Why Airlines Don’t Want You to Fly Basic Economy

(Bloomberg) -- When buying an airline ticket, the old days of choosing between coach and business are long gone. In the never-ending effort to pad thin margins, airlines have become more sophisticated merchants. They've created an array of travel options—particularly in the economy cabin—where a new, stripped-down fare awaits the most frugal travelers.

They call it basic economy.

Just a few years old, the basic fare is now firmly entrenched. Last week, Alaska Air Group Inc. began selling its version, and JetBlue Airways Corp. is preparing to launch a similar offering in mid-2019. (Southwest Airlines is the only major player to have eschewed this ultra no-frills fare.)

So, for those who have yet to experience it, this is how basic economy differs from everything else short of the baggage compartment: The fares don't allow changes or refunds. Some carriers still let you choose a seat (for a fee) a week or more before you travel; others don't. Most allow you to use the overhead bin space like everyone else; United Continental Holdings Inc., however, does not. Some airlines, such as Alaska and Delta Air Lines Inc., even let you accrue mileage toward elite status in some loyalty programs.

But in the end, everyone else on the plane will still know who you are: No matter which airline you fly, if you choose basic economy, you will board last.

JetBlue President Joanna Geraghty said basic fares reflect a consumer environment in which many travelers shop strictly on price. “Highly price-conscious travelers voted with their wallets, showing they are willing to give up some of the experience for the lowest fare possible,” she wrote in a September JetBlue blog post, warning that the carrier's “success is at risk” without such fares.

At its core, however, the phenomenon is sleight-of-hand marketing. The goal is to reel you in with the rock-bottom fare, but in doing so make basic economy so unappealing that many people scrape together additional money to trade up to the traditional, now more expensive economy fare. Basic economy also represents what appears to be a permanent revenue boost for airlines that often struggle to raise prices.

In the U.S., Delta pioneered basic economy as a defensive measure against lower-cost rivals such as Spirit Airlines Inc. and Frontier, which feature low prices as their primary product. The idea was to match their fares on competing nonstop routes, albeit with fewer benefits, such as the ability to change flights.

Basic economy fares have accompanied a broad industry trend in which the aircraft is divided into various cabins with differing amenities, called segmentation. You may thus find sections of seats that are traditional economy, economy with slightly more legroom and premium economy, all on the same aircraft.

Basic economy has spread to Latin America, the Caribbean and across the Atlantic, but has yet to appear on the longest flights to Asia or South America.

“If Norwegian and WOW Air had been offering $99 seats from Tokyo or Buenos Aires to the U.S., I'm sure we would've seen basic economy in those markets,” said Seth Kaplan, editor of trade journal Airline Weekly. A low-cost airline's cost advantage narrows on long flights, and passengers generally consider meals and seat assignments more crucial as the trip length increases. “That also partly explains why low-cost, long-haul flying in general hasn't been as successful as low-cost short-haul flying,” he said.

Alaska began a “soft launch” of its new, basic economy “saver” fare earlier this month on tickets sold from San Diego to three cities, with sales across its full network expected by early December; saver flights will begin in all markets by early January. The Seattle-based carrier is touting the chance to choose a seat—albeit a middle seat in the back of the plane—as its main difference from the rest of the industry.

Some choice is better than nothing, an airline official contends. “I think that's extremely important to people,” Andrew Harrison, Alaska's chief commercial officer, said in April when the new fare was unveiled.

But even for the cheapest, most stoic customers, a line has to be drawn somewhere. This summer, Fort Worth, Texas-based American, the world's largest carrier, began allowing basic-economy travelers to bring a carry-on bag after finding it was losing business to Delta, which allows bags.

As for the success of the airline's marketing strategy? American said last month that about 60 percent of customers choose main economy over basic, but that it expects the percentage to dip to around half, given the change to its bag policy.

United is an outlier for restricting carry-on bags for basic economy passengers, a move the airline credits for helping to board planes faster and keep departures on schedule. It also sees more people trade up to regular economy than American does, owing to its more onerous restrictions. United has no plans to change its bag rule, Andrew Nocella, the airline's chief commercial officer, told Wall Street analysts last month.

“Basic was carefully constructed to be, I think, a win for allowing us to segment our product, to allow us to compete effectively against ultra-low-cost competitors and allow our operation to deliver better results for everybody in terms of on-time departures,” Nocella said. “And it's working as designed, and so we're full speed ahead with where we're at.”

To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net

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