Why United, American and Delta Fear Ultra Low Cost Competition, Explained

American, Delta, and United have had nearly enough of discount airlines stealing market share — and they’re finally doing something about it.

The trio is ready to fight back with their own cheap, no-frills fares. You may have heard about what some have called an ‘economy minus’ fare. Delta is already selling its version, which it calls Basic Economy, and American and United plan to introduce theirs next year, slightly later than expected 

In exchange for low fares, passengers will not receive many of the extras they expect from full-service airlines. But the fares will help American, Delta, and United better compete with America’s three ultra low cost airlines — Frontier, Spirit and Allegiant.

Here’s some background about why the Big 3 are taking this step.

How Do Spirit, Frontier and Allegiant Price Their Fares?

When you see a Spirit, Frontier, or Allegiant fare on a search engine, you might think it’s a typo. Frontier has been especially aggressive recently, selling one-way fares as low as $1 plus taxes and fees, even for longer flights, such as Los Angeles to Chicago. Spirit and Allegiant can be super cheap, too. On occasion, Spirit offers 99 percent off sales.

But fare sales aren’t the only time discounters undercut the majors. At the last minute, when American, United, or Delta might charge $400 one-way between major cities, Spirit and Frontier might charge half of that. (Allegiant generally does not fly between big cities.)

What Do You Get for That Fare?

Frontier, Spirit, and Allegiant charge extra for nearly everything, including a lot of stuff many travelers assume always is free. Perhaps most surprising to many is a fee for all but the smallest carry-on bags, which varies depending on route and other factors. As one example, Spirit would charge $26 for a carry-on from Chicago to Dallas in late October.

The airlines all also charge for seat assignments, checked bags and onboard food and drinks, though Frontier does hand out free glasses of water. Frontier CEO Barry Biffle, who had been a senior executive at Spirit, has said the cost of provisioning water is negligible compared to the outrage passengers feel when they learn it isn’t free.

Customers sometimes complain that they buy a ticket without knowing about all the extra fees. But usually, even after paying fees, travelers come out ahead.

Why Are the Big 3 So Concerned About 3 of the World’s Most Uncomfortable Airlines?

For the answer, look to Europe. When Ryanair and EasyJet started with super low fares and bare-bones service, competitors like British Airways, Air France, and Lufthansa mostly ignored them. The larger airlines figured they served different types of travelers.

But over time, Ryanair, EasyJet, and the airlines that copied them stopped catering to just the lowest end of the market. Wealthier travelers started flying them and realized that the experience was good enough, considering the money saved. Ryanair is now the largest independent airline in Europe by passengers carried, and it is even courting business passengers.

Now, the three largest airline holding companies in Europe — International Airlines Group, owner of British Airways, Lufthansa Group, and Air France/KLM – all own their own bargain airlines. But none of the sub-brands is as successful as Ryanair.

How Are American, Delta and United Responding?

All three have roughly the same plan, though only Delta has implemented it so far. American and United should have their strategies in place next year.

They’re introducing new fares that do not include some perks passengers have come to expect. On Delta, that means passengers cannot choose seats in advance, and they cannot change their ticket, even if they pay a fee. Elite frequent flyers are also not eligible for free upgrades into premium economy or first class. Because business travelers value their upgrades and flight changes, this means the fare is designed for leisure customers.

Passengers buying these fares will still receive more value than they would on a discounter. They’ll get free drinks and small snacks, and they won’t have to pay for carry-on bags. They’ll also get a bit more legroom, because legacy carriers still offer about two to three more inches of it, even in their worst seats.

Don’t American and United Already Price-Match?

They often do, and that’s a costly strategy.

If American sells a $49 fare from New York to Dallas now, as it might to compete with Spirit, that fare comes packed with goodies Spirit does not offer, such as free seat assignments, and, for frequent flyers, access to complimentary extra legroom seats.

American is OK with that in the short term, because it wants to do whatever it can to keep discounters from encroaching into its hubs. But long term, it needs to sell a product that more closely matches what ultra low cost carriers sell. And since business travelers likely won’t buy the new fare, American will be able to keep most of its lucrative corporate-travel related revenue.

Will It Work? Will United, American and Delta Hold Onto Their Market Share?

Hard to tell. The big three have been around for nearly 100 years, and they’re not known for being nimble. They have huge corporate structures and antiquated computer systems.

But this is as good of an idea as any. The last time airlines made strategic moves of this magnitude to try to thwart competition, they were responding in the early 2000s to a threat from low cost carriers like JetBlue and Southwest. Both United and Delta created a quirky low cost subsidiary — United called its Ted, while Delta went with Song — and while neither was necessarily a failure, the two airlines weren’t much of a success either.

This is a much lower risk plan than the airline-within-an-airline strategy. All American, Delta, and United are doing is lowering their fares and giving customers fewer perks. That’s less complicated than creating a new budget airline. The biggest expense is probably building the technological infrastructure to handle the new fares.

What do the Ultra Low-Cost Carriers Think of the Competition?

Executives from all three discount airlines usually just shrug. They tend to argue they’re targeting a different type of passenger than American, Delta and United. They figure they should carry the most cost conscious travelers, while legacy airlines worry about getting a business passenger from New York to L.A. or Shanghai.

Frontier’s Biffle likes using restaurant analogies to describe the market. He argues a high-end restaurant would never try to compete with a fast food spot.

“Look, it’s no different than restaurants,” he said in September. “You’ve got Morton’s and Capital Grill, and you have McDonalds. Some people can’t afford Morton’s. They may need to do got Taco Bell. All we are doing is providing a low fare option for people who can’t afford it otherwise.”

How Do the Economics Work?

There are three main reasons Frontier, Spirit and Allegiant can make money and charge so little for flights. The first is ancillary fees. On every flight, Spirit makes an average of $51 per passenger in non-ticket revenue. In the second quarter, that was only $1.50 less than Spirit’s average ticket price per segment.

Second is packing in seats. Frontier has 230 coach seats on its Airbus A321s, or 40 more than JetBlue has on its all-coach A321s. With 40 more seats in the same space, Frontier can amortize the cost of operating the plane over more passengers.

Third is cost control. As befits their name, ultra low cost carriers are fanatical about controlling costs. One way they do it is by hiring contractors at most airports, both for customer service and on the ramp, hauling bags. This can sometimes be a problem, as contractors are not always as reliable as employees. Over the summer, Frontier’s former ground services contractor at Denver International had so much trouble with bags that management employees were sent from headquarters to help.

Airlines compare costs through metric called cost-per-available seat mile, or CASM. It measures the cost for an airline to fly one seat, one mile. Excluding fuel and special items, American’s CASM is about 9.3 cents. Spirit’s is 5.3 cents. That chasm is a big reason Spirit can offer so many cheap fares.

What’s the Difference Between a Low Cost Carrier and an Ultra Low Cost Carrier?

Everything. The United States has four main low cost carriers — Southwest, Virgin America, JetBlue, and Alaska.

Their costs are a little lower than American’s, United’s and Delta’s, and sometimes — though not always — their fares are a bit cheaper. But Southwest, Virgin America, JetBlue and Alaska all give passengers a bunch of extras for free. No one is buying drinks or carry-on bags on any of those airlines, and that’s not expected to change.

The four low cost carriers have so far not decided to introduce no-frills fares.