That Basic Economy fares were on the road map for United Airlines was not a surprise. Today the company detailed the policies around those fares and some industry observers were caught off guard as the rules were laid down. Perhaps most notable: Basic Economy passengers will not be permitted a full size carry-on bag. Passengers choosing the cheapest seats will only be permitted a “personal item” and otherwise subject to fees for checked bags. The new fares will go on sale in Q1 2017 starting with flights in Q2, just ahead of the peak summer rush.
In addition to no carry-on bag United’s Basic Economy passengers will not have the opportunity to select a seat in advance. Seats will be assigned by the computer shortly before boarding and there will be no opportunity to change the seats at that point. This raises the potential for families to be split up, of course, something that United recognizes. It is approaching that situation by calling attention to the potential and discouraging families from booking such fares; it is unclear just how that will play out at the gate. Not only will Basic Economy passengers not be able to choose a seat, they will also not be eligible to buy up to Economy Plus or premium cabin seating. Given the significant revenue these up-sells generate some have questioned the total economic impact of that decision.
Basic Economy passengers will also be the last to board the plane. It is unclear if a new boarding group designation will be created but this separation should help with enforcing the carry-on bag limits as all travelers in that group will be subject to that policy. The impact of this is so great that COO Greg Hart suggested the reduction in gate checked bags with solve a huge operational problem “in one fell swoop” as fewer carry-on bags even make it to the gate area, much less on the plane. Unless the number of seats in Basic Economy increases significantly (which the company explicitly said is not expected) this seems overly optimistic, but it should help.
The newly designated fares will earn award miles but will not earn any credit towards elite status nor towards lifetime million miler tiers. But the rules do allow for some benefits based on elite status. An elite member or the primary cardholder on certain co-branded credit cards will keep their priority boarding benefit and will also be afforded a carry-on bag allowance. Checked bag fees will also be discounted or waived based on status tier. Still no advance seat assignment nor Economy Plus, but not a complete erosion of elite benefits.
In theory the introduction of Basic Economy fares is meant to drive ancillary revenue. Travelers are encouraged to buy the benefits they want ad hoc rather than paying the higher fare that includes all of those features. As the number of benefits included in the normal fare erodes it is harder to discern exactly what those benefits will be, but United believes it can still drive the incremental spend. Blocking some ancillary purchases, such as E+ seating noted above, is surprising in this context. Preventing a traveler from paying more to receive differentiated service is counter to the theory of building ancillary revenue. But it can still work.
By reminding passengers at the initial transaction point that the fares are highly restricted the airlines are often able to induce payment of the slightly higher “normal” economy fare. These same passengers are then able to buy Economy Plus or up-sell premium cabin seats later in the process, essentially allowing the airline to double-dip on incremental revenue, though only one of the two transactions would be considered ancillaries. Regardless of what they are called it is clear that the goal of these new fares is to increase revenue per passenger on board.
Perhaps the biggest winner with this new offering is Chase. The value proposition for a one-off customer to carry a co-branded credit card is now significant. Getting the priority boarding and carry-on bag included is a solid value proposition given the relatively low annual fee.
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