American Basic Economy Is Expanding To Most Domestic Flights By September

American announced the full details of their basic economy fares at the beginning of the year. While Delta introduced basic economy fares several years back, American and United became significantly more punitive with these fares.

For example, in the case of American, those booking basic economy fares:

  • Aren’t able to select seats in advance; instead they’re automatically assigned seats at check-in, or can pay to assign seats 48 hours out
  • No upgrades are permitted, even for elite members
  • Only a personal item can be taken on the plane, and not a full size carry-on
  • They have to board with the last boarding group
  • Tickets are non-refundable and non-changeable, even at a fee
  • Full redeemable miles and elite qualifying dollars are awarded for these fares, though only half elite qualifying miles and segments are awarded

In February American began selling basic economy fares in 10 city pairs, though they haven’t expanded it nationwide yet. Meanwhile United decided to rip the band-aid off quickly, and introduced basic economy on virtually all domestic flights as of late May. They reported that just over 30% of people were booking these basic economy fares. They admit they’ve lost some business because of how prevalent basic economy fares are, and have backtracked slightly as a result. Specifically, they’ve removed basic economy fares on some high last minute fares in expensive markets. It’s insulting to be asked for an extra $40 to take on a carry-on when you’re paying $1,000 for a last minute ticket.

View from the Wing notes how on today’s second quarter earnings call, American said that they plan on rolling out basic economy on virtually all domestic flights by the end of September 2017. This is despite:

  • American acknowledging they’ve seen some “share shift” from United, given that United has rolled out basic economy nationwide, and it has caused some people to book on American
  • United saying they’ll see some of those passengers back on their planes once American expands basic economy, since American will no longer have a competitive advantage

This is also a reflection of the fact that basic economy fares don’t actually lead to airlines introducing lower fares, but rather airlines instead charging more to get the same thing you got before (or else United wouldn’t see people booking American instead). We saw this clearly when United first introduced basic economy.

Unfortunately this will be yet another devaluation for American frequent flyers. We’ll have to pay extra just for the privilege of taking advantage of many of our elite benefits. Given how uncompetitive the US airline industry has become, American will get away with this, and I suspect it will improve their bottom line.

Comments

  1. I don’t know how you can say for sure that this won’t create lower fares? I fly ORD-FLL often and United’s Basic Economy fares on this route are dirt cheap (they are competing against Spirit). I was searching for a flight in October and found $99 round trip basic economy fares on United for that route.

    That’s a fantastic deal to just get from point A to B on a legacy carrier and not have to deal with Spirit’s operational nightmares.

    I am really hoping AA falls in line with United and Spirit on this route and hope to see AA prices actually come down for basic economy.

    Also, United has matched Spirit ORD-MSP similarily bringing down fares on that route.

    This could be a good thing in terms of pure price (which many infrequent travelers solely base their decisions on). Now as an Elite Flyer this is terrible and indeed would be a devaluation of benefits if you choose to book a basic economy fare.

  2. @ORD Flyer: the point is that UA was probably offering those $99 fares before Basic Economy – now they just come with less benefits than before.

    Of course the whining about Basic Economy not meaning lower fares – while mostly true – is meaningless. When I am buying a plane ticket the relevant comparison is to the other fares being offered at that point in time – not to what the fare was last month or last year. So truthfully the Basic Economy fares are the “lower” fare in most cases.

  3. …and I just signed up for AA status challenge hoping their BE rollout won’t be as bad as United…

  4. @ORD Flyer, @Bob — I agree with you guys. Lucky’s repeated claim about basic economy–now they’re just charging more for the same level of service–ignores the fact that airline pricing is dynamic. Maybe without basic economy the base fare would be $120 now instead of $99 — prices do tend to go up with inflation every year, and oil prices are higher than they were. It’s really speculative to assume that prices would have stayed the same, without basic economy, and therefore basic economy is just making us all worse off.

    I also think basic economy does improve the service for other customers, at least marginally. If nothing else, there’s less competition for overhead bin space so people who pay for the higher-fare regular economy tickets are more or less assured they can find space for their bag, which didn’t used to be the case. And with fewer people struggling to find space for their bags, the boarding process is more efficient so everyone can get going faster.

    Lucky also suggested that the airline industry is horribly uncompetitive. I don’t think that’s accurate at all–at least not on many routes where basic economy is being introduced. Antitrust officials generally consider optimal competition to involve at least three competing firms, where no firm has more than 50% market share; when just two firms compete, it’s easy for them to collude–but studies have shown that three is enough to get most of the benefits of competition. In the U.S. Domestic market, no airline has more than 20% market share! Southwest, Delta, American, United all have about 15-20% of the domestic market. But they also face significant competition from JetBlue, Alaska, Spirit, Frontier, etc. And in most markets there are few barriers to entry from a low-cost carrier — for example, if the legacy carriers start charging rip-off prices on transcontinental routes (as they used to do in business class), it’s easy for, say, JetBlue to come in and expand its offerings on those routes (e.g., Mint caused business class fares for leisure travelers to come crashing down on transcontinental routes).

    Another measure of how competitive an industry is is whether there are opportunities for supra-competitive profits, or are the industry market leaders simply earning a fair return on capital. To be honest, the financial performance of all of the airlines has been dismal for years. Although it’s improved recently, the debt of most U.S. airlines is given a “junk bond” rating because the airlines are so risky and capital-intensive that they’re really just barely squeaking by compared to what most companies would earn with the same amount of capital.

    Based on those metrics, I think it’s fair to say that there is in fact plenty of competition in the airline industry. Consumers just don’t like the level of service. But that’s the *result* of competition, not evidence that competition has been thwarted. Most consumers ultimately care more about price than service, so the airlines give them exactly what they want: the lowest possible price, which necessitates cutbacks to service. And they even offer a variety of ways to upgrade at different price points — pay a little more for regular economy, a bit more than that for economy plus, and somewhat more for domestic first. So the notion that somehow basic economy is evidence of a lack of competition in the airline industry strikes me as entire backward. Av-geeks tend to have that view, only because they don’t have any framework for comparing the aviation industry to other industries that are dominated by a few players. On any comparative basis, the aviation market is really a competition success story.

  5. The only people who are not seeing price hikes are people that don’t bring anything but a purse or laptop on a plane with them and don’t give a shit about where they sit. This is not anything different than what we’ve seen with Frontier over the years. Yea, there’s competition in some markets, but it was there before and prices reflected it then.

  6. @Bob United most certainly was NOT offering $99 round trips ORD-FLL before the basic economy days. I’ve been flying this route for years and never have seen a legacy that low until Spirit price wars and basic economy came along.

  7. I don’t like AA doing this, but if my company’s travel management system makes me book on these fares, I’ll look forward to charging all of the “extrAAs” back to them, which shouldn’t resort in any sort of long-run cost saving.

    I’ll miss the full EQM, though.

  8. @John? What are you even talking about??? Do a little research about things before writing complete non-sense! fuel price is higher than when?? Look at a fare breakdown for an international fare: the fuel surcharge is more often than not $150, which is totally unjustified. Brent is barely at $50/barrell which is half of what it used to be and about 1/3 of the highest levels reached. So don’t try to change facts to support your “logic”.

  9. I’m no antitrust expert but when Parker in his call a couple of weeks back acknowledged UA was losing share due to AA being slower rolling out basic economy and all but implored them to get with the game for their mutual benefit, then AA makes an announcement to thst effect shortly afterward, there is at least a wift of collusion and price fixing in the air, especially coming from a character who slid over from top management at AA to UA recently and without missing a beat.

  10. @MACH81 — Oil prices hit a low of $28 per barrel in January of 2016. Oil is currently $50 a barrel, so it’s significantly more than it was 18 months ago. (Sources are cited below.) While it is true that prices were higher than $50 per barrel from mid-2009 to late-2014, this article is talking about the relatively recent expansion (within the past year) of basic economy tickets. Fares did come down when oil prices decreased in 2015, so the point is, it wouldn’t be a shock to see fares creep back up again as oil moves from $28 to $50 a barrel. Thus, the fact that the “basic economy” fare is the same today as regular economy was a few months ago doesn’t establish that “basic economy” passengers are not receiving real savings; the airlines’ costs have gone up in the past 18 months, so without basic economy, they might have just raised *all* economy fares to compensate for fuel costs.

    With regard to your point about “fuel surcharges”: Basic economy is a domestic fare concept. There are no “fuel surcharges” or carrier-imposed surcharges on domestic fares. So I don’t see the relevance of your complaint about fuel surcharges to this discussion. In the U.S. domestic market, the fare is the fare (including fuel), so one would expect fares to go up and down in response to changes in fuel prices.

    In any event, the phrase “fuel surcharge” is anachronistic. Even on international routes, U.S. carriers now simply call those “carrier-imposed surcharges”; they have given up any pretense that the surcharges have anything to do with fuel. It’s kind of like how all hotels in Miami and certain other locations impose a “resort fee” for things that are normally included in the base price in most other cities. In some markets, surcharging is common — and to make their fares competitive in those markets, U.S. carriers match the surcharge behavior of other carriers. Only the total fare (base fare plus carrier-imposed surcharge) is meaningful, and base fares are adjusted regularly so that the savings from lower fuel are reflected in the total price even though the carrier-imposed surcharges, for the most part, are fairly constant.

    Sources: http://www.telegraph.co.uk/business/2016/03/11/iea-oil-prices-may-have-bottomed-out/ (discussing the nadir in March of this year); https://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/scalping_report/2017/06/28/Crude-Oil-Prices-Continue-to-Rally–Nearing-Resistance.html (last month); http://oilprice.com/Energy/Crude-Oil/Can-Oil-Continue-To-Rally.html (today); http://www.nasdaq.com/markets/crude-oil.aspx

  11. @ DaveS — I think that’s a fair point. But the antitrust laws generally distinguish between “parallel” pricing strategies (basically copying your competitor’s pricing) and actual collusion. What airlines do, I think, is not beyond reproach — but it’s generally considered on the OK side of the line (although they are pushing the limits with comments like the one you point to).

    But to my mind, the more compelling point is that these are businesses that just don’t make any real money, relative to the amount of capital invested. In a world where, say, Wal-mart, a seemingly staid and mature business, trades at more than 18 times earnings, keep in mind that American Airlines trades at 10 times earnings and United is at less than 9 times earnings. That’s a dismal P/E ratio, and it’s even more pathetic because right now we’re in a pretty frothy market. Both of these airlines are rated junk bonds. I honestly love air travel as much as others on this blog, but we have to recognize that as businesses, these airlines are basically used to living a knife’s edge away from failure—they need massive amounts of money to buy airplanes, pay their unionized staff, buy jet fuel, have operations and personnel in hundreds of jurisdictions, etc. With all of those costs, they’re barely scraping by. Plus, consumers are price conscious almost to an absurd degree. There is no business I can think of where *everyone* buys through a website that just ruthlessly searches out the cheapest possible option (treating every competitor as basically fungible) so you have to justify to yourself paying even a few dollars more than the cheapest possible fare. No one was willing to pay even a few extra dollars for American’s “more legroom throughout coach” back in the day. They’re prefer to save $5-$10 each way than have a more humane travel experience. That’s really a form of bruising price competition that’s quite rare in most other industries.

    Given those realities of the airline industry, I think it’s a bit overblown to accuse them of lining their pockets through anticompetitive behavior. But the reality is there’s ultimately nothing to stop Southwest, Jet Blue, Alaska, and others from competing aggressively whenever the legacy airlines overplay their hand and try to overcharge—and those other carriers are in fact formidable competitors.

  12. Life is a journey and not a destination. I’ve been journeying now for 70 years (and hope to have many more) but regardless I doubt I’ll spend my last few days rejoicing the fact that I saved $20 on a basic economy fare. Work an extra day and then enjoy the journey. If you don’t fly First Class your children will.

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