Basic economy fares; major US airlines push the ULCCs

Overall, the roll-out of segmented fares by the three large global US airlines during the past year seems to have produced positive results. But there has also been some churn in the evolution of tiered fares, as United pulled back on an aggressive roll-out of its Basic Economy offering and American has adjusted product accoutrements of its lowest fare offering to become more competitive with Delta.

Even with those adjustments, the upsell rates from basic economy for American and Delta remain solid, which bodes well for each company reaching its respective revenue goals from segmented fare schemes.

There has obviously been some effect on US ULCCs from a larger pool of lower fares in the US marketplace, and during the past year Spirit has worked to shore up operations and its product. And although Spirit’s revenue growth was solid in 1H2018, pressure on its fares remains intact.


  • Delta believes it can generate USD500 million in incremental revenue from segmented fares in 2019.
  • During the past year, American and United have tweaked their basic economy offerings during the roll-out of segmented fares.
  • Spirit is offsetting some of the effects of basic economy with higher non-ticket revenue, but it remains to be seen how far the airline can push ancillary sales.

Delta aims for USD500 million from segmented fares; AA and UAL make tweaks

It’s been close to a year since American, Delta and United introduced new fare tiers with a dedicated basic economy offering. The segmented fares were designed to help those airlines improve their revenue management, and basic economy has become a tool for competing more effectively with the ULCCs Frontier and Spirit.

Delta recently concluded that its success in selling branded products, its growth in premium seats and work on future functionality should deliver USD350 million of incremental revenues in 2018, and that amount should increase to USD500 million in 2019. The airline has revised its 2018 top-line revenue growth forecast upwards, from 4% to 6%, to 7% to 8%. 

Initially, United engaged in a swifter roll-out of basic economy than American, and the result was that American matched United’s fares even though it did not have a basic economy product in place. The result was that some passengers jumped to American, which contributed 1ppt to United’s 3.7% unit revenue decline in 3Q2017.

At that time, United stated that it would refine its basic economy structure, and this included scaling back the breadth of the offering to a portion of its domestic network, cutting the number of fare classes in which basic economy is an option, and varying buy-up levels in its tiered fare structure.

See related report: Basic economy fares meet American Airline’s and Delta’s expectations; United needs to catch up

In addition to making tweaks to the roll-out of basic economy in the domestic market, during 2Q2018 United expanded Basic Economy to a portion of its Latin American routes and introduced what it deemed as a “basic economy-like” fare to Europe.
United expects a solid passenger unit revenue performance in 3Q2018, forecasting an increase of 4% to 6% year-on-year.

American, meanwhile, has experienced some hiccups with its basic economy offering as well. Although its upsell rates from basic economy to other, more expensive, fare tiers have reached 60% (according to CNBC), the airline’s revenue performance lagged its peers in 2Q2018; a trend continuing into 3Q2018.

American opts to join Delta in allowing a carry-on for basic economy customers

American has stated that some of the factors creating a widening unit revenue gap include weakness in Latin America (where American has a greater presence than Delta and United) and tougher year-on-year comparisons. However, American's CEO Doug Parker has acknowledged: “Some of it is underperformance in the United States, which is a concern for us”. 

The airline recently made changes to its Basic Economy offering, matching Delta in removing the carry-on bag restriction for domestic and short haul international flights, a move that will allow passengers to bring bags for storage in overhead bins. Once the changes take effect in Sep-2018, United will be the only airline among the US Big 3 charging passengers who purchase basic economy tickets for carry-on bags.

Even with the changes, American feels confident that upsales from basic economy will reach approximately 50%, CNBC stated.

Spirit battled deep discounting even before the roll-out of segmented fares

As the tweaks to basic economy continue, there is little doubt that the US ULCCs Frontier and Spirit are feeling the effects of a larger pool of lower fares in the US marketplace.

Spirit has been battling discounting in the US market for two years – even before the formal roll-out of segmented fares by American, Delta and United.

During 1H2018, Spirit’s total unit revenue (TRASM) fell 4.6% year-on-year. The airline’s fare revenue by flight segment decreased by 2.5% to USD55.51, which was offset by a 4.3% rise in non-ticket revenue per flight segment to USD54.90. The result was a 0.8% increase in total revenue per flight segment to USD110.41.

During 1H2014, Spirit’s total revenue per flight segment was USD137.19 and its average ticket revenue per passenger flight segment was USD81.43. That was before some US major airlines began the deep discounting that preceded the roll-out of segmented fares.

Spirit executives have admitted that “we know there are instances, and it’s been more noticeable of late where our price point is no longer the lowest price point in the market”. However, Spirit management stated “we’re selling at those fares”, which would indicate the company’s efforts to improve its operational reliability and overall image.

During the past couple of years Spirit has also gradually introduced dynamic pricing into its ancillary revenue offerings, and in late 2017 the airline debuted a bundled fare product. The company has previously concluded that its 'The Thrills' fare bundle was a major driver in shoring up non-ticket revenue in 1Q2018.

See related report: Spirit Airlines matures: new strategy with WiFi, image change

Basic economy is a permanent fixture in the US and ULCCs will adapt

It remains to be seen how far Spirit can push its ancillary revenue to offset the evolution of basic economy fares in the US marketplace. The airline’s capacity growth in 2019 is falling to the mid teens, after expanding nearly 23% in 2018.

With fuel costs rising, most US airlines are likely to slow capacity growth in 2019, which will create some pricing traction.

But the reality is that basic economy is a permanent fixture in the US marketplace, and ULCCs will need to find ways to adjust to that reality – likely through a mix of more sophisticated revenue management, and efforts to shore up more positive customer sentiment.

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