Why I (Sort Of) Respect American’s Ridiculous Upcharge For Avoiding Basic Economy

In February American began selling basic economy fares in 10 city pairs. They continued to progressively roll out these fares until earlier this month, when they introduced basic economy fares in virtually all domestic markets.

American’s approach to basic economy was very different than United’s. In February United decided to rip the band-aid off quickly, and rolled out basic economy fares in almost all domestic markets overnight. Just a couple of weeks ago, around the same time that American rolled out basic economy fares systemwide, United admitted that basic economy wasn’t quite working out as they had hoped, and eliminated basic economy on many types of fares.

United’s general approach to basic economy has been that they’ve charged a $20-40 one-way premium for regular economy over basic economy. They’ve really been consistent, and we haven’t seen huge upcharges. That’s very different than American’s approach — many readers have contacted me to point out how ridiculous the upcharge is for some American basic economy fares.

Take the below flight from Miami to Houston (pointed out by @ladakn99), where basic economy is $55, and regular economy is $190. Regular economy costs almost 350% as much as basic economy. As someone who hates the concept of basic economy, you might think I have a real issue with that. Personally this actually bugs me a lot less than the approach United has taken.

Let me explain.

When basic economy was first introduced, airlines claimed that this was in order to allow them to compete against ultra low cost carriers, which charge for everything. The idea was that they could appeal to different market segments by offering different services to different passengers.

But that’s in no way how United implemented basic economy. Their strategy instead was to make the previous lowest fares basic economy, and then charge $20-40 extra one-way to let passengers buy back what came included before. In other words, United was banking on a majority of their customers being willing to pay an extra $20-40 one-way to not be miserable.

The worst part was that at first United had basic economy fares even on their most expensive tickets, like a $442 one-way ticket from Newark to San Francisco. I’ve never seen Spirit publish a domestic one-way fare that high! Let’s keep in mind this plan proved a failure for United, and they rolled back basic economy, especially on more expensive domestic fares.

This brings us back to American. Do I like seeing them charge 350% as much for regular economy as basic economy? No. But I appreciate that in these instances where there’s a huge disparity, at least the basic economy fares are often ridiculously good. I think the airline is justified here in saying “we’ll throw in these really low fares with a lot of restrictions to compete with ultra low cost carriers, but we’ll charge a lot more for our normal fares.”

While I’d rather just not see basic economy at all, I at least think what American is doing here is a bit more true to the idea behind basic economy. American is publishing some super low fares to compete with ultra low cost carriers, and these fares are exclusively available in basic economy, with a substantial upcharge for regular economy.

The counterargument is “well yeah, but the cost to the airline isn’t an extra $135 to carry-on a bag.” That’s true, but what airlines charge in airfare has never directly reflected the cost of the services provided. That’s why there are dozens of fare classes. The airlines try to maximize everyone’s willingness to pay, but inevitably some passengers are always subsidizing others.

I guess to sum it up, for a domestic one-way flight I think an airline is more reasonable to charge $55 for basic economy and $190 for regular economy, than to charge $442 for basic economy and $467 for regular economy.

Comments

  1. …Except that the basic economy fares are the SAME price as the lowest economy fare prior to this roll out. EXACTLY the same fare; I know because I was pricing out a trip the day before and then day of when they introduced this crap. They did no discounting to attract customers. The fare difference they are trying to get away with is deplorable, and hopefully will not work. Our company’s travel administrator is furious as no one is able to use our web booking tool and everyone is having to call in to get our travel booked to avoid the basic fares. It’s a nightmare and causing enormous cost increases.

  2. I sent you an email about this to a Hotmail account I had for you; not sure if that’s the right address. AA had a $217 up-charge from Basic ($111) to regular economy ($328) for a one-way ticket from ORD to SFO for travel later this week.

    The point you made in the article makes sense. However, United charged ~$110 for Basic Economy with a modest (~$20) up-charge to regular economy. Virgin America charged ~$110 for the full service product. So I don’t understand why American’s regular economy pricing would be so uncompetitive.

  3. When you remove cost from a product, you must also remove value to avoid clouding the buyer’s decision. Pretty standard. When it’s priced correctly, it should be an easy choice (meaning they’re clearly different products and don’t step on one another feature/benefit/cost-wise)… because that means the delivered value is different enough.

  4. I’ve always felt that if basic economy really was priced at a low level to compete with Spirit, that’s fine. That would be a real choice that some would want to take. What I have despised is the introduction of so-called “basic economy” fares that are really just the same fare as before but with lower quality service, introduced to get people to pay upcharges for what was once included at that fare, and in no way competing with Spirit. That’s a marketing gimmick to deceive people.

  5. I agree with DaveS. I have thought of Basic Economy (BE) as a fare class of its own. However United’s implementation seems more of a discount on whatever the regular fare happens to be at that time. And I have to admit that it took a while for me to grasp what United was really doing since it seemed to be non-intuitive.
    In terms of large spreads between AA economy and BE, think of the spread between Y and J fares. There can be situations where the spread can be small — good discounts on J and Y selling out — or very large spreads. So I would not be surprised to see a variation in spread between Y and BE fares IF . BE is a fare class of its own.

  6. Good point Lucky. If someone wants a budget ticket they know what they are getting into and have been given a great discount for their willingness to do so. At the end of the day someone has to board last , have a middle seat all the way in the back , and no carry on space left. They ought to be rewarded with a discount.

  7. Gary Leff has a better more realistic view points than you on this topic IMHO
    Calling it exactly what it is .Not with you on this one
    I left American over these fares, award price increases and lack of saver awards not so much price as I am paying the same or more for tickets on other airlines
    But the customer service is 100X better at every pint and contact and I feel valued as a customer and always responded to immediacy with any issue at all
    I’m a lifetime Plat elite earning my keep to earn status at Alaska
    Thanks to the idiot goons that don’t get it @American
    O miles flown on AA for the first time in 20 Years and proud!
    Many Millions previously flown and earned

  8. This certainly makes a lot of sense and is well executed by American.

    Let’s say Spirit / Allegiant or some other ULCC flies IAH-MIA and American is matching. They are matching an ULCC fare with Basic Economy.

    The regular economy fare is higher because of business travellers. Their corporate travel website essentially sandboxes out ULCC and Basic Economy Fares and that $190 regular economy fare is the cheapest available on their system.

    This segments the market well. A leisure traveler who will price shop with an ULCC sees that $55 fare. The business traveler that will not buy basic economy or price shop with an ULCC sees a $190 fare. This is why the American system works and the united system is being rolled back

  9. @James

    Going by the flight time the faster 805am flight is operated by a B777, the slower by B757’s.

    B777 cruise speed Mach 0.84
    B757 cruise speed Mach 0.80

  10. @Chase:

    “…Except that the basic economy fares are the SAME price as the lowest economy fare prior to this roll out. EXACTLY the same fare; I know because I was pricing out a trip the day before and then day of when they introduced this crap. They did no discounting to attract customers.”

    Well, presumably they previously discounted their regular (non-basic-economy) fares, to compete. But now they are using basic economy fares to compete, and selling regular economy at a price they think the market will bear.

    ” The fare difference they are trying to get away with is deplorable, and hopefully will not work. Our company’s travel administrator is furious as no one is able to use our web booking tool and everyone is having to call in to get our travel booked to avoid the basic fares. It’s a nightmare and causing enormous cost increases.”

    What you are saying is, their strategy is working. They are getting you to pay more.

  11. Basic economy fares are the same as previous reg economy. I’ve been tracking a one way for a particular flight and it actually is $10-15 more in the past two weeks than regular economy was a few weeks before. Also F got way more expensive. It’s a ripoff. Currently looking at flying SWA or some LCC instead since I have no incentive to fly AA anymore whether it be price or full service for a reasonable amount more.

  12. I am also a bit concerned about the analysis. Basically you are saying the strategy works and they got the pricing right.

    So American can be successful in being both: a ultra low cost provider and a full service provider?

    While I understand that on some corporate power point that must sound amazingly well, I am really concerned about long term implications:

    – multiple but one consistent brand strategy (what is AA in the future? How will consumers understand?)

    – how will they capture value? With a different strategy in every booking class? How can that be communicated?

    From a strategy point of view United did the right thing. The debundled at a reasonable and understandable rate some of the services. Maybe the customer understood it as a price increase and it was not successful. But AA tries to multiple companies in one. That cannot be successful in the long run.

  13. Your argument would make more sense if the new basic economy fares were significantly cheaper than the previous main cabin fares. If the basic economy fares are the previous main cabin prices, and now regular main cabin is SIGNIFICANTLY more expensive, I’m not sure how you would prefer this or understand it more than United?

    If there’s a route where the ULCC is $100, American basic economy is $100 (and let’s say United basic economy is $100), then based on this pricing the main cabin price would be $200+, versus a United regular economy price of $120 – all while the previous prices were close to $100 before the basic economy rollout. IMO this just drives people away from American or at least loyalty to American.

    This may be a sample size issue though and in those examples they want the (restrictive corporate policy) business traveler to buy main cabin ticket, the leisure traveler to buy basic economy and then have higher yield international connecting passengers take up the rest of the main cabin fare bucket? This stuff is always more complex than simply looking at pricing for individual routes.

  14. DWondermeant….. and I would. Still They Do NOT even miss You or your vitriolic. if You don’t like AA so be it….. move On. Your attitude Is My Issue….. a cancer I wouldn’t Want as a Company. (your half assed claim of Loyalty like most Whinners is Pure BS and We all Know It!)

  15. While I like a less expensive product for technically the same service, I also understand this will attract the travelers who aren’t seasoned and don’t understand the systems, how things work, TSA regs, etc. This will load up the already crowded planes and airports and I honestly doubt the airlines are going to see any type of improvement. Today flights are already full and if one flight is delayed the ripple effect is felt throughout the system. Any slack in the system no longer exists. I honestly think the airlines will lose money over this feature or they’ll only offer very few BE tickets.

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