American Airlines introduces basic economy fares
Following the lead of Delta Air Lines and United Airlines, American Airlines yesterday announced a new Basic Economy fare on select flights starting no earlier than February 2017. The new fare class will be the lowest available on the American flights where it is available. However, it will also be the most restrictive.
“Basic Economy fares will go on sale in February in 10 select markets, with the first flights occurring shortly thereafter and expansion to additional markets expected later this year. Not every American Airlines flight will offer Basic Economy fares.”
Basic Economy overview
Basic Economy vs. Main Cabin on American Airlines (click to enlarge)
Highlights (or lowlights depending on your perspective) include:
- Seat assignments – Made automatically and only when customers check in. Paid seat assignments can be purchased 48 hours before the flight.
- Upgrades – Not permitted, regardless of elite status level.
- Bags – One personal carry-on item that fits under the seat (such as a purse or small backpack) is allowed. No overhead bin luggage may be brought on board. Larger carry-ons such as a rollerboard bag must be checked at the ticket counter for the applicable checked-baggage charge. Basic Economy customers who bring more than an under-seat personal item to the gate will incur regular checked baggage charges plus a $25 gate service charge per bag.
- Elite customers and eligible AAdvantage® credit cardmembers will be allowed to bring one personal item, one rollerboard, and they maintain their current free checked bag allowance.
In-flight experience (e.g. drinks, entertainment, etc.) will be the same as Main Cabin today. Passengers will be able to earn both full AAdvantage miles and Elite Qualifying Dollars, but only half Elite Qualifying Miles and Elite Qualifying Segments. Th exceptions to some of the restrictions for holders of "eligible" AAdvantage branded credit cards (as well as elite American AAdvantage members) make the co-branded credit cards that much more attractive.
I think this is a smart business move
Many, especially the points and miles blog community, won't like the new restrictions that come with Basic Economy. In fact, the negative comments seem to predominate on the Wall Street Journal article covering the announcement. However, as a former pricing manager, I think this fare class makes perfect sense from a business perspective. Some will say this is "nickel and diming" the flying public, but I see it as an attempt to address a broader spectrum of price sensitivity across the airline's customer base.
Because Basic Economy is not replacing Main Cabin fare, customer are only "nickel and dimed" if they pursue the new fare. However, if you continue to fly in standard economy, nothing is changing. This is not a reduction of benefits but rather additional options for the flying public, and I generally see greater freedom of choice to be a good thing. According to American, approximately "87% of its fliers are bargain-sensitive travelers who fly once a year or less, yet generate half its revenue." Given the competition from extreme discounters such as Spirit and Frontier, as well as more traditional discounter Southwest, a cut-rate offering could be attractive to a very large part of the customer base and will likely keep some of those customers from defecting to competitors.
Of course, with lower price something is lost and in the case of bare-bones economy fares, those are things that we have generally come to expect when flying: carry-on luggage and overhead bin space, seat assignments, and upgrades for elite frequent flyers. As one commenter to the WSJ article said, "Do I have to pay extra for a safe landing too? Such stupidity. " I think this point-of-view is misplaced since, as noted, this move increases options. The bottomline is that if something like carry-on luggage is more important to you than the monetary savings, then you would find more value with the standard economy fare. And that is the entire point of what is known as "good-better-best" pricing: offer various price points with additional value at higher level to better address the full spectrum of customer price sensitivity while enticing customers to upgrade to the higher priced - and more profitable - offering.
Conclusion
Personally, this move has little to no impact on me. I primarily fly Delta where I have never purchased their equivalent basic economy fare. I do value some of the benefits that have been removed in order to offer the lower price. If this fare only removed in-flight entertainment, I would likely consider it. Except for long transoceanic flights, I can spend the flight either reading or watching movies on my iPad. I would gladly forego the relatively low value IFE access in order to save money on my tickets.
These tradeoffs will vary between customers but, Delta and United expect incremental revenue of $250-$300 million due to customer pricing segmentation. Incremental revenue would not be possible if pricing tiers did not work. We should never lose sight of the fact that airlines are in business, first and foremost, to turn a profit, If introducing tiered pricing generates profit, then American management would be shirking their fiduciary duty if they did not consider Basic Economy for American. After all, for someone who wants to minimize their airfare expense as much as possible, Basic Economy could make the opportunity to fly a full service carrier a strong option for many travelers.