Seat 2B By Joe Brancatelli
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The Chimera of Cheap
October 29, 2015 -- Thought buying a coach ticket and flying at the back of the bus couldn't possibly get any worse? Guess again. The airline industry is rushing to take even more away from you.

But here's the twist: This time you'll have a choice. You can say no and, as at least one airline is learning, it's very profitable when two thirds of us do say no once presented with the worst-flight-imaginable scenario.

When American Airlines met security analysts last week to announce a record quarterly profit of $2 billion, it also offered up something less surprising. Now that it had successfully completed the most difficult tranche of its slow-walk merger with US Airways, American was turning its attention unbundling even more small "perks" from its cheapest coach fares.

The reason? Robust competition from Spirit, Frontier and other low-fare/high fee airlines that advertise a cheap ticket price and then hit you with costly buy-ups for everything from a seat assignment to a boarding position.

To hear American tell it, the challenge from the Spirit brigade is stronger than many thought. American president Scott Kirby says the carrier competes with Spirit Airlines on 25 nonstops routes from American's Dallas-Fort Worth hometown hub and 24 nonstop routes from Chicago, where American maintains a hub at O'Hare Airport.

"They are larger than either Delta or United" as a competitive force, Kirby insists. "In Chicago, they're the number-three competitor. They're larger than Delta in Chicago. On those 25 routes in Dallas that Spirit flies, they have 20 percent market share, huge market share."

Kirby also dropped this nugget: 87 percent of American's customers fly the airline just once a year and they contribute about half of its annual revenue of about $42 billion.

The unmistakable conclusion: Nearly nine out of 10 of American's customers have no loyalty to American, buy the least-expensive fare they can find and are the most susceptible to the chimera of cheap projected by Spirit Airlines.

Until now, American has responded with the airline equivalent of a blunt instrument: low walk-up fares that allow everyone from American's frequent business flyers to the once-a-year types to pay less and get more than they'd get from Spirit.

Next year, however, American expects to roll out an entirely new weapon: low fares stripped of everything but basic transportation. In other words, a tit-for-tat response to Spirit. If you buy cheap, you'll get cheap and either pay through the proverbial nose for extras or, maybe, not get extras at all even if you're willing to pay for them.

Other than naming the concept "disaggregating the product" Kirby had no specifics about the new American buy-super-cheap, get-nothing-much strategy. But we know what Spirit-fighting fares look and act like because Delta Air Lines already has them.

First introduced in 2012 on a few routes from its Detroit hub, Delta (NYSE: DAL) dubbed the fares Basic Economy and made no secret of their purpose. They were inserted into the already complicated fare structure as a way to help Delta look competitive with those entry-level Spirit prices. They were so successful, at least from Delta's point of view, that the airline rolled them out more or less nationally last year.

Basic Economy fares are just that: bare-bones transportation with nothing else to recommend them. The list of what they don't offer is daunting:

  • They are absolutely nonrefundable. Use them or lose them.
  • They cannot be changed for any reason even for the rapacious industry-standard $200 fee. Use them on the flight you booked or lose your money.
  • They do not allow you to stand by for another flight.
  • They cannot be upgraded to a higher class of service under any circumstances.
  • You cannot get advance seat assignments. In fact, you can't choose a seat at all. Your seat will be assigned by Delta after everyone else has been accommodated.
  • Many Delta SkyMiles benefits for its elite flyers do not apply.
Delta defends Basic Economy with an irrefutable argument: You're paying what Spirit charges and these are essentially Spirit's rules for its least-expensive prices. Delta also points out that as crappy as its coach seats are, they are at least more spacious than most Spirit chairs. (Delta's legroom is 30 or 31 inches while Spirit's are as tight as 28 inches.)

On its way to implementing Basic Economy, Delta learned something, too. Once it explains to travelers albeit in bellicose language with alarming pop-over disclaimers how restrictive Basic Economy fares are, many flyers "voluntarily" buy a higher price.

"We see is a very high upsell rate" from Basic Economy, says Delta chief revenue officer Glen Hauenstein. "Once people see what that fare is and what it offers ... 65 percent of the customers opt out of that fare."

Ask for a sample of the not-so-subtle upsell and Hauenstein offers this: "If the lowest fare from Detroit to Orlando was $59 and that was a match of an existing Spirit fare, it was presented on Delta.com [as] a product without a seat assignment. Most people are opting not to take that fare, but to take the next higher fare, which is essentially an added-on price."

Given Delta's success with Basic Economy, there's no reason that American won't introduce a clone of them as their Spirit-fighting product. United Airlines, too. In fact, imitating Delta is what the airline industry does best these days.

At this point, a savvy and cynical flyer can't help but note that airlines have yet to strip one perk from the bare-bones prices: frequent flyer miles.

It's possible that they could remove frequency points from the uber-cheap fares, but frequent flyer plans are like drugs. Even that once-a-year flyer Kirby mentions thinks he or she is getting something for nothing when they earn miles. And airlines love nothing better than letting people earn miles because they often turn a once-a-year flyer into a twice-a-year customer.

And that, of course, gives airlines two chances to upsell you out of the worst flight imaginable instead of one.


This column is Copyright 2015 American City Business Journals. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright 2015 by Joe Brancatelli. All rights reserved.