Great question. Basic Economy fares are spreading like germs through a pre-school. Airlines are predicting big revenue gains from these new class of fares, and it looks like they may be right.
Not familiar with Basic Economy fares? These started popping up recently amongst the Big 3 carriers. Delta started the party, while United and American followed thereafter. Essentially, you’re buying a ticket that comes with fewer options, depending on which airline you fly.
The part that might not be immediately obvious is how much money the airlines make from folks who choose to bypass Basic Economy. United Airlines essentially made their lowest fare in every market Basic Economy. That means if you’re “buying up”, you’re giving them more money than you would have a few months ago. How much? Wandering Aramean takes a look at the math. United’s Scott Kirby recently said that 30% of passengers are buying Basic Economy. That means 70% aren’t. Here’s his theoretical math:
UA carried 12.6mm passengers in May 2017. Many of those are international (~45% of ASMs) but some rough math suggests about 60-65% of travelers were eligible to buy a Basic Economy ticket. Call that 7.5mm passengers each month now facing a $10-50 price hike in each direction for the tickets, and 70% of the passengers are paying that as only 30% are buying the Basic Economy option. If we pick $20 as the average price increase due to the Basic Economy mark-up that’s a quick $100mm/month in incremental revenue and United is already starting to see that come to fruition
If anything, Seth’s math on average fare difference is low. I actually just spent a bit of time analyzing the spread in fares. I think the average is definitely higher than $20 right now. Whether the split stays at 70/30 and the fares stay where they are is anyone’s guess.
Basic Economy Is Big Business
I’m setting aside my cynical customer side for a moment. This is really one of the smartest strategies the airlines have tried in a while to raise fares. It’s a cash grab, pure and simple. If United (or American or Delta, for that matter) don’t see the sort of results they want, they can pull back on Basic Economy.
As scary as it sounds, I don’t actually think they’ll see blowback from most customers. And, their elite customers have already been put through all the big changes over the last few years. If they’re still loyal, Basic Economy isn’t going to chase them away.
As much as I hate to say it, I think Basic Economy is here to say. It’s not as Scott Kirby, President of United Airlines, says. Customers aren’t voting with their wallets for cheaper fares. The airlines have just found a really interesting way to make us spend more.
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