United Airlines President Scott Kirby spoke to an investor conference on Wednesday and, unsurprisingly, came out with some interesting numbers about what the company’s Basic Economy product is delivering since its official introduction in February. There are two facts I find most insightful.
Domestic Rollout Complete
Nearly every domestic market is now available with a Basic Economy fare. There are a handful of exceptions in Alaska and Hawaii but pretty much every passenger looking to buy a ticket on United Airlines for a domestic trip will now have the “choice” to buy the severely restricted product. It took Delta far longer to get to full deployment, from its launch of Basic Economy and American Airlines, which launched Basic the same day as United also lags behind in rollout. Delta is ahead in the sense that it recently began placing the fares on international/intercontinental routes. Expect United to catch up on that front soon.
A 30% take rate
Kirby also shared that more than 30% of coach passengers are buying the Basic Economy fares, even with all the warnings and restrictions that are associated with these tickets. That number is higher than I expected and represents an interesting revenue number. Kirby expressed confidence that such market segmentation should lead to $1bn in annual incremental revenue for United by 2020.
UA carried 12.6mm passengers in May 2017. Many of those are international (~45% of ASMs) but some rough math suggests about 60-65% of travelers were eligible to buy a Basic Economy ticket. Call that 7.5mm passengers each month now facing a $10-50 price hike in each direction for the tickets, and 70% of the passengers are paying that as only 30% are buying the Basic Economy option. If we pick $20 as the average price increase due to the Basic Economy mark-up that’s a quick $100mm/month in incremental revenue and United is already starting to see that come to fruition. Of course, there are still some passengers with seats bought before the Basic fares were introduced in markets but my back of the napkin math suggests that getting to $1bn in annual incremental revenue because of Basic Economy might actually be underestimating the value proposition of this fare hike to travelers.
Read More about Basic Economy:
- Basic Economy isn’t about the LCCs
- Learning from United’s beating, American rolls out Basic Economy
- United Basic Economy fares are alive, spreading
- Basic Economy, real penalties
- The Basics of United’s new Basic Economy fares
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Why didn’t he make it simple with one powerpoint slide that says:
We raised tickets $50
$50×7,500,000=$375,000,000 per month more
This is the sort of excellent detailed reporting you’re famed and trusted for bringing us so thank you once again.
I have to wonder how many folks UA hired to so enough pricing analysis or whether they just rolled it into their existing automated models. Either way, they worked very fast indeed to deploy domestically. Surely, international numbers are in progress.
The profits are known to management such that we’ll see it grow. One wonders whether they’ll go all fee all the time.
Doesn’t hurt that Google Flights only lists UA Basic Economy; there’s no way to specify regular economy only.
Yeah, and this pisses me off something special. But the same is true for other airlines when buying a BE fare; UA’s willingness to sell more of them is a small impact there, of course.
At least you’re warned reasonably well before the purchase, contributing to that nice increase in revenue to UA.
Did u know those basic fares already existed? All they did was add restrictions.
Sorry, but that’s simply untrue. This is a fundamental change in the way UA, AA & DL are pricing and marketing their product.
I haven’t seen a noticeable bunch of people in Group 5 with only one bag.
I haven’t heard any announcements advising/warning people with Basic Economy to be boarding with only one small carry on and not to place it in the overhead bin.
Will see.
Anyone seen this 30% at the gate?
Is this a true discount or has the lowest non Basic Economy fare just gone up in price. If a true discount are they pulling passengers away from the Discount Airlines or just discounting their existing customer base.
@Michael- on a small unscientific sample, it looks to me like the latter- the basic economy fare is similar to the old lowest fare, in the markets that I monitor. So really just a semi-concealed price increase.
But Seth, that’s what I think is wrong with your analysis- you don’t take into account the impact of a price increase on demand. If the average ticket price is $10-$50 higher for 70%, surely some of that demand shifts to alternative options. Thats probably why their estimate of the benefits are lower.