What is the decision facing United Airlines?

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Correctly setting prices in any industry is challenging, but air travel can be an especially complex proposition. On the same plane, you’ll have customers that are primarily schedule focused and willing to pay a higher rate to get to a business meeting on time. Sitting next to that traveler (probably in the middle seat) is a leisure traveler who planned a trip months in advance and just wants to get the lowest fare possible. And then there is the perishability issue—when the wheels go up, any empty seats can no longer produce revenue at any price. This is the environment that United Airlines and other carriers face every day. United Airlines is one of the leaders in an industry that has seen many companies come and go since the beginning of commercial air travel in 1914. Along with American Airlines and Delta, United is considered one of the “big 3” in air travel. Formerly a part of airplane manufacturer Boeing, the company was formed in 1931 and today claims to have the world’s “most comprehensive global route network.” Recent counts show 4,600 daily departures taking 148 million passengers per year to 354 destinations in 48 countries. While clearly a survivor, United has in recent years found themselves in competition with a new class of airline known as ULCCs: ultra-low-cost carriers. You may have flown on one of these economical (or “cut rate”) carriers, such as Spirit, Fron-tier, and Allegiant. Southwest Airlines also offers low fares, but (along with Jet Blue and Virgin America) is considered in the low-cost carrier category, as they offer some standard services not available with the ULCCs. In this class of airline, what dis-tinguishes them is what they do not include as part of the fare: reserved seats, snacks, drinks, ability to carry on a bag, in-flight entertainment, seats that recline, leg room, and often, on-time arrivals. These flights are not about service—they are all about getting you from point A to B at the lowest price possible. To compete with low-cost carriers, United first took a run at creating an LCC of their own. Called Ted, the airline had its own separate planes. Skeptics joked that the name stood for “the end of United.” While United survived, Ted was discontinued after five years. United’s latest initiative focused on competing with the (now ultra) low-cost carriers is through the creation of an additional fare class: Basic Economy. The prices are low like those of the ULCCs, and so are the services: no seat selection, no seat assigned until day of departure (a.k.a. a middle seat!), no tick-et changes, no refunds, and one of the biggest: no full-sized carry-ons. The fare savings are not huge—typically between $25 and $40—but enough to attract customers who are very price sensitive, including many in the millennial generation. “Big three” compatriots American and Delta have followed suit with their own versions of the fare class. So far, Basic Economy seems to be a huge success for Unit-ed and other airlines. In addition to keeping some customers away from the ULCCs, United is able to sell a small portion of their unused inventory as a kind of “loss leader,” attracting travelers to their airline and then “upselling” some customers to a better (and more profitable) class of service. The company has been able to upsell up to 70 percent of bookings on its own website and about 50 percent on third-party sites. They also make significant revenues on fees when travelers decide they need that overhead bin after all, often paying more in total than they would have by purchasing a standard economy ticket. Between fees and upgrades, it’s projected that by 2020, United will earn an additional $1 billion through the program. While United tries to be very transparent about the differences between standard and economy fares, an unintended consequence of the pricing has been the creation of a sort of class system in the coach compartment of their planes. Standard economy passengers, including some with “elite” status based on miles flown, resent basic economy “lowlifes” taking precious overhead bin space. On another airline, one passenger spent the night in jail after a battle for the bin with a fellow traveler, and in another case, the conflict turned into a fist fight. So much for “Traveling the Friendly Skies!” The airline industry will continue to evolve with new technology, additional competitors, and changes in consumer preferences. To continue to survive, United Airlines will have to carefully manage their pricing process to meet the needs of all the classes of passengers that they serve.