dougie P successfully engineered the takeover of American Airlines, and Dave Barger was forced out by Wall Street “Analysts” (soulless profiteers who now control a ruthless, deceitful, predatory, Cartel reminsicent of Robber Barrons and the heinous Trusts President Teddy Roosevelt believed were toxic parasites worthy of busting in his era), so that they could install a puppet willing to do their dirty work and destroy JetBlue (as they’ve been doing with more and more product degradations and brand destruction efforts of late) so as to better eliminate any advantages it used to have that originally made the airline successful.

    You see, and as Gary’s discussion here notes, if one airline offers a better overall value to consumers as others are racing to the bottom, then the Cartel’s predatory and oligopolistic business model fails.

    So, if Alaska Airlines and/or JetBlue instead decided to truly compete by offering a better product that did NOT punish flyers, then the oligopolists’ would have to either step up their product, or “underperform” to use American’s doublespeak for our product sucked SOOOO MUUUCCCHHH (“How Sucky WAS It?!?!” …hehehe) so people flew Delta, JetBlue, Southwest or Alaska instead.

    And thus, how convenient is it that shortly after Wall Street orchestrated the elimination of Virgin America earlier this year, that within months we now see BOTH Alaska Airlines and JetBlue fall into line with successive rounds of product degradations, fare fences raised ever higher and topped with even more barbed wire, checked bag fee increases, and now, of course, both also implementing a Basic Economy such that both Alaska and JetBlue can still say they’re (nominally) “better” with “better” merely meaning “sucking just a little less than ‘first at being worst’, or Delta.

    Yep, such is life these days; but, as I’ve noted many times over the past year here and elsewhere, this is EXACTLY what happens in industries that have become toxic, wealth transferring Cartels that lack competition, and ruthlessly enforce a business model that are EXACT MATCHES for those discussed in Econ 101 books under the Chapters named “OLIGOPOLIES” & “CARTELS”.

    In the end, this cartel is nothing more than a Greed Tax imposed on consumers no different than a “Mob Tax” commonly referred to as “Rackets” and “Extortion”.

    If anyone doubts this, just check out the announcements in coming weeks as 3rd Quarter 2018 10-Q’s are filed, and managements fall on top of each other seeking to outdo each other with ever larger than the already obscenely large stock buybacks (something, btw, that for much of the 20th century were illegal due to the corruption, greed and destruction they caused to companies and the nation’s economy before they were outlawed).

    But hey, I’m sure those who believe in legalized consumer fraud and theft by a toxic, predatory, industry cartel will vociferously disagree and call for even LESS (faux) “competition” (see recent article earlier this week by Dan Reed in Forbes advocating a takeover of JetBlue by one of the Big 3 oligopolists); more product degradations; more cabin densifications; even smaller seats in narrower, no legroom rows; fewer and even smaller lavs; even more bs fare rules, with ever higher fare fences; even more and ever higher bs fees, penalties and punishments – all while never actually having to experience these obnoxious and degrading things themselves from the comfort of their private jets and/or space hogging McMansions…er private suites…when these, greedy, soulless ghouls fly.

    Maybe someday soon we’ll get our souls, and common sense, back. But until then, and just as American’s outcome with Basic Economy proves:

    It ONLY works if everyone else marches in virtual lockstep and offers an unremarkably dissimilar crappy product.

    Once upon a time, when it was considered a good thing to be an educated consumer, success was determined by who could be better, which contrary to what the bald faced liars, industry sycophants and higly paid shills say, is EXACTLY what made JetBlue successful in an industry otherwise littered with a great many startups that went the “no frills” (n/b: that’s what “Basic Economy” on failed airlines like Tower Air, PeoplExpress, and many others, plus Delta when it had “no frills” fares, used to be called) route.

    Yes, JetBlue was built using a model of being BETTER.

    Too bad its current business model is one of intentional degradatins and destruction with an eye towards “justifying” (as in evading anti-trust regulations) its sale to one of the already waaaaayyyy too big oligopolists in this industry’s already horrible, predatory and abusive Cartel.

  9. Gary what is your obsession with AA? AA did not outrageously under perform they slightly under performed so you missed the ball with that one. Did you not get hired at AA or something because any comment that comes from you about AA is a negative one.

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