Business First Look

'Basic economy' or third class? Big Three airlines roll out new way to travel

In a bid to compete with low-budget airlines, companies are turning to further 'segmentation' of their fliers, debuting cheaper but relatively frills-free basic economy seats.

A passenger talks on the phone as American Airlines jets sit parked at their gates at Washington's Ronald Reagan National Airport, Jan. 25, 2016.
Susan Walsh/AP/File
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Basic economy, which Traveler Magazine deemed a buzzword of 2017, has arrived.

Pressed by the rock-bottom fares of emerging low-cost carriers such as Spirit Air, Frontier Airlines, and Allegiant Air, the big three are playing catch-up. American Airlines, Delta Air Lines, and United Airlines are all rolling out a new class of no-frills tickets called “basic economy” that trades perks for dollars. Now, the ball is in the court of budget travelers to decide whether the new fares promise a deal or a scam.

As the new year begins, the race to the bottom is on. On Wednesday, American officials announced that basic-economy tickets will go on sale next month. Delta already offers basic-economy seats on 40 percent of its domestic routes, with plans to cover the whole country by the end of the year before expanding to international flights. United has plans to roll out its similar program early this year in Minneapolis.

The new option could be good news for travelers on a tight budget. "Not only does this provide more price competition, but thanks to the larger airlines' more extensive schedules, it may be easier for passengers to find low fare flights," travel industry analyst Henry Harteveldt told NBC. It also shows how much airlines are willing "to fight to keep every possible passenger they can, along with every penny of revenue," he added.

Initial checks suggest that savings could fall in the dozens of dollars range, with randomly chosen basic-economy seats for Delta flights next month priced $7 to $25 cheaper than the corresponding economy ticket. Fares could go even lower if Delta chooses to match budget competitors, Rick Seaney, the chief executive of FareCompare.com, told the Associated Press.

But the savings will come at a price. Basic-economy customers will generally be giving up the ability to make changes or upgrades, and to chose their seat ahead of time. Rather, seating will be determined at boarding.

Furthermore, strict baggage restrictions apply. American and United will permit passengers a carry-on item small enough to fit under the seat, but those accustomed to traveling with a big rolling suitcase will be hit with a $25 checked-bag fee, and more if it has to be gate checked.

Similar practices are already common among the low-cost carriers, but the changes could come as a surprise to customers of the legacy airlines, who may expect a certain level of service. "These passengers will definitely feel dimed when they find out they will pay a penalty when they try to bring on their rollaboard," Mr. Seaney told NBC.

Meanwhile, the big airlines hope to find their niche striking a balance between budget and service. Passengers are “still receiving that whole United experience” – including snacks and Wi-Fi – onboard the plane, United spokesperson Jonathan Guerin previously told The Christian Science Monitor.

The change comes as airlines are trying to adapt to an evolving travel market. Online fare aggregators make locating the lowest prices easier than ever, eroding customer loyalty. Increasingly, the airlines are shifting tactics to a concept known in economics as “market segmentation.”

It’s the same strategy that allows museums and movie theaters to boost profits by providing various pricing tiers, separately targeting customers with different abilities to pay, such as seniors, adults, and students. Such a practice is especially profitable in these industries where the infrastructure needed to handle an extra customer is already in place. The weight of an additional passenger costs the airline only a few dollars in fuel, but brings in hundreds of dollars of revenue, so each empty seat represents a damaging loss.

If the introduction of basic economy goes well – United expects it will generate revenue to the tune of $1 billion by 2020, USA Today reports – fliers may see further segmentation in the future. In addition to regular economy, Delta already sells “premium economy” international tickets priced closer to economy than business class. They feature roomier seats and an improved menu.

All that’s left is for customers to vote with their wallets, deciding which level is right for them. They just have to be careful they know what they’re buying, as it seems some travelers don’t take the time to read the fine print. According to Delta, half of their customers who intend to buy basic economy trade up when given the option.

Ultimately, it could be hard to argue with more choice. "It's probably a win-win," Ceridwyn King, an assistant professor at Temple University’s School of Tourism and Hospitality Management, told the Monitor in November. "They can fill their plane with smaller gaps, and there are going to be people who [the new fare] will definitely speak to."

This report contains material from the Associated Press.