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United Airlines' Bare Bones Basic Economy Fares: Genius? Contemptible? Or Both?

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This article is more than 7 years old.

It’s not all that rare for a company that announces a new product, price structure or product to be both hailed for its business brilliance and castigated for its consumer contempt. It happens every day, with investors praising plans that promise the kind of big revenue increases that make consumer advocates cry foul.

Usually one side is right, and one is wrong, though it can take months, even years to fairly judge.

But United Continental on Tuesday managed to announce a new wrinkle in its service that actually is both brilliant from a business perspective and contemptuous of consumers at the same time.

It is implementing a new kind of cheap fare that will include no frequent flier mileage points, no advance seat selection and, gasp, almost no room for carry-on bags.

On United, the nation’s No. 3 carrier in passenger miles flown, customers who buy the new 'Basic Economy' fares won’t be allowed to stow gear in bins above their heads. Nor can they stuff a week’s worth of clothes, documents, a lap top and three or four other gadgets into a huge hiking backpack that includes strap-on water bottles, a blanket and a sleeping bag.

United 'B E' passengers’  backpacks – or shoulder bags, or briefcases for that matter – will need to be more modestly sized because they must fit in the space below the seat. That’s a space roughly equal to the size of the box that a large Texan’s boots come in.

Delta, the nation’s second-largest carrier in passenger miles flown, has a similar Basic Economy fare already in place, but United’s limit of just one small-ish carry-on is tougher. Meanwhile, No. 1 American plans to launch its own B E fares with reduced service levels early next year, but has yet to spell out all the details.  Analysts widely expect both of those carriers to adopt United’s B E rules in short order.

A BRILLIANT INNOVATION

Admittedly, it’s hard to call brilliant any action by any company that takes some long-available product feature away from consumers. But the kind of Basic Economy fare product that United detailed Tuesday qualifies. It was no coincidence that the long-stumbling Chicago-based carrier announced its new B E product on Tuesday as Wall Street analysts gathered there to hear the carrier’s newly-in-place management team explain how they’re going to re-make United to be at least as successful as its peers.

United has been in the analysts’ doghouse for years. That’s because since around 2011 it has lagged behind not only American and Delta but also quasi-low cost carrier Southwest Airlines – which carries more passengers in the domestic market than any of the Big Three – in terms of revenue per available seat mile.  United last year took in just 11.89 cents for each available seat mile its planes flew, compared with American’s 12.12 cents and Delta’s  12.8 cents. Despite its reputation as a low fare carrier Southwest out-did them all last year by raking in 13.01 cents of revenue per available seat mile.

At first glance those gaps may not seem like a big deal, but the United-Southwest unit revenue gap is nearly 10 percent. United trails American in unit revenue generation by  2%, and Delta by 7.7%. But given that each of the Big Three flies more than 240 billion available seats miles a year – and Southwest logs more than 140 billion a year – those seemingly small percentage gaps create yawning gaps in the amount of money taken in annually. No wonder analysts have been down on United.

United’s Basic Economy fare clearly is designed to close that gap. Yes, some people – college students, ultra-tightwads, knuckle-heads bound for Vegas for a weekend of gambling and partying who want to save as much cash as possible for the tables and the bar – will be enticed to buy B E fares.  But United clearly expects that by making the B E service so Spartan and so unappealing many of its passengers simply will 'buy up' into sequentially higher priced fare categories.

Why would they do that? To earn frequent flier points, to make their seat selections ahead of time (thereby avoiding the dreaded middle seat or being separated from their traveling companions), and to gain access to the overhead bins. Don’t laugh. That overhead bin space is worth $25 each way. That’s how much travelers flying on a B E ticket will have to pay to check their first bag (its $35 to check a second bag). So why not buy a fare that costs $30, $40 or even $50 more than a B E fare, given the added value it represents? You get a better seat and mileage points, and if you pack smart you won’t have to check a bag at all.

Investors responded positively Tuesday to United’s announcement. It also helped that United Continental Holdings, United’s parent, also announced that it is deferring the delivery of 61 Boeing 737s worth nearly $5 billion that were scheduled to be delivered between now and the end of 2017. Those orders also will be converted to the new, more efficient MAX version of the venerable 737, but there’s no clear delivery date for them. That means United will not be growing as rapidly as previously planned and, therefore, is expected to gain increased pricing power as travel demand gradually catches up with its available capacity.

United Continental shares rose nearly 5 percent on Tuesday, or $3.12 a share to $66.06, while Boeing’s shares fell $1.88 to close a $148.11. United’s shares, like those of American, Delta and Southwest, also have been on a two-day climb propelled by Monday’s revelation that Warren Buffett’s Berkshire Hathaway has invested more than $1.3 billion combined in the shares of those four carriers. Those investments are being seen as a watershed moment because the highly regarded long-term investor famously had ridiculed the idea of owning airline shares as foolishness for the last 15 years because they consistently under-performed or lost money.

CONTEMPT FOR CONSUMERS

It’s hardly surprising that the small fraternity of travel consumer watchdogs began howling loudly and in unison once United shared publicly the details of its Basic Economy fare and service plan.

Charlie Leocha, chairman of Travelers United told Reuters that United’s Basic Economy fare plan 'clearly shows how airline consolidation is eliminating choice. Simply stated, this is an example of airline consolidation gone too far, with choice and transparency being wrung out of the system.'

The airline consolidation horse is quite a long time out of the barn now, so Leocha’s  complaint is, among other things, pointless. But he and other travel consumer advocates have been rightly critical of airlines’ steady devaluation of their ground and on board customer service products – especially those delivered to passengers who purchase low-end fares. And they are right in that the big carriers are only further angering and alienating lots of consumers on which the airlines still depend to fill seats that otherwise would go empty and cause airlines to earn less or even begin losing money again.

American consumers’ disdain for, and even anger at airlines is an old story, and an ugly one. Even in 2016, after several years of unprecedentedly healthy profits and greater investment in service quality elements,  the airline still industry ranks 37th out of 43 industry categories tracked by the American Consumer Satisfaction Index at the University of Michigan. And if it weren’t for the truly awful service performance and reputations of TV, internet and telephone service providers and of the U.S. Postal Service, the airlines would rank at the very bottom of the Index.  American consumers, according to the Index, hold grocery store chains and internet news and opinion sites in higher regard, for Pete’s sake.

And it’s no wonder. U.S. airlines consistently fail to deliver on their promise – getting both you and your bag to your destination on time – more than 40% of the time.

Sadly, these new Basic Economy fares offer no remedy to the airlines’ dismal public reputation for service quality. Indeed, it’s hard to imagine how it could get much worse, but the very concept of Basic Economy fares and the truly Spartan service that will come with them can only make it worse.

Neither the poor folk who buy them because they simply can’t afford to pay more, nor the cheapskates who purposely choose to buy them to save a few bucks are likely to sing the praises of the wonderful airlines that allow them to travel at such affordable prices. Rather, though they may do a bit of humble bragging about the prices they paid, you can sure that a large majority of people fly on B E fares will complain - loudly and frequently - about the lousy conditions: no points, no overhead, no seat choice, no leg or elbow room, no food, no fun, no smiles from the flight attendants, and on and on. It’s human nature.

And don’t think that those who buy their way up, out of steerage class (that’s essentially what B E will be) will be dancing arm-in-arm down the yellow brick aisle like Dorothy, Tin Man, Scarecrow and The Cowardly Lion on a flight to Oz. They will, after all, be paying 'extra' - from their point of view - for service items they used to get for “free” when they bought the lowest-price fare. That’s no way to win friends, or to positively influence the congressmen and senators of ticked-off citizens who also buy plane tickets.

So, will Congress swoop in and outlaw Business Economy-type fares and services? It wouldn’t be surprising to see some such effort. New York's Chuck Schumer (the presumptive new Democrat minority leader of the new Senate that will assemble in 2017) has never passed up the opportunity to call for some type of airline consumer protection regulatory action in the past when airlines took steps that were unpopular with some segment of the population. So why would he pass up this new opportunity to rake the airlines over the public relations coals, even if he knows, as he always has, that nothing will come of his antics?

THE RESULT

This, unlike so many other situations, likely will not end with either the airlines, or the consumers, being judged 'wrong.'

Theoretically it is possible that the airlines will run into a marketing brick wall and be forced to give up their drive to establish Basic Economy as a new bottom end category. It similarly is a theoretical possibility that consumers and consumer advocates will come to embrace Basic Economy as a good trade-off that gives a segment of the traveling public what it most needs –basic transportation between two points and nothing else – while pleasing other segments.

But don’t bet that way.

Rather, the advent of Basic Economy airline fares and services is all-but certain to go down as both a brilliant business move that increases airline revenues and pleases investors, and as a public relations failure that further erodes what little is left of the airlines’ reputations as quality service providers.

What’s really happening here is the hyper segmentation of a business that for most of its history had been relatively egalitarian. Yes, some people always have paid more – or flew often frequently enough to qualify – for first class seats. But the rest of us shared “coach” sections as if they were the great leveler of American social strata. Those days now are over.

In fact, they've been over for many years now. Still, 'coach” still sorta seemed like an everyman kind of place where we all were more or less equal. Basic Economy fares and services will wipe out what bits of that notion remain.

Airlines now will be offering multiple, clearly differentiated service products the way auto companies long have offered different models of cars for different size pocketbooks and different classes of people. If you want to pay bottom dollar for basic transportation, Ford gladly will sell you a stripped-down Fiesta for around $14,000. If you want middle-of-the road dependability you can buy a well-equipped but not fully tricked-out Fusion for $30,000. And if you want the best, most luxurious car Ford makes, you can drop $70,000 on a 2017 Lincoln Continental.

Henry Ford himself once believed in egalitarian car markets. He made the Model T for it. And for a while everyone, it seemed, loved it. But the car market quickly began segmenting more than 85 years ago and today we have become completely comfortable with that arrangement.

Now it’s the airlines’ turn.