Why Legacy Carriers Are Launching Below-Economy-Class Fares
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Low oil prices have made it easier for major airlines to lower fares so that they can compete with the prices offered by no-frills carriers. At the same time, though, legacy carriers are under increasing pressure from investors to achieve better profit numbers. Though passengers like to see lower fares, Wall Street does not.
Major airlines, led by Delta, may have come up with a solution that will allow them to compete with the likes of Allegiant, Spirit and Frontier on price while also making investors happy.
No-frills fares instead of no-frills flights
Delta has already had success with what it calls “basic economy” fares, which it currently offers in some markets. These fares are similar to those offered by no-frills carriers: there are no change options and passengers do not get to select their seats. Basic economy fares on Delta do still include snack service and access to some in-flight entertainment options.
How does offering low fares like this appease Wall Street? Delta does not have a basic economy class; passengers who buy these fares simply sit in regular economy class, but enjoy fewer perks than those who bought full-priced fares. The airline still gets full value for the surrounding seats. This means that offering basic economy will not seriously affect the ratio between profits and operating costs, and it won't affect the seat-mile statistics that investors use to measure airline performance.
Delta says these fares are only available in “select markets.” This means that the airline is using rock-bottom prices to draw passengers who make their airline ticket purchased based on price and nothing else. If Spirit or Frontier are not flying on a given route or serving a particular city pair, then it would be a good bet that Delta will not be offering basic economy fares on that route.
Other airlines following suit
This idea has taken hold in the industry. Both American and United have said that they will be adding no-frills fares by the end of this year. This makes the most sense for American, which often finds itself having to compete with budget airlines. Again, by offering some no-frills fares for a flight instead of lowering all the fares for a flight, American can convince price-conscious fliers that Spirit (for example) isn’t the only cheap option on a particular route (while also selling plenty of full-priced tickets and earning a higher profit on the flight as a whole).
As long as American and its peers can get the supply-and-demand equation right for these no-frill fares, it seems, on paper, like a winning strategy. At the very least, it puts pressure on low cost carriers by taking away the only real advantage that they have over larger competitors.
Airlines like Southwest and JetBlue have made changes to help them compete on things other than price. However, for Spirit, which charges extra for literally everything, it is all about the price of the base fare. We are likely to see legacy carriers offer more no-frills fares on certain routes in the future so that they can take away the ultra-budgets' only advantage.
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