Delta’s Basic Economy could become formidable threat to ULCCs

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Delta’s fare rebrand, introduced in late 2014 and featuring a Basic Economy option designed to take aim at the new crop of ultra low cost airlines, unsurprisingly garnered a lot of attention, and some criticism. But if executed properly, the new scheme could become a formidable threat to the ULCCs that claim US majors are largely uninterested in the low-yielding passengers they aggressively target.

The new Basic Economy fares offered by Delta join other tiers that the airline has regrouped as part of its new branding effort – Delta One/First class, the extended legroom option now dubbed Comfort + and Main Cabin. Delta structured Basic Economy to mimic the bare bones offering of ULCCs, and the new class offers little flexibility to the cost conscious travelers choosing that option. Tickets are non- refundable, passengers cannot make seat selections in advance and itinerary changes are prohibited.

An article in Time online dubbed Basic Economy as “rigid” and “cruel”. But Delta highlights that the benefits of its lowest tier fare scheme remain superior to the no-frills approach adopted by ULCCs.

“If you think about our competing with Spirit in the Detroit to Orlando or anywhere we compete in Detroit or in Atlanta, our lowest fare has a lot more content than their lowest fare,” Delta chief revenue officer Glen Hauenstein told analysts and investors in late 2014. “Spirit is not the most on-time airline in the country…Spirit doesn’t have minimum of 30-inch pitch with recline.”

Atmosphere research travel analyst Henry Harteveldt also points out that unlike ULCCs, customers opting for Delta’s Basic Economy option receive complimentary drinks and snacks. “It’s not a demeaning experience to the customer,” he concludes.

The Basic Economy concept is not new to Delta. It has been trialling the fares in select markets since 2012, and now offers the product in approximately 75 of its markets. As it has studied customer behavior in those markets, “customers really don’t want that product [Basic Economy]. When they realized what it is, we have an 80% rate of them selecting a different product,” says Hauenstein.

Given those conclusions it may seem counterintuitive for Delta to spend so much time developing a product offering to compete with ULCCs. But based on calculations from Spirit, the ULCC’s network overlap with Delta as of the fourth quarter of 2014 was 29%, which probably justifies Delta finding ways to compete with Spirit.

Previously Spirit has stated one aspect that makes its model so viable is that it targets a passenger segment – low yielding, leisure passengers – that are largely unattractive to major US network airlines. But Delta’s actions show that those airlines are paying attention to the expanding ULCCs. Harteveldt remarks that Delta likely does not want to give up a single passenger or single penny of revenue to ULCCs.

Looking back over the decades, Delta does not want to make the same mistakes competing with ULCCs as it did with other traditional low cost airlines including Southwest and JetBlue, he adds.

Delta admits that it needs to collect an appropriate amount of data to determine the optimal price points and fare differentials for its Basic Economy offering. “Right now it’s about $20, and for $20 you can have a ticket that’s refundable. You can get your advanced seating assignment. And so, what ultimately people are willing to pay for that and how we manage the click-through rate and how we manage the availability is really going to be the key to our success in that product,” says Hauenstein.

Harteveldt believes Delta has put enough fences in place around Basic Economy to stem revenue dilution from passengers that might trade down for a cheaper fare. The question is whether corporate travel managers or CFOs understand what Basic Economy is and if they will encourage employees to buy it. Those fares place a burden on corporate travelers that need flexibility, he says. “If a trip is cancelled there is no refund whatsoever.”

After Delta revealed its fare revamp, some speculation surfaced that its rebranding could open the door for changes in other fare classes. The airline has not made any firm commitments in that regard. But it could be leaving the door open for some enhancements. Hauenstein concludes that the Basic Economy “product that exists today is primarily a product that will exist tomorrow. Where we are continuing to make enhancements to the product is in the Main Cabin, and in the Comfort Plus and in the First Class and Delta One categories”.

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