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United Airlines Creates a Differentiated (and Risky) Basic Economy Product

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United Airlines Creates a Differentiated (and Risky) Basic Economy Product

United Airlines Creates a Differentiated (and Risky) Basic Economy Product
November 15
15:07 2016

MIAMI — United Airlines is making some waves in the friendly skies. On Tuesday, November 15, the airline unveiled a new product set to debut on its flights this spring. To the surprise of no one, United is launching a Basic Economy fare, which will be made available for sale in January 2017.

United to Add ‘Basic Economy’ Fares

The announcement was expected, as both United and American have publicly stated their intentions to design a product similar to Delta’s Basic Economy, the first discounted fare intended to compete directly with the ultra-low-cost carriers (ULCCs). Spirit, Frontier, and Allegiant have made inroads into the business of the traditional legacy carriers with a completely unbundled, no-frills product that appears to very price-sensitive customers.

United’s Basic Economy fare appeals similar to Delta’s from many angles, including many of the same limitations, such as preventing seat selection prior to check-in. However, one element of United’s product stands out significantly: carry-on bags will not be included.

Preventing Basic Economy fliers from bringing a carry-on serves to differentiate United’s product from Delta’s, and will likely allow the airline to even further discount fares and capture more customers away from the ULCCs. However, there are likely to be some reputational and operational expenses that United will have to combat.

Spread of “Basic Economy” stands to benefit consumers


As noted above, United is not the first to launch a Basic Economy product. Despite the major difference of not allowing its customers to bring a carry-on, the move largely follows suit of Delta. Basic Economy fares are spreading, which offers tremendous value for price-sensitive customers.

Although there is likely to be some chatter bemoaning the airlines for continually stripping down the elements traditionally associated with an air ticket, Basic Economy fares are by far a good thing. Yes, there are plenty of restrictions that accompany a Basic Economy fare. However, with these limitations comes a cheaper price.

This marks a big win for leisure-oriented, price-sensitive customers, who are more concerned with the cost of traveling rather than the amenities they receive. Basic Economy fares allow the price-sensitive segment of fliers to capture more value from the overall travel experience, cutting the cost of the ticket more than their willingness to pay decreases.

On an industry level, the spread of Basic Economy fares basically acknowledges the threat that the ULCCs pose to the business of the “Big Three” traditional legacy carriers. Increasingly, Delta, United, and American are discounting fares in order to compete with the Spirits and Frontiers of the world. Basic Economy fares allow them to better match the on-board product with that fliers would receive on a ULCC.

Implementation of No Carry-On Policy Poses Reputational Risk


One key element of United’s Basic Economy product is its restriction of carry-on baggage. Unlike the product that United rolled out in its announcement, Delta’s Basic Economy fares still allow fliers to bring carry-ons aboard flights.

On paper, United’s decision to limit carry-ons is a good one. Stripping carry-ons from the fare will allow United to further discount Basic Economy tickets, capturing even more price-sensitive customers from defecting to the ULCCs.

However, restricting carry-ons will be extremely challenging to implement on a practical level. In its press release, United says that all customers buying a Basic Economy fare will be grouped together in boarding and assigned a Group 5 position. Nonetheless, it is difficult for any airline to ensure that boarding coincides perfectly with the groups it assigns. Some Basic Economy customers will probably manage to board the aircraft with carry-ons in hand, despite the rules.

This presents a clear risk for United, as there is the potential for brand inconsistency to harm the airline, particularly at spoke stations where contractors will be charged with enforcing the new policy. Furthermore, it is possible that one of United’s more premium customers will arrive late to the boarding process, and the gate agent will question the customer’s carry-on. This presents perhaps even greater risk, as United certainly does not want to cause any dissatisfaction among its elite fliers, even momentarily.

United’s Basic Economy fares bring significant revenue potential, but the no carry-on policy may detract from the company’s brand image. One would think United would be particularly guarded of its brand image at the present time, given Munoz’s stated focus on creating a better airline for its customers. Brand consistency is something the airline desperately needs as the airline seeks to gain some altitude from its not-too-distant struggles.

Only time will tell if, and by how much, United’s reputation will suffer as a result of the carry-on restrictions.

United’s Operational Performance Could Suffer As Well


The potential negative impact on United’s brand reputation and the difficult of enforcement on a practical level have been well discussed since the airline’s Basic Economy unveiling. However, another aspect that may be impacted by the new product is the airline’s on-time performance (OTP).

Again, United will board all Basic Economy travelers last, in Group 5. In general, fliers opting for steeply discounted fares are less familiar with the boarding process, and the travel experience in general. If United employees spend considerable time actually enforcing the no carry-on policy, this could lengthen the boarding process, and cause slight departure delays as a result.

In this sense, the airline will be faced with somewhat of a tradeoff on each and every flight. Do you try to board all customers as quickly as possible to save OTP, or place more attention to ensure policies are followed correctly?

Spending a few extra minutes in the boarding process here and there may not sound very important, but delays can quickly stack up throughout the day. Small departure delays can easily stack up to create a material delay by the end of the day. This is particularly true given the banked nature of the airline’s hubs, which experience concentrated waves of arrivals and departures throughout the day.

Granted, the OTP impact of this move is not likely to be very significant. However, it would seem that every point counts in Munoz’s quest to improve the OTP of the airline’s flights. Munoz has repeatedly proclaimed the importance of getting customers where they need to be on-time, and this move if anything runs counter to that goal.

Will American and Delta Follow Suit?


It seems clear that United has plenty of benefits and drawbacks to weigh. At the same time, American is planning to launch its own Basic Economy product sometime in 2017. The airline has yet to come out with any details, and it will be interesting to see what American does and does not choose to adopt from United’s product.

If American does opt to include the restriction on carry-on baggage, the attention then turns to Delta to see if the airline will likewise follow suit.

Basic Economy is here, and here to stay. We look forward to the implementation of Basic Economy on all United domestic flights in 2017, and the competitive responses from other carriers, including the legacies and the ULCCs.

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About Author

Alex McIntyre

Alex McIntyre

Texan. Airways Business Analyst. Emory University student, and lifelong AvGeek. Favorite airport and aircraft are: Dallas/Fort Worth International Airport and the Boeing 787. Passionate about all things commercial in the airline business, including route networks and hub operations. I love the window seat.

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2 Comments

  1. Michael Jensen
    Michael Jensen November 15, 16:53

    This is probably the brainchild of that guy they hired from Spirit – let’s sink down to their level and not differentiate ourselves in a more flyer-friendly manner…can’t wait to see what is next…

  2. Bill Hough
    Bill Hough November 16, 14:38

    I have to respectfully disagree. More airline nickel-and-diming is a bad think. Why does UA consider necessary to further degrade their product to the level of Sprit or Alligant? I still think that airlines should charge one honest fare and skip the nickel-and-dime fees. Too bad tax percentages are not calculated on the “all-in” price.

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