American, United airlines to try to woo fliers with budget fares
Stung by competition from ultra-discount carriers, American and United airlines plan to strike back with cheap, no-frills tickets.
The airlines hope that, by the end of the year, they will be able to lure budget travelers using basic-economy fares — inexpensive tickets that don't include typical benefits such as pre-assigned seats.
The carriers hope that once the new fares draw attention, the bare-bones features will prompt some customers to “buy up” to a pricier choice, aviation consultants said.
Basic economy is one prong of a broader effort by the nation's largest carriers to bolster revenue from each seat flown a mile, a standard industry measure that has been battered for about a year, partly because of fare wars with discounters such as Spirit and Frontier airlines. The declines have helped push down the Bloomberg U.S. Airlines Index 17 percent this year through last Thursday.
“Spirit and Frontier, by the choices they've made with recent expansion, have managed to give a poke at the dragon,” said Samuel Engel, head of the aviation practice at consultant ICF International. “When you start flying into the major carriers' hubs instead of skimming a bit at their sides, you tend to evoke a competitive response.”
Americans' passenger revenue for each seat flown a mile tumbled 8.9 percent from a year ago; it fell 7.4 percent at United. Meanwhile, Spirit plans to boost capacity 65 percent this year in Los Angeles, an American hub, and Frontier will grow 12 percent in Denver, a core market for United, according to Credit Suisse.
American and United are working out the details, but the rock-bottom fares could have restrictions against upgrading, changing or getting refunds for those tickets, in addition to allowing seat assignments only at the airport. American declined to comment as it continues to refine its offering. United declined to comment, referring only to previous remarks by executives.
It's too soon to know what effect the fares will have on the ultra-discounters, according to a Spirit spokesman. A Frontier representative said the airline will watch to see how markets develop.
The strategy carries risks for the legacy airlines. American, United and Delta Air Lines dominate in the United States and have alliances with global carriers — advantages that would seem to negate the need to compete for the most price-conscious customer, said Jay Sorensen, a former Midwest Airlines executive who is president of airline consultant IdeaWorksCompany.
“Something just seems very wrong here,” he said. “The analogy is like Kohl's saying, ‘We're going to have a section in our story dedicated to dollar deals because we think Dollar Store is a threat.' You'd look at that and say, ‘Why are you doing that? That's not your market.' ”
The big airlines see basic-economy fares as putting passengers into seats that otherwise would fly empty.
A crucial part of the strategy is the “wine list effect” — a tendency for people to avoid the least-expensive item in favor of a slightly higher-priced option, believing they're getting a better value, Engel said.
The restrictions on the cheap fares might push buyers to higher-priced options, said Peter Belobaba, principal research scientist in the Department of Aeronautics and Astronautics at the Massachusetts Institute of Technology.
“As a strategy, it's not a bad one” for the large carriers, he said.
Delta, which offers basic-economy fares, has acknowledged the dynamic in how passengers make decisions.
“When presented with the options, when they were informed of what this product was, those customers chose something else,” Delta President Glen Hauenstein said on a conference call in April. Basic economy is available on about 2,000 domestic Delta routes, and the carrier plans to keep rolling it out this year.
Delta has been experimenting by increasing some fares and putting restrictions on certain low-price options to keep revenue firm. It has started requiring a round trip for some of its lowest fares.
United expects that many customers “will buy the next-higher fare to preserve all of their frills, all of the things they're accustomed to,” such as priority boarding, said Douglas Leo, senior vice president for revenue management.
“This will help us improve revenue, reduce the risk of buy- down and it also helps us compete in a more surgical manner with ultra-low-cost carriers,” he said.