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‘Basic economy’ is a reasonable business decision for airlines

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2015 marked a significant inflection point in the domestic US airline market, and we are now beginning to see the full manifestation of that inflection point. In 2015, American Airlines, Delta Air Lines, Southwest Airlines and United Airlines started taking Spirit Airlines and other ultra low-cost carriers (ULCCs) seriously. Spirit adopted the ULCC model in 2007, and for about seven years it (and Allegiant Air and later Frontier Airlines) was largely ignored by the established carriers.

Spirit’s fee-heavy, ultra-low base fare model was creating new airline passengers who were willing to forgo amenities, pay fees for both checked and carry-on bags and sit in tight seats. These passengers, former Spirit CEO Ben Baldanza and executives from Allegiant would explain, were deciding between driving or flying ULCCs, or between a staycation at home or a weekend in Las Vegas or Florida via a ULCC. They had no interest in paying mainline airline fares, but would consider flying on ULCCs.

Eventually, though, the combined networks of Spirit, Allegiant and Frontier grew large enough—and hit the mainline airlines’ hubs often enough—that American, Delta, Southwest and United could no longer ignore them or the growing number of passengers who were choosing ULCCs, which had consistently high load factors despite reputations that weren’t always stellar. So the mainline carriers began aggressively matching ULCCs’ fares, particularly on routes where they were competing head-to-head with ULCC flights.

That’s the context under which American and United (following Delta) have introduced “basic economy” fares, and it’s an important context to understand. American and United will start selling basic economy tickets in some markets this quarter, and there is a feature of those fares that is attracting a great deal of attention (much of it negative): American and United basic economy passengers won’t be allowed to bring overhead bin carry-on bags aboard aircraft. US Senate minority leader Chuck Schumer (D-New York), for example, has deemed this “really troubling,” saying “the overhead bin is one of the last sacred conveniences of air travel.”

Others have noted that the basic economy fares aren’t “new” discounts, and that is technically true, but only because airlines started offering a certain number of seats at Spirit Airlines-level fares on many routes two years ago. The average US domestic airfare, including checked baggage fees, dropped each of the last two years and was 6.8% lower in 2016 compared to 2014. A big part of that was the aggressive price matching going on.

The basic economy fare merely formalizes this price matching and attaches some conditions to airlines’ lowest fares, one of which is not including overhead bin space for those passengers paying those fares. But the passenger is still getting a better seat and more “free” onboard amenities, such as snacks and sodas, than he or she would be getting on a ULCC, where they would be charged a fee for overhead bin bags. Prospective airline customers are free to choose the ULCCs or drive—or buy a regular economy ticket, which is what the overwhelming majority of passengers sitting on a commercial aircraft will be doing.

The overhead bin carry-on restriction also seeks to solve an operational problem that anyone who flies regularly in the US domestic market is well accustomed to: the last boarding passengers searching up and down the aircraft for the last bit of free overhead bin space. American and United are attempting to take some control over this process. On routes where basic economy fares are offered, the last group of boarding passengers won’t have overhead bin bags. This should make the final part of the boarding process better for everyone—flight attendants, passengers already seated and those boarding last. Even a minute or two of gained operational efficiency is a big deal to an airline.

Finally, there is one knock I can anticipate: Well, you say, Delta (which does not have the overhead bin baggage restriction) is offering basic economy fares even on some routes where ULCCs have little or no presence, and in fact has committed to having basic economy fares on every one of its flights—including long-haul international—by sometime in 2018. So, isn’t that more about gouging passengers than competing with ULCCs?

Not really, because (1) ULCCs—including long-haul international carriers like Norwegian—are continuing to grow and may soon be in many of those markets and (2) Delta, to be followed by American and United, is trying to see if it can use a small amount of its inventory to find “new” price-sensitive passengers the way Spirit has on routes throughout the US and between the US and Caribbean/Mexican destinations. Delta sees basic economy first and foremost as a “competitive tool,” president Glen Hauenstein recently said.

The roll out of basic economy fares may or may not drive the incremental revenue gains airlines are anticipating—United president Scott Kirby is predicting $250 million this year. That is for the consumer market to decide. But basic economy, as with checked baggage fees, is a very reasonable business decision for airlines to make.  

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