Major U.S. airlines are carving up cattle class, hoping to nab
every customer from the tightwad to the spendthrift amid
intensifying competition from discount carriers and declining
ticket revenues.
Delta Air Lines Inc. is ahead among U.S. carriers in adopting
this "segmentation" strategy. The carrier started experimenting
about three years ago and has since rolled it out in a big way,
which for the Atlanta-based airline means splitting its coach fares
into three categories: Basic Economy, Main Cabin and Delta
Comfort+.
The No. 2 U.S. airline by traffic is trying to compete with
budget rivals and wring more out of recent product upgrades by
selling them to fliers willing to pay more rather than giving them
away free to elite frequent fliers.
American Airlines Group Inc. and United Continental Holdings
Inc. said they would introduce tiered offerings later this year.
Some European carriers already have embraced the strategy; Air
Canada was a pioneer.
"Finally, airlines are putting some thought into retailing,"
said Peter Belobaba, principal research scientist at the
International Center for Air Transportation at the Massachusetts
Institute of Technology. "You can be upfront with consumers and
show them different options with different prices and
characteristics."
Divvying up coach is a big strategic shift, driven in part by a
need to counter discount carriers that make up a third of the U.S.
market. Airlines also are eager to raise ticket revenue that has
been falling for years as budget airlines have grown. For the past
two years, fares have tanked and most airlines have posted
declining unit revenues—the important metric that measures how much
they earn for each seat flown a mile.
American has said it hopes segmentation would bring in $1
billion in additional revenue annually.
United already sells bundled amenities after tickets are
purchased including checked bags and roomier seats. Scott Wilson,
United's vice president of e-commerce and merchandising, said the
airline is eager to expand into full multitiered fare offerings.
Until recently, he said "there hasn't been the opportunity to
market good, better and best."
While large airlines spend a lot of money and energy luring
lucrative business customers, they are a minority of travelers.
American, the largest U.S. airline by traffic, estimates that 87%
of its customers are bargain-sensitive travelers who fly once a
year or less, yet generate half of its revenue.
For decades, airlines concocted elaborate fare rules to separate
leisure travelers scrounging for low fares from business travelers
willing to pay much more on short notice. The former group was
required to book well in advance and spend a Saturday night at
their destination, while business-class customers enjoyed ticket
refundability and didn't have the weekend-stay rule.
In many instances, however, a customer who paid $200 ended up
sitting next to a flier who paid $800 without any distinction in
boarding process, seat or in-flight service. "It created a
tremendous amount of abrasion between the passenger and the
airline," said Jay Sorensen, president of airline-loyalty
consultant IdeaWorks Co.
Discount airlines don't follow those old pricing rules. They
sell one-way tickets and offer lower fares than the major carriers
even at the last minute. Matching them outright can dilute a major
carrier's revenue.
Delta says the new pricing model is more competitive with
discount carriers, while giving customers more choice. The cheapest
fares in Basic Economy often are priced close to those from
ultra-discounters Spirit Airlines Inc. and Frontier Airlines Inc.
without including fees for advance printed boarding passes,
overhead bin space and any type of beverage.
Delta's basic fare comes with its own restrictions: passengers
can't make flight changes or stand by for a different flight. And
the fare only allows fliers to get a seat assignment after
check-in, and precludes upgrades or priority boarding, even for
frequent fliers.
Comfort+, Delta's premier coach class, offers the opposite
experience: advanced-seat assignment, early boarding, larger seats
and free alcoholic beverages. Ticket changes are allowed at the
standard $200 fee.
Delta said earlier this month that the "branded fares"
initiative is in line to generate $1.5 billion in incremental
revenue by 2018. Comfort+ is alone expected to generate $300
million in incremental revenue in the second half of this year, and
potentially more as the program expands to international routes by
the end of 2017.
A recent search on Delta's website for a round-trip flight from
Atlanta to Fort Lauderdale, Fla., late this month generated a Basic
Economy fare of $149. Main Cabin was $179 and Comfort+ went for
$214. First class was $406.
About half of the travelers who view Basic Economy fares end up
upgrading, bolstering the carrier's revenue, Delta said. This is
made possible by Delta showing both Basic Economy and Main Cabin
choices on its booking engine, after a customer is warned of the
restrictions on the former.
Some fliers are concerned that the plethora of new categories
would make pricing too opaque. But Greg Bradley, a behavioral
economist at the University of Southern Mississippi thinks the
rules are clear. Delta "has opened up air travel to a segment that
wouldn't have traveled as much," he said.
In his own travels, though, Mr. Bradley said he eschews the
lowest fare category but has upgraded to Comfort+ even on short
flights, to lock in early boarding, a seat in the front of the
coach cabin and room for his bag in the overhead bin.
(END) Dow Jones Newswires
September 11, 2016 21:15 ET (01:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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