The Evolution of Basic Economy – an Update

A Window into the Competitive Playbooks of the Airlines

Low Cost Carriers were a thorn in the side of the legacy carriers long before the industry felt the need to add the term “Ultra”. With networks built on maximizing revenue through connectivity, the legacy carriers became prime targets of low cost airlines who could fly point-to-point for low fares with their low cost structure. Starting with the original PSA and Southwest, low cost carriers required response from the legacy carriers. It is from these early responses that we first saw restrictions such as the Saturday night stay, and 14-day advanced purchase.

As the first generations of LCCs age, the latest iterations required a designator to differentiate. The new LCCs that grew to presence in the 2010’s includes airlines such as Allegiant, Frontier, and Spirit, all with costs even lower than the traditional LCCs, and thereby earning the title Ultra Low Cost Carriers.

The greatest impact has been felt by Spirit and Frontier, who have managed the threat of Basic Economy.

With this new generation of low fares competing against the legacy carriers, we once again saw new restrictions and fare segmentation. Basic Economy was born in 2016 at United, Delta, and American, and saw wide adoption by early 2017. The new restrictions included charging for carry-on bags, reduced frequent flier rewards, limited changes, and no seat selection (without a fee).

In 2018, we took a detailed look into Basic Economy fares, and how they were deployed by the legacy carriers. We found a new competitive environment where legacy carriers were using Basic Economy fares aggressively against ULCCs, and the ULCCs had yet to find a way to respond. Now, in 2019, we take a look back at how Basic Economy fares have evolved, and how the ULCCs have responded. Even though Basic Economy is offered system-wide on all legacy carriers, we will once again focus this analysis on how it is used as a competitive tool against the ULCCs.

Comparing Overall Changes on Competitive Routes

A picture is worth a thousand words, and the above shows the evolution of Basic Economy.  Traffic on ULCC markets rose at a much more reasonable pace, while fares were allowed to tick back up from the initial beating they took in 2017.  The charts suggest the aggressive attacks we saw in 2017 from United were much more tempered in 2018. Delta, not very aggressive with Basic Economy fares in 2017, have continued to optimize revenues with a modest increase in fares on those routes.  American also reaped the benefits of using Basic Economy as a fare escalator, and reduced traffic in some competitive markets. 

But the greatest impact has been felt by Spirit and Frontier, who have managed the threat of Basic Economy, waiting out the barrage, and are now recovering.  Spirit, especially, has seen fares and traffic rise in competitive markets while Frontier has found more markets away from competition.

While the overall competitive market has shown reduced activity and an increase in rationality, the intricacies of the individual markets are windows into the competitive nature of the airlines. It is from this window we can start to see personalities form – a fascinating peek into how the different organizations recognize and respond to competition.

Chicago to Dallas – American and United

The Chicago to Dallas market provides one of the most inclusive examples of how Basic Economy is evolving. The market includes the presence of legacy carriers, American and United, a traditional LCC, Southwest, and the requisite ULCC, Spirit. Looking back at the 2015/2017 comparison, the effects of Basic Economy were apparent. American segmented away from their lowest fares using the Basic Economy structure, and Southwest seemed to benefit from the move. Average fares at both airlines showed an increase over 2015, and the stated reasons for Basic Economy held true. Basic Economy fares were used by American as a way to keep pressure on Spirit by always offering a competitive fare, but allowing revenue management to pull fares to the right. United, on the other hand, wielded Basic Economy more like a weapon. Matching fares and keeping the Basic Economy bucket open indefinitely. If there was a $30 ticket on Southwest, chances are you’d find a $30 Basic Economy ticket on United, regardless of how full the aircraft was. As a result, average fares for United dropped almost 23% on the ORD-DFW route, but traffic surged 61%.

Spirit, on the other hand, found themselves constantly forced to keep their lowest fare bucket open as there was almost always a matching Basic Economy fare on a competitor. Average fares dropped, however their cost structure and ancillary fees helped mitigate the damage.

2018. What a difference a year makes. Fares between Chicago and Dallas are up across the board. United has returned to fares higher than the 2015 baseline, and American has been able to increase average fares by 32% YOY.

Once again, the average fares tell only a small portion of the story.  The distribution of all fares provides a much clearer picture into how the airlines are deploying their inventory to achieve the best pricing, and still remain competitive.  This is where things get interesting.

Comparing United and American shows a contrast in pricing philosophy between the two competitors.  You can clearly see the difference between basic economy fares at the $25 level, and main cabin fares around the $125 level.  The difference between United and American is that United is selling more fares below the main cabin peak (we are assuming, for the sake of simplicity, that these deeply discounted fares are all Basic Economy).  American, on the other hand, is deploying fewer Basic Economy fares on this market, driving a higher percentage to main cabin.  As a result, American is able to command a $21 premium over United on average.

Looking at how this differs from 2015 and 2017 shows a drastic shift in the market pricing.  In 2015, we saw United and American competing with Spirit in a pre-Basic Economy environment.  All they had available to offer was the main cabin fare.  The largest segment of fares for American were below $100, as they aggressively competed against ULCC fares.  United took a more measured approach with a wider distribution of fares, but also lost out on traffic as they were third in terms of capacity share. 

Equilibrium for the longer-term dynamics of the Chicago to Dallas market seems to have been found.  United is still using Basic Economy more aggressively than American, but they have both drastically backed off the amount that are offered.  The Chicago-based airline made aggressive capacity moves in 2017 with 61% growth over 2015.  While they have moderately backed off with a 12% reduction last year, they have clearly reestablished themselves as a serious player to match Southwest.

Southwest, themselves, have done a masterful job staying above the fray, and deploying fares to mimic the lowest Basic Economy bucket without the restrictions.  Their fares continue to rise and I suspect the similarities between their fare distributions and American’s is no coincidence.

Likewise, Spirit has also found a way to exist in the market as the smaller Basic Economy buckets allow them to reduce the lowest fare peaks.  While traffic growth has been stagnant, Spirit has increased average fares from $33 to $45, a 36% increase in base fare.

Who won the Chicago to Dallas Basic Economy war of 2017?  Yes.  As in, they all did, (although Spirit probably won the least).

Overall market capacity is largely flat, but United, American (and indirectly Southwest) were able to stop Spirit’s expansion, and increase fares in the process.  Spirit proved they could compete in a massive market even while being targeted by all three competitors and their Basic Economy weapon.  United gained some valuable market share, and American gained the largest increases in fares.

In the end, Chicago to Dallas provides a great example of how Basic Economy has evolved.  The skirmishes have cooled, and the Basic Economy airlines are shifting the fare class to more of a revenue management tool than a weapon to keep pressure on Spirit regardless of its effects on their own bottom lines.

Dallas to Las Vegas – American

The Dallas to Las Vegas market was chosen in 2017 as it showcased how American and Southwest have responded to Spirit.  Once again, we see a very similar story to what we found between Chicago and Dallas.  American is still selling the lowest Basic Economy fares, just on far fewer tickets.  Fares have risen.  Subsequently, as Spirit finds American’s Basic Economy buckets closing more rapidly, they too, have been able to allow their fare distribution to shallow and improve average fares.

Southwest has shown little change in pricing philosophy on the route, and seem to be caught a bit in the middle.  While they were able to increase fares slightly, they were not able to align the bulk of their fares with American’s main cabin fares as they were able to do between Chicago and Dallas.  This is likely due to Spirit’s capacity share, which is much higher on the Las Vegas market than it is on Chicago.  Simply put, Spirit is big enough going to LAS to force Southwest to compete on their terms.  This is less an indication of Southwest’s overall pricing performance and more a testament to the power of market share.

Again, the Basic Economy fares seem to have slowed Spirit’s expansion in the market, creating a compelling end-state.  Overall capacity for the market was down 2% after gaining 11% over the previous two years.  The bulk of this capacity reduction came from American, who seem to have found a way to reduce capacity while increasing fares, and most importantly remaining competitive in the market.

Detroit to Orlando – Delta

­As an example of how Delta was approaching the ULCC competition with Basic Economy fares, we chose Detroit to Orlando, where both Spirit and Frontier had a presence.  The conclusion was that Delta maintained a measured and limited response with their Basic Economy product, while Spirit and Frontier fought for the rest.  The war continues, although Spirit seems to have won the battle for the time being.  The interesting dynamics of this market revolve around the Spirit and Frontier fight, as they maintain very high peaks at their lowest fares, with average fares at their lowest levels.

The fight is likely worth it to the winner, if the other markets we studied are any indication.  There is enough room for a ULCC to compete against legacy Basic Economy fares, but probably not two.  The winner will likely enjoy the equilibrium found in the Chicago – Dallas and Dallas – Las Vegas examples, and Delta’s current response furthers the hypothesis.  With Frontier removing 35% of their capacity and Spirit growing by almost an identical amount, it seems Spirit wants this market more, and barring any drastic moves by Frontier, will likely emerge the victor.

 Yet, Delta’s muted response remains interesting and an apparent insight into how the airline sees themselves competing against ULCCs.  As we saw in 2017, between Detroit and Orlando, Delta seems almost entirely focused on optimizing their fares and staying above the ULCC fray, bringing in almost five times the average fare.  A fare war is raging below Delta as Spirit and Frontier’s fares remain at their lowest levels, yet Delta’s fares have been able to climb another 5%.

Fort Lauderdale to Boston – Jetblue

While we originally focused on the responses of Delta, United, American, and Southwest to the ULCCs, we decided to include an example of how both Jetblue was handling the ultra-low fare competition.  For Jetblue, the largest point of ULCC overlap is in MCO and FLL, for which we chose the FLL-BOS market to compare.

A market once dominated by Jetblue, Spirit has significantly increased capacity between Fort Lauderdale and Boston, more than doubling since 2015.  Interestingly, Jetblue has not felt the need to match Spirit’s fares, allowing growth of their ULCC competitor at reasonable fares.  Jetblue’s fare distribution has remained constant, and much wider than Spirit as they continue to see modest fare and traffic growth.  This is impressive, especially considering the most recent challenger in the market, Delta.  The Atlanta based carrier has descended on this market in an intentional way, helping to grow the overall market capacity by 22% YOY.  Still, as Delta fights for market share, their fares remain significantly lower than Jetblue, with a strikingly similar fare distribution.

This is a market to watch.  Jetblue has very successfully ignored Spirit and their growth between FLL and BOS, but the question remains whether they can ignore Delta.  With a fare structure so similar, the two carriers will inevitably be fighting for the same passengers.  If Delta continues their rapid expansion into the market, it could cause Jetblue to respond more aggressively.  Yet, even as Delta brings the fight to Jetblue, they are matching very little, if any Spirit fares.  This bodes well for Spirit, who will likely be able to grow to the market equilibrium found in other markets, while the higher fare carriers fight in the fare classes above.

Verdict – Basic Economy is Now Just Another Fare Class

As expected, we see Basic Economy deployment in ULCC markets has changed.  No longer is it the defensive answer to match ULCCs fares.  Basic Economy is now little more than a new lowest fare class, used as little as possible, and allowed to increase based on optimizing revenues rather than tied to ULCC fares.  The example used in the previous article of American matching Spirit fares at all costs on the DFW-FLL example can no longer be found.  In fact, using a similar search today, Spirit returns a fare of $112 (all taxes included) while American’s Basic Economy fare is $317.  Basic Economy fares now seem tied closer to the mainline fares as a discount, than to ULCC fares to match.

This is a good thing for both the legacy carriers and the ULCCs.  Basic Economy was originally a shot across the ULCCs’ bow as legacy carriers used it to compete with ULCCs first and raise fares second.  Today, the motive seems reversed as the ULCC fares are matched much less often, and Basic Economy is closer to where the original main cabin fares used to be.  In essence, Basic Economy was a genius way to make the lowest fare class more annoying, and to bump more passengers up to a higher fare.  Originating as a discount which the public accepted, the effect was a straight fare increase. In fairness to the airlines, this is exactly what they said would happen.

Can we Declare Basic Economy Been a Success?

We posed the question in the original article, has Basic Economy been a success?  After analyzing dozens of competitive markets, the results are conclusive. Yes, Basic Economy has been a success (although the argument could be made that Basic Economy, initially designed to combat ULCCs, no longer exists). The unabated expansion of ULCCs into large legacy markets has revealed its limits with the threat of Basic Economy.  Yet the fascinating result is that the legacy carriers seem content leaving Spirit and Frontier with no more than 20-25% of the market.  Balance points have been found, and while the ULCCs have been denied the opportunity of endless expansion in legacy markets, the analysis suggests they have been given a clear signal that a quarter of all other markets are fair game.  This explains the continued ULCC expansion into other markets, such as Frontier’s recent announcement in Newark.  There is still room for a ULCC.

If there is a loser in the scenario, it is the flying public.

The advertised up-sell from Basic Economy to main cabin economy fares is another big win for the legacy carriers.  It is a great story to show how Basic Economy has produced the up-sell, however at Basic Economy fares nearing 3 times the ULCC fares in some markets, it is difficult to say whether these passengers would ever have considered the new legacy Basic Economy fares to begin with.  The true beauty of Basic Economy fares is in not selling Basic Economy fares. Still, United seems to match a noticeable, albeit reduced, amount of ULCC fares, and American even fewer yet. Basic Economy will still match the ULCCs, just with far fewer seats than in 2017.

If there is a loser in the scenario, it is the flying public.  It wasn’t a smooth transition and passengers are now paying more for fewer amenities than before.  Yet, in markets with ULCC presence, the flying public is provided the same low fare options with ancillary charges through Spirit and Frontier. If price is critical in those markets, there are still ULCC fares.  This suggests we’ve returned to a segmented market where ULCCs and legacy carriers are not really fighting for the same passengers. 

Basic Economy has proven to be very successful at raising fares, and moderately successful at stopping ULCC growth.

In the middle are the traditional LCCs, Southwest and Jetblue.  More similar to legacy fare distributions than ULCCs, the LCCs have developed mature revenue management strategies to maximize fare.  They have done an admirable job avoiding the Basic Economy war, and are also benefiting from its cease fire.  Yet, the process has revealed the traditional low cost carriers as much closer to legacy when it comes to pricing, than the new generation of LCCs. 

In the end, Basic Economy has proven to be very successful at raising fares, and moderately successful at stopping ULCC growth.  It likely became too expensive to continue matching fares, especially when the new segmentation could further increase their own fares and profits.  Instead of the game-changer it looked to be in 2017, Basic Economy will likely be remembered in the same context as the Saturday night stay requirement:  a way to separate those who will pay more from those who won’t. Just like they said it would be. Fortunately, for such a highly competitive industry as the airlines, this bodes well for everybody.

How we did it – Methodology for Comparing Fares

In the first analysis on Basic Economy fares, we developed several processes to identify their impact on the industry between Q4 2015 and Q4 2017. We used identical processes to build the visualization of fares in Q4 2018. All taxes have been removed from fares, and the data has been cleaned using machine learning to represent as close to reality as possible. It should be noted that we originally compared a two-year difference between 2015 and 2017, while the latest iteration updates only to 2018.  If you have suggestions for further analysis into fare distributions, reach out and we would be happy to discuss.