Alaska Airlines Set to Introduce Basic Economy

Jan 26, 2018

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Update: Alaska Airlines announced that it will add a basic economy fare later this year. Unlike its competitors’ basic economy products, Alaska’s will feature assigned seats.

Alaska Airlines, after finally completing its takeover of Virgin America, may now follow in the footsteps of the big three legacy US carriers. During Alaska’s earning’s call on Thursday, the company hinted that it had been looking at basic economy and unbundling fares, and how those actions could positively affect its revenue.

2017 saw the introduction of basic economy fares on American and United, with Delta devaluing basic economy on transatlantic routes. Non-US carriers like Aer Lingus have started to unbundle fares on international routes too.

In the company’s fourth quarter earnings call, Alaska Chief Revenue Officer Andrew Harrison said that the airline has been looking at basic economy:

With a single reservation system, we will be able to address upsell and segmentation opportunities which the legacy carriers are executing on today and that we have not been able to participate in. There are a number of ways for us to participate. Basic economy is just one of those, fare families and ancillary bundles are others. And whatever approach we take, we are committed to tapping into the opportunity before us to increase upsell and ancillary revenues. This particular opportunity would represent incremental revenue above our stated synergy targets for the merger. We are just beginning to evaluate the full potential of upsell and will share more with you on our future calls.

The key words here are “we are committed to tapping into the opportunity before us to increase upsell and ancillary revenues.” Alaska has introduced some cost cutting measures to boost profits, including the end of free Biscoff cookies on flights that leave after 10am.

Then Shane Tackett, Alaska’s SVP of Revenue Management and & e-commerce, was asked to elaborate on what the airline is losing by not offering basic economy:

We have modeled the impact. Andrew just mentioned, we think it’s north of $100 million once it’s fully out and running and sort of optimized, which that would take some time. I would just say, other airlines, I think, it took a year or more to get to market and sort of fully roll it out. (…) And I think we’ll go faster than that. We certainly are going to be motivated to be faster than that, but it’s not something that’s going to hit like Q2, as an example. And I’ll just say we haven’t decided on what this would look like for us. And it could be something that’s like basic, we tend to not do me-toos of sort of the network carriers. Our business is little bit different. It usually doesn’t need the same product set. So we’re looking forward to being able to talk with you guys in the future call about what this might look like for us.

The good news there is that Alaska has no immediate plans to roll out basic economy, and its version might not be as bad as the others we’ve seen.

The industrywide trend has been to start charging à la carte for everything from seat selection to carryon bags and early boarding. Larger airlines have seen increased competition from low-cost carriers like Spirt and Frontier on the domestic side and Norwegian and WOW for international routes — hence the unbundling of fares.

If Alaska does introduce basic economy, in one form or another, it will leave Hawaiian, JetBlue and Southwest as the last holdouts without it among US mainline carriers.

Alaska has seen rising operating costs over the last two years and it may have to to meet an upcoming pay hike for its flight attendants this year. It still reported $367 million in net profit in 2017, but that was mainly due to a one-time tax benefit after the 2017 tax cut. Alaska also said that it will be giving each of its employees a $1,000 bonus due to the tax savings, and that’s on top of $62 million in bonuses that the airline plans on distributing.

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