Economic News
United Wants to Match Low-Cost Carriers on Price
Yesterday our contributor Kyle took a look at the business model of Allegiant Air including the unique elements that allow them to offer such low fares. Incidentally, if United Airlines has anything to say about it, Allegiant’s fare-cutting measures could be the norm soon enough. As CNN Money reports, United Continental’s president Scott Kirby announced yesterday that he intends to take on the discount carriers of the world, saying, “The best way to compete with a low-cost carrier is match their prices. Half our revenue approximately comes from customers that are mostly shopping on price, and we cannot ignore half of our revenue and we can’t let our low-cost carriers have price advantages in our hubs.”
To accomplish this goal, United will be expanding their “basic economy” option that enables flyers to save by only being assigned a seat at check-in and only being allowed to place their carry-on under their seat. Customers booking under these conditions will actually be able to select a seat ahead of time if they desire although, like Allegiant, there will be a fee for this. Kirby says this basic economy model will be rolling out to more routes — including some international destinations — in the near future. The airline also plans to increase its capacity between 4 and 6% in 2018.
While it could mean good news for some budget-minded customers, Wall Street has not responded favorably to Kirby’s plan as of yet. Not only was United’s stock down some 6% on Tuesday night following the announcement but shares of rivals Delta and American Airlines were also hit as investors prepare for a price war across the industry. Returning to the customer side of things it’s also worth noting that, although some passengers may buy into the no-frills model, others might reject the “nickel and diming” it leads to.
Over the past 20+ years the airline industry has been one of the most watched thanks to frequent mergers, national tragedies, fluctuating fuel prices, and of course the ongoing implementation of new fees. With carriers like Southwest catching on along with true budget carriers like the much-loathed but quite profitable Spirit, this latest development can’t really be considered much of a surprise. That said it will interesting to say how airlines like United find a balance between offering options for price-sensitive customers while still catering to those willing to pay more for a better flying experience.
