American Airlines President Robert Isom recently sat down with David Koenig of the Associated Press for a wide-ranging interview covering the promise of never losing money again and how the company takes a long-term view of its future potential. Mixed in to that conversation are two spectacular statistics about Basic Economy and Premium Economy. One is exactly what I’d expect while the other is decidedly not.
— David Koenig (@airlinewriter) November 27, 2017
Premium Economy Profitability
American’s Premium Economy product is brand new and not deployed sufficiently broadly yet to truly affect revenue numbers. Isom specifically calls out that fact in the interview. But the second half of his answer about the product is incredibly telling with respect to the value of those seats on board.
When customers do buy up, they’re buying up to the tune of $400 over what they would have purchased in an economy fare. More or less a doubling. We have talked about Basic and Premium being worth about $1 billion overall. The larger share of that is in Basic Economy.
A $400 up-charge from economy to premium economy doesn’t sound all that great to me. It is a much les dense product on board and comes with other increased soft costs as well. Compared to passengers paying in the realm of $120 each way for Main Cabin Extra seats on a long-haul flight the incremental premium doesn’t seem that significant.
A quick search for flights between Dallas and Honolulu showed a $500 spread on the fares with MCE coming in around $240-260 round trip, depending on the specific seats chosen. The good news in that case is that the fares were $850 and $1350. That’s not a bargain fare sale price by any stretch, though at 11.2 cents and 16 cents per mile the revenue number is hardly stellar.
And, if Isom’s comments are taken at face value, it appears that those fares are significantly higher than other places American is selling its Premium Economy product. The idea that the incremental $400 is “more or less a doubling” of consumer spend means that the average economy fare is $400 and the average premium economy fare is $800. And these seats are focused on long-haul markets. That is a worrisome yield to me.
Basic Economy Buy-Up
It is no secret that the airlines present Basic Economy fares in hopes that passengers do not buy them. It is a price hike. And for a significant portion of American’s passengers it is working. Isom repeated the statistic that half of passengers presented with a Basic Economy fare – and the attendant restrictions – ultimately choose to pay more for the regular coach ticket. That number was first presented in July and seems to be holding steady for the company.
— Seth Miller (@WandrMe) July 28, 2017
The good news for is that the fare hike represented by Basic Economy continues to work. The next trick will be to either increase the number of passengers paying more or increase the pricing differential. Or both.
Increasing the number who pay can come either from making Basic Economy even worse or my exposing more customers to the fare differential data. It is likely the latter is where the carrier will focus efforts. The requires more 3rd party retailers – particularly OTAs – to alter their sales flows to include both the basic economy and regular economy fares. This is the sort of challenge airlines have fought with OTAs over for years and one that the IATA NDC standard should address. Alas, expecting full adoption of that platform in the near future is likely to lead to disappointment.
Read More: United pulls back on Basic Economy