Did you think Basic Economy fares would be good for consumers? Ha. Airlines are in the business to make money, and this is one more tool to maximize their ability to increase revenues. For shareholders, that's good news.
American Airlines’ Basic Economy fares — the cheap, no-frills tickets that bar most passengers from bringing larger carry-on bags — only have been available for six weeks, and they’re sold in just 10 U,S. domestic markets, but one influential Wall Street analyst says they’ve already been beneficial for the carrier’s revenues.
Analyst Hunter Keay of Wolfe Research said he tracked American’s pricing for the first five weeks of Basic Economy and found it helped the airline raise fares close to the departure date.
American created Basic Economy to appeal to the most cost-sensitive travelers — passengers who do not mind that they’ll board last, that they’re not eligible for upgrades, or that they can’t make ticket changes. Before, American often would lower its fares for its standard coach product — it felt it had to compete on price with discount carriers like Frontier Airlines and Spirit Airlines — but last-minute business travelers were often the unintended beneficiaries. Now that the cheapest fares don’t offer standard perks, business travelers are unlikely to buy them.
Under the new paradigm, Keay said, prices for regular economy fares — the types business travelers prefer — “increased sharply” in the last one to two weeks before travel. Meanwhile, Basic Economy fares held steady, with American generally pricing the tickets at $20 less than the cost of an advanced purchase regular ticket. At that price, Basic Economy fares often are roughly competitive with Frontier and Spirit’s pricing.
“As Basic Economy becomes more refined and widely accepted, the idea is to restore a traditional booking curve where higher value fares increase sharply within 1–2 weeks of the travel date, diverging from the lower value fares, when business travelers often book,” Keay wrote. “Our analysis suggests it is working.”
All three U.S. airlines now sell some version of Basic Economy, with United and American recently joining Delta Air Lines. For now, United only sells its Basic Economy fares on nonstop flights to and from Minneapolis, but that should change soon.
In examining American’s fares, Keay said he also found American sold fewer cheap tickets than analysts might have expected. In most markets, he said, American stopped selling Basic Economy fares several days before departure. If passengers wanted a last-minute ticket, they could buy an expensive regular fare — or none at all.
“This suggests [American] is sticking to its guns on pricing, we think, as demand forecast tools give [American] the confidence that last-minute booking business travelers will show up to buy main cabin seats at higher prices,” he said, though he noted it could also mean some of the flights were sold out at all price points.
Keay noted American’s pricing scheme had a trickle-down effect on pricing from its ultra low cost competition. As soon as American pulled its cheap fares, Keay said, Frontier and Spirit raised their prices.
Keay said the lowest ticket price sold by Spirit and Frontier increased 12 percent on the day American removed Basic Economy fares from a market. Two days later, he said, the lowest Spirit or Frontier fare had increased 62 percent.
“[Ultra Low Cost Carriers] seem to be responding to Basic Economy, undercutting it meaningfully when it is there but also quickly raising fares when it goes away,” Keay said.
Keay acknowledged it’s still early in the evolution of Basic Economy, and noted American is still testing the concept. Still, he said early returns suggest the fares will be successful — for investors, at least.
“If network airlines can pull this off in larger scale, which we think they can, it is a potentially enormous synthetic fare increase — though it will take time,” he said.
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Photo credit: It's early, but American's new Basic Economy fares are probably beneficial to the airline's financial results, one analyst said. American Airlines