American Turns Cheapest Seats Into Big Draw Amid Virus

(Bloomberg) -- American Airlines Group Inc. introduced its cheapest fare class in 2017 to coax a few travelers away from budget carriers. These days, such no-frills tickets are becoming a mainstay of the company’s efforts to fill its planes.

During a brief uptick in travel in June, about two-thirds of customers weren’t enrolled in American’s loyalty program, indicating they probably weren’t repeat travelers, Chief Revenue Officer Vasu Raja said. As many as 85% of that group bought so-called Basic Economy fares, he said. Since then, such bare-bones tickets have continued to account for a majority of customers, who also are under 30.

The rare pocket of demand offers a modest lifeline as airlines grasp for ways to soften a travel collapse caused by the coronavirus pandemic. With budget-conscious younger customers more willing to fly than the business travelers American has traditionally targeted, the airline is sweetening its lowest-end offerings and trying to use them as a way to jump-start sales.

“We envision Basic Economy as being much different than what we designed it as,” Raja said in an interview. “We anticipate using it quite directly as a means of getting customers who really weren’t travelers before to come to market, as an entry product into the airline, to the travel experience.”

American rose less than 1% to $13.47 at 2:01 p.m. in New York. The shares fell 53% this year through Thursday, the second-worst decline among major U.S. airlines.

Few Amenities

American rolled out the fare category three years ago, mimicking an earlier move by Delta Air Lines Inc., and offered a small number of seats to battle discounters such as Spirit Airlines Inc. and Frontier Airlines.

Since then, Basic Economy has provided far fewer amenities in exchange for the lower price. Passengers are allowed one carry-on suitcase and a personal item, aren’t eligible for upgrades and must board last. They can’t choose a seat without paying a fee at the time of booking, and -- except with a coronavirus-related waiver -- can’t change their reservations.

Starting Oct. 1, however, American is making the deal more attractive. Passengers with the lowest-cost tickets will be allowed to pay extra for cabin upgrades, more leg room, same-day flight changes and priority boarding.

“These are companies seeking to capture whatever revenue is on the table, and the revenue that’s on the table right now is low fare,” said Samuel Engel, head of the aviation group at consultant ICF. “By giving those customers multiple options to buy up, you have a better chance of capturing a little incremental revenue.”

Travel Plunge

U.S. passenger numbers are still down about 70% from last year’s levels, and business travel is expected to take years to recover. Airlines are trying other ways to get customers back on board, from bargain fares to stepped-up cleaning regimens in planes and airports.

Most recently, they junked their $200 fees to change an existing reservation on trips in the U.S. and nearby international destinations -- although American doesn’t allow Basic Economy tickets to be changed.

Last week, United Airlines Holdings Inc. began allowing its Basic Economy customers to choose seats in a section with extra space, and in 2018 let them get a seat assignment by paying a fee. Delta also allows customers to pay for a seat assignment between seven days and 24 hours prior to departure.

At American, Basic Economy will get another boost as the carrier allows elite members of its loyalty program who opt for the low fares to keep all their perks, such as free checked bags and priority boarding and security screening. That change also takes effect Oct. 1.

“This segment is real -- younger people who are not afraid of Covid-19,” said Z. John Zhang, a marketing professor at the University of Pennsylvania’s Wharton School who focuses on pricing and competitive strategies. “They want to experience the world and they have a laptop.”

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