The rise of the “basic economy” airfare: Five takeaways for financial institutions

During a recent investor call on November 15, United Airlines announced a new fare class called “basic economy”, which offers price-sensitive customers its lowest-fare option. United joins Delta and American as the three major US airlines to cater to this market segment.

Airline baggage

It’s worth noting that, in exchange for the lowest price United offers, the Basic Economy fare, which is set to roll out in January 2017, comes with a few key conditions:

  • No pre-assigned seating – travellers are provided a seat number on the day of their flight
  • Travellers board last after all other passengers
  • Travellers are limited to one carry-one item that must fit under the seat in front of them – no use of the overhead bins is allowed

Key takeaways for banks

Despite some of the public backlash against this new fare class, there are things banks can learn. After all, for years, financial institutions have looked to the airline industry as a model for individualizing products and pricing to the needs of the customer – with a strong emphasis on cross selling.

  1. What customer segment am I targeting with the Basic Economy strategy? The Economist notes that the new fare class is presumably a response to profitable discount carriers, such as Sprint and Frontier. By launching this new offering, United may feel it has a meaningful value proposition for customers who would typically choose lower-cost options.
  1. What does this customer segment care about (or not care about) relative to my other customer segments? On the surface, the move makes a lot of financial sense for United, as they expect to increase annual revenue by $1 billion by segmenting the economy cabin. United sees an opportunity to unlock value by offering more (or restricting) choice in its economy cabin – Economy Plus, Economy and Basic Economy – on a range of attributes, including:
      • Amount of leg room
      • Boarding order
      • Proximity to the front of the plane
      • Flexibility for same-day travel itinerary changes
      • Ability to accrue frequently flyer miles
      • Allowable carry-on luggage

In theory, Basic Economy customers are willing to forgo most of these amenities to receive the lowest price.

  1. How transparent is the Basic Economy fare? Although the execution of United’s Basic Economy fare will help answer this question, there are a few lingering items that will undoubtedly prompt discussion: Is the price clear? Are there any add-on fees to be aware of? Are customers aware of the restrictions associated with the fare? Do they understand the cost to upgrade to the next fare level and the benefits of doing so?
  1. How do I enforce the conditions of the Basic Economy fare? Once the fare is rolled out, how will United ensure proper “segmentation” before and during flights? What happens if Basic Economy customers try to use the overhead bins to store their carry-on luggage? How will flight attendants “police” these actions? If enforcement is poor, what is the perception of higher fare customers, who are paying more for the right to store their luggage in the overhead bins? If enforcement is strong and receives pushback, how transparent is the Basic Economy fare to begin with?
  1. How does launching the Basic Economy fare impact my existing business? Is there a customer experience impact for my higher-paying customers? To what degree does the new lower fare cannibalize sales of higher priced fares?

In trying to compete with newer players like Spirit, Frontier and Allegiant, United recognized it needed to cater to a growing number of price-sensitive travelers, all while providing the same perks and value to those paying higher fares. Similarly, banks must develop strategies to attract and retain customers by understanding and meeting the needs of their differing client segments.

How Zafin helps

Banks can apply elements of United’s methodology to further segment and target their own customers. Zafin’s technology platform helps banks overcome legacy system limitations to create and execute innovative product and pricing strategies for specific customer segments. If you have the strategy, our platform can help you make it happen.

Learn more about how Zafin is making the business of banking better for both the client and the bank: http://zafin2017.wpengine.com/contact

This blog post was written by Kyle Thom, Director of Marketing at Zafin. You can email him directly at kyle.thom@zafin.com