What does Basic Economy bring to American Airlines? According to company President Robert Isom it plays out at roughly $23 per passenger in increased revenue for each passenger who ultimately chooses to not buy Basic Economy product. And roughly half the customers who are given the option are buying up from Basic Economy to Main Cabin according to the company.
Half of AA's customers buy up when presented with a Basic Economy option. Which means a whole bunch do not. #PaxEx #AvGeek pic.twitter.com/fY81SKN5Lj
— Seth Miller (@WandrMe) July 28, 2017
Following on United’s comments last week where Scott Kirby spoke to the challenges his company faces with its BE product, particularly because American isn’t fully deployed, the topic was a frequent player in this morning’s investor earnings call. American provided additional details on the rollout progress for its version of the commoditization and insight on how it drives revenue from the offering.
Learning from United’s beating, American rolls out Basic Economy
Basic Economy is on sale in 78 of American’s markets today covering the US and Canada. Isom acknowledged that not being fully deployed on Basic Economy did drive “fairly modest share shift in close-in bookings” meaning some United customers booked away to American to avoid the BE product. But the net revenue gain for such was “very marginal” and the company does not expect that the trend will continue for two reasons.
First, United pulled back on its aggressive BE marketing push in higher fare buckets/close-in bookings. That reduces the opportunity for other carriers to match price with a more full-featured product. Second, American is pushing forward with its rollout of Basic Economy and will complete the effort within Q3 ’17. Yes, it saw a marginal increase in bookings and revenue by not selling Basic Economy in markets where United and Delta are selling it. But the $23/passenger up-sell is worth more to the bottom line.
Just the idea of buying UP to Main Cabin is wrong.
— Blazej 'Lexmechanic' 🎮 (@Lexmechanic) July 28, 2017
United pulls back on Basic Economy
From a yield management perspective Isom offered insight on the pricing of the product. The Main Cabin product starts as a $20 up-sell from Basic Economy in markets where it is offered. As the travel date approaches the up-sell rate increases to a $40 starting point, assuming the lower fare buckets are still on offer. And the yield management systems can dynamically price the Basic Economy product to increase even from the $40 differential if it believes more revenue can be derived from a customer.
As most leisure travelers buy on price, my guess would be that AA considers half buying up to be fantastic.
— justinbachman (@justinbachman) July 28, 2017
This dynamic approach to the pricing differs from what United and Delta implemented in their comparable offerings and gives American significant flexibility and greater potential upside. Thus far the average realized revenue on a BE->MC upsell is $23, attributed to the fact that most customers are making that purchase sufficiently far out that the default $20 number hits. But people are paying more in some cases so don’t expect the $20 price to be the only option you see.
Separately, CEO Doug Parker also addressed the 29″ pitch seating that was supposed to fly on the company’s 737MAX fleet and the reversal of course on that plan. He noted that the details about that tighter squeeze “came out on its own” rather than being an official statement (Leaks!!) and that the pushback came from customers but also strongly from the flight attendants.
Sorry, I was commenting on that it wasn't about getting more seats on the plane. If MCE only, then they think they sell vs free to elites.
— Edward Pizzarello (@pizzainmotion) July 28, 2017
The crew did not want to be in a position of explaining to passengers on board why the product was so crowded and ultimately Parker says that was the tipping point in reversing course on the layout. It does mean six fewer Main Cabin Extra seats to sell, but it is possible that AA is willing to write off that marginal revenue as otherwise being given away “for free” to its elite members. In that context the lost revenue is relatively low as the total number of seats on board doesn’t change.
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It seems like an interesting take to say that Basic Economy is generating a big boost for American when it’s only in such limited markets, when only 50% of customers in those markets who ultimately buy from American rather than booking away pay up, and when they acknowledge some modest gain on other markets where customers are booking to them and away from United’s broader rollout of basic economy.
Did I mishear during the earnings call that the $23 figure was for those buying up, and not “for each passenger who ultimately chooses to not buy Basic Economy product” as you wrote above? It seemed clear the explanation was about $23 because most buy ups are being sold at $20. This wasn’t an average across all customers, it seemed an average of those customers buying up.
And apologies I may have been less than clear, big boost to me seemed like it meant a material amount of revenue to the airline or significant driver of ariline profit or at least revenue delta, but I don’t think that’s what you mean?
The $23 number is average across those buying up.
It is not a major material number in the earnings in Q2 because of limited markets and limited time the fares were on offer. It absolutely is a major number in terms of building a fare hike into the product while calling it “customer choice” or whatever they’re saying these days. In 60 days the domestic rollout will be complete. At that point it is an average increase of more than $10 per ticket in each direction. It is not on all seats, of course, as AA won’t sell BE on most walk-up fares, but the total boost to revenue is big.
I also believe the bit about incremental share shift being undervalued relative to the BE premium is telling. For all the kvetching online people are paying more to get the tickets, just like the airlines want.
Definitely, it’s a fare hike. And we don’t know the extent of share shift, neither United nor American shared those numbers, United’s comments made it sound bigger American’s downplayed but we don’t have access to those numbers.
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