By Eric Olson, American Express Global Business Travel
Basic economy: it’s the new product buzzword in the airline industry.
When Delta™ first introduced the product in 2012, it limited the scope to its domestic network in order to observe consumer reaction and fine-tune the offering before expanding its coverage. Five years later, Delta has expanded basic economy to most of its domestic network as well as internationally.
United™, which launched the product in February 2017, quickly expanded its offering from a seven-route test phase to nearly its entire domestic network, excluding Hawaii. American™, which implemented its basic economy at a similar time as United, now has expanded to 70 select domestic routes.
So what is this product and why did the airlines decide to make their most basic product (i.e., economy) more basic?
What is basic economy?
According to United’s definition, “these lower-priced fares provide most of the same in-flight services and amenities that are available with standard economy…but with some important restrictions,” such as no flight changes or refunds, no upgrades, no advance seat assignments, and passengers are the last to board the aircraft.
There is one key product difference across the three major U.S. airlines worth noting: carry-on baggage. With their basic economy fare, American and United both restrict the size of the carry-on bag to a personal item that can fit under the seat in front of you. Delta, however, allows one full-size carry-on (i.e., rollerboard) in addition to a personal item to be stowed under the seat.
The concept of fewer-frills airfare products is not new. European and Asian carriers have been testing their own versions through the years. However, basic economy is tied to a respective standard economy class fare that the consumer has to buy up into — a key distinction that sets the product apart from basic economy’s relatives.
Why did the airlines introduce basic economy?
The commonly suggested reason is that the industry introduced the fare to compete more effectively with the low-cost carriers (LCC) that have given rise to unbundled airfares and have grown significantly as fuel prices have come down from their $110-per-barrel highs in 2012. This theory is given more credence when considering one of Delta’s first launch (test) routes: Flights from Detroit to Florida, where ultra low-cost carrier Spirit™ is a primary competitor.
Today, however, another explanation for the rollout of basic economy seems more plausible: to push consumers to buy up.
As some major media outlets recently have reported, including NPR and the New York Times, it seems basic economy fares aren’t actually any cheaper than the standard economy fares that preceded them, but rather are a means to sell customers more expensive tickets. With the rise of basic economy and the proliferation of LCCs, it is becoming clear that some customers don’t mind paying for amenities like checked luggage, seat assignments and boarding the plane before other passengers, while others are just as happy to forgo them. Basic economy provides airlines a vehicle to compete more directly with LCCs, while also giving them an opportunity to leverage the fare as a buy-up product to its standard economy cabin.
Airlines are testing how they can use basic economy fares strategically. For instance, at the time of this writing, Delta is charging a $50 buy-up from basic economy to standard economy for a round-trip flight from Detroit to Orlando, a route for which Spirit offers nonstop flights. Meanwhile, Delta is only charging a $40 buy-up for flights from Minneapolis to Austin, Texas, a route where Delta is the only nonstop carrier.
A search for Atlanta-to-Nashville flights, where Delta is the only nonstop carrier, reveals a $50 buy-up to standard economy as well — suggesting that Delta is actually testing thresholds of price elasticity of demand on a route-by-route basis. Flights from Detroit to Orlando and Atlanta to Nashville are both popular leisure-type routes where customers are more likely to pay for the amenities of the main cabin.
United and American appear to be working through their pricing strategies during their early days of logistical implementation. United’s basic economy fares typically run $30 round-trip below the standard economy levels. Newark to Miami, which has a $40 differential, appears to be a trial route and using the same leisure strategy mentioned above. American’s 70-route release is accompanied by a less distinct pricing trend, where the round-trip buy-up from basic economy to standard economy hovers around the $20 mark with minor route-by-route variation. Regardless of the scenario, the price points are subject to change due to dynamic pricing, which is common in the airline industry.
Enjoying a head start, Delta also has launched a buffet of products termed “branded fares,” which includes basic economy, main cabin (standard economy), Delta Comfort+, and first class across the domestic segment to test purchasing behavior. Internationally, fares include Delta Premium Select and Delta One as the premium economy and business class options. Look for similar product differentiation from competitors in the future.
What do we recommend?
So, what does all of this mean for the business traveler? And what do we, at American Express Global Business Consulting, advise? Ultimately, the answer depends on what is important for each travel program and the goals they set out to achieve. Typically, business travel is a “must go” situation and the cost of disruption would be greater than the savings from purchasing basic economy in lieu of standard economy. That said, if cost savings is the utmost goal and there is minimal exposure to the restrictions of basic economy, then it may be the better option.
If you are worried that your business travelers unknowingly may book basic economy, you can block visibility or bookability of these fares through the booking tool. However, as these fares utilize relatively new technology for distribution and blockage may not be 100 percent successful, we always recommend educating your travelers on the product and what it entails.
With the latest events in the airline industry, it also is worth noting that not having a seat assignment (one of the basic economy restrictions) is among the primary criteria that airlines consider when they select passengers to deny boarding in an oversold situation.
Will the airfare marketplace be taken over by basic economy in the near future? Where will it go from here? To answer those questions, consider the following: Delta launched basic economy in 2012 and slowly has rolled it out to an increasing amount of routes, but, five years later, it’s not a comprehensive offering. Meanwhile, American and United only recently launched the product, initially on a small scale. Combine that with our knowledge of the reservation and distribution process and we can come to a simple conclusion: Basic economy is technically very complicated and will take time to comprehensively roll out.
You can expect the airlines to finish rolling out the product domestically quite quickly. Delta and United are almost there. You also can expect basic economy to start popping up for international fares in what may appear to be random order. The international expansion, however, will not be random at all. Logistically, implementing the basic economy fare is a complex process that requires a meticulous plan, making an international release unlikely to happen anytime soon.
If you’re interested in learning how much you could save by incorporating basic economy into your travel program, reach out to American Express Global Business Consulting for a tailored program assessment.