Is United Losing Money On Basic Economy?

Basic Economy fares have been rolling out across the Big 3 airlines since last year.  They were conceived as a way to compete against ultra low-cost carriers like Spirit and Frontier Airlines.  The fares strip out common benefits like carry-on bags and seat assignments.

There’s been much teeth-gnashing about the implementation of these fares.  At one point, United Airlines was offering Basic Economy fares on pretty much every flight.  That meant that someone could be forced to pay an extra $25 on an $800 ticket just for the right to grab a seat assignment.  The pricing itself hasn’t been perfect, with oddities popping up in different markets as the airlines tweak the structure.

United tested a bunch of different price points, seeing how many customers they could get to buy-up and at what price.  While they had rolled Basic Economy out across the domestic network, United publicly admitted they were hurting because not all airlines had done the same.  American Airlines then moved to expand it across their network.

In some ways, the American Airlines Basic Economy package is better.  It’s also not as bad as originally thought, in that it now appears American will allow folks more flexibility when there are weather or mechanical issues.  In some ways it’s worse than the United version, though similar enough.  That means United will make more money now that customers aren’t booking with American to get more benefits, right?

At best, the answer is maybe.  Why?

United Announces Significant Losses Due To Basic Economy

View From The Wing buries the lede when he waits until the end of the post to note that United disclosed significant downward guidance due to on Basic Economy.

The summary provided by The Street says that United attributes 100 basis points of negative guidance to Basic Economy.  In more straight-forward terms, it means they’re attributing 1% of the negative outlook here.  That might not sound like a lot.  Trust me, it’s a material issue.  They’re claiming just about as much loss is attributable to Basic Economy as is to Hurricane Harvey, which shut down one of their largest hubs for days.

The Final Two Pennies

The name of the game is making money.  United (just like American and Delta) believes they can squeeze more money out of customers with creative price increases.  Problem is they showed up to the surgical procedure with a sledgehammer, when a scalpel was the right tool.  Given all the data they collect, it’s a bit confounding they couldn’t have figured some of this out before ticking off customers.

It’s just as confusing as recent moves to get cheap with first class customers.  They’re growing profit by taking away one bagel at a time.

Cost-cutting is a reality in the business world, especially so in publicly held companies.  There’s another strategy where you focus on your top customers and try to get more revenue from them.  Lots of those folks are spending their company’s money to buy tickets.  Others are not overly price-sensitive.  Maybe a bit more time spent focusing on building customer loyalty and increased spending would be prudent.

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