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The economics behind "Basic Economy" – A masterclass in price discrimination
- joe_the_user 1y agoI just got back from a week-long vacation where I flew Southwest. It was my first Southwest flight in a while and I will now not fly any other airlines. The rise of "basic economy" seems a lot like the general phenomena of "enshitification" and has a similar motive - degrade your product to squeeze the last drop out of the consumer. And it seems logical that charging by the "degree of shit" in a product means every level is going to be shit actually.
- Zak 1y agoSouthwest just started charging for checked bags after over a decade of being the airline that doesn't do that.
- hooverd 1y agoSW seems to be steadily removing everything that differentiated them as a carrier. There's no reason to choose them other than pure price for a route now.
- bobthepanda 1y agoThey were able to resist enshittification for a long time because they were actually one of the most profitable airlines and were able to keep their unique culture. Then they had a flight meltdown, lost a bunch of money, and got targeted by activist investors.
- Zak 1y agoI don't quite follow what would motivate activist investors to pressure a company to stop doing the things that made it profitable.
- WorldMaker 1y agoYou are thinking long term profitable, but most of the current "activist investors" barely think about short term profitability, and mostly from the perspective of their own profitability selling shares or running a short somewhere and "indirectly" helping their short by giving bad advice to a different company. They mostly read the quarterly reports and that mostly to look for "easy profits" Company A is making that they could pressure Company B to do for a quarter or two to bump stock prices before they sell again. Swoop in when a company has a bad quarter, pressure them to have "one good quarter", sell, rinse, repeat. (Makes them good money, makes most companies a race to the bottom to appease their whims as short-term investors.)
- Zak 1y agoIt seems to me that tax incentives favoring dividends over share price growth might make for a healthier economy. Am I way off base with this?
- WorldMaker 1y agoIt's a good idea in theory if you can somehow force dividends to some long term vesting strategy to reward long term investors over short term investors. It's a bad idea in historic practice, given the very origin of the turned out to be awful, something of the root of much short-term-ism and "activist investors" in the first place, "fiduciary duty to the shareholders" phrase was the awful Ford v. Dodge Brothers case where the Dodge Brothers were some of the earliest investors in Ford (as partners and parts dealers for Ford) and went to court to argue that record profits in a particular quarter should not be invested in long-term capital investment (a large new plant) and R&D as Ford was planning to do, but presented as a windfall of a large dividend to shareholders instead. The court agreed with the Dodge Brothers for, er, dodgy reasons, and the clear conflict-of-interest motive from hindsight of the Dodge Brothers "activist investing" in that moment was to notoriously use said dividend windfall to expand their efforts as a Ford competitor (produce more Dodge cars, if you haven't guessed) from Ford's own profits. It's not a single court case that gets us to where we are today with short-term thinking in Wall Street, but that's such a weird foundational one.
- kube-system 1y ago> over a decade over half a century!
- Zak 1y agoI could have phrased that better; Southwest was the airline that didn't during a period where all the others did. Prior to 2008 or so none of the major airlines in the USA did.
- gruez 1y ago>The rise of "basic economy" seems a lot like the general phenomena of "enshitification" and has a similar motive - degrade your product to squeeze the last drop out of the consumer. And it seems logical that charging by the "degree of shit" in a product means every level is going to be shit actually. How do you draw the line between "cutting frills that nobody really cares about" and "enshitification"? Prior to airline deregulation air travel was luxurious[1]: >BERAS: But it's not just that the planes were more spacious. Back then, the airlines would go out of their way to compete with each other on amenities. >MALONE: Right. Like, the plane we're on, it had a lounge in the back. You might get a six-course meal or a fancy cocktail included. >BERAS: Plus, all kinds of other perks, like custom playing cards delivered in a fancy case, shaving kits delivered in a fancy case, cigarettes delivered in a fancy case. >MALONE: Yeah. And, you know, as we get into the '70s, the amenities got ridiculous. Airlines even had meat carving stations, so flight attendants would roll the meat right up to you and carve it up right there in front of you at your seat. >BERAS: But perhaps the pinnacle of all amenities was... >VAN DER LINDEN: They had a piano bar, an honest-to-God piano. But air fares dropped after deregulation, after much of these perks were reduced[2]. Of course, people who wanted those amenities would rather than they be bundled, because they'd be paying for it anyways and airlines could benefit from economies of scale for offering those amenities. They might even call it "enshitification", if the word was around back then. But most people would rather that their experience be a little crappier but save a few hundred bucks on airfare instead. [1] https://www.npr.org/transcripts/1197960905 https://www.npr.org/transcripts/1197960905 [2] https://cdn.theatlantic.com/assets/media/img/3rdparty/2013/2/air12.jpg https://cdn.theatlantic.com/assets/media/img/3rdparty/2013/2...
- Henchman21 1y agoI frequently wonder if these folks attempting to squeeze the very life out of the “consumer” (I prefer the phrase “citizen & voter”) ever stop and wonder what will happen when there’s nothing left to squeeze? Because that day is coming sooner rather than later. Its my suspicion that it will end with blood. Rather a lot of it.
- grugagag 1y agoAs if businesses had more than a few quarters in mind. I really don’t think they care for they’re already extracted the profit when shit hits the fan.
- gruez 1y agoThe employees and executives might not care, but surely the shareholders do? If they really think "shit hits the fan" is going to happen any time soon, then they should sell their overvalued shares and buy some fixed income instrument like treasuries. Except they don't, because that'll be a dumb move. Despite the saying of "companies only care about the next quarter" being around for decades, the stock market has been on a tear, with little sign that "shit hits the fan" is going to materialize any time soon.
- deleted 1y ago[deleted]
- esafak 1y agoI prefer airlines that don't nickel and dime. In fact, I prefer to fly less since the experience has consistently deteriorated over decades. If you travel internationally you get the added fun of dealing with border agents. And even they have discovered price discrimination, with their VIP lines. All told, is all this chicanery benefiting airlines?
- ggm 1y ago> All told, is all this chicanery benefiting airlines? I am pretty comfortable it contributes to revenue and profit outcomes the board likes.
- tonyedgecombe 1y agoIt feels like competitive pressures in some markets drive away all the profits leaving corporations with no choice but to engage in underhand tactics. Car rentals and printer inks are a couple of examples of the same process leading to really shitty behaviour on the suppliers part.
- ggm 1y agoI agree. Boards should be under more pressure to deliver longterm outcomes of benefit beyond their immediate board term, KPIs and rewards. Possibly the path out is to make some board renumeration tied to 5 and ten year success. These shitty LCC patterns make short term revenue and the long term consequence of market share moves don't get factored in.
- nemomarx 1y agoI think it's kinda race to the bottom / lemons market. A lot of people search for flights through aggregators so you need to optimize for the price shown there, and the customer doesn't know if that's the real price or if there'll be add ons so they won't go for a more expensive one on faith. Best bet is finding out which airline treats you best and going all the way to a loyalty card with them or something I guess? that seems to work out a little better
- ggm 1y agoIt's already a regulated market. If we want to stop fare practices we do not agree with then mandating specific bundling in luggage, legroom, food and credit/rebook is available as a regulation. And of course the economic arguments against it, and legal/philosophical.
- gruez 1y ago>If we want to stop fare practices we do not agree with then mandating specific bundling in luggage, legroom, food and credit/rebook is available as a regulation. Let's take the one of the items as an example: I rarely rebook, so I'm presumably benefiting from this price discrimination. Why should I support that it be forcibly bundled? I might be sympathetic to having some sort of baseline fare for advertising purposes, so it's not a race to the bottom to get the lowest sticker price, but I can't see how it's justified to limit consumer choice by disallowing the sale of restricted fares.
- ggm 1y agoI'm not saying you're wrong but this is also much the same argument as "why do I pay more tax when I am not using public health" or other community wide benefits. Philosophically you either believe in a price which benefits the community at large, or you want the lowest price outcome for yourself and others to be exposed to their costs.
- gruez 1y ago>Philosophically you either believe in a price which benefits the community at large, or you want the lowest price outcome for yourself and others to be exposed to their costs. How does the community benefit when there's only one price for airfare, and there isn't any mechanism for the poor to save a buck? I rarely rebook tickets, probably because I rarely fly for work, so I can book tickets months in advance. I suspect it's the same for most vacationers, so they're benefiting from this policy, likely at the expense of people who need to cancel last minute (corporate flyers?). The same goes for meals. Is it really that hard to pack a lunch that we need to mandate free lunches for everyone?
- djoldman 1y agoIt appears that taking advantage of human imperfections and irrationality are taking up more and more of companies' strategies and time. You've got folks thinking constantly about advertising, pricing strategies, dark patterns, network effects that prevent or discourage churn, etc., in ways that tend to exploit flaws in the consumer's decisioning process or gaps in their knowledge, to the consumer's disadvantage. It feels rare to see an actual new valuable product or improvement.
- bix6 1y agoSpot on. Surfline gave us a bunch of new features over the past year but you have to pay more for them. Gone are the days of delighting your customers — gotta take every penny you can from each market segment.
- bluGill 1y agoYou can find people back in 1880 (probably before, but that is as old as I've seen something) saying much the same thing. Yet we have had a lot of innovation since then.
- Frieren 1y ago* citation needed
- jjk166 1y agoPeople were saying that in the 1880s, which was the gilded age. People took action at the time to deal with the problem, and it was significantly reduced for many decades. Just because an issue existed long ago does not mean it has continuously existed or is intractable.
- slg 1y agoI think the biggest change in general corporate management in my lifetime was the deprioritizing of the concept of goodwill. I’m not naive, businesses have always prioritized profit. However, there used to be this idea that pure profit maximization ruined your brand and reputation. You didn’t want to be known as the asshole company that nickel and dimes everyone or has draconian policies that make people hate dealing with you. Now the corporate mindset is seemingly that if anyone leaves any interaction with you with any positive feelings, you didn’t squeeze enough money out of them.
- paxys 1y agoLow effort, AI generated, catchy title. Perfect recipe for making it to the top of news aggregators.
- gruez 1y ago>AI generated What's your basis for this?
- sct202 1y agoI was thinking it could be AI just from the bullet points bold statement colon structure, but there's a lot of grammatical inconsistencies that I'm not sure an AI would do; for example, the writer's periods and commas are sometimes inside the quotations, sometimes outside, and sometimes both inside and outside.
- deleted 1y ago[deleted]
- jakub_g 1y agoUh, it felt weird indeed reading those super verbose descriptions of what airline X did in year Y and what they changed in year Z, repeated like 5 times in slightly different words. Note: it's a content marketing article on a blog of a company dealing with airline refunds, so it makes sense, you're probably right.
- deleted 1y ago[deleted]
- cadamsdotcom 1y agoThis always happens when growth of a good or service slows but the provider is still expected to keep delivering growth. Historically it has led to finding efficiencies - but that takes R&D, not just financial engineering. In the near future humanity will to do a mix of three things: a) accept that growth is over (it’s not, this is temporary until the next thing is invented), b) find a way to return to the frenzy of innovation that pushed us to expect growth (likely by leaning back in to R&D), and c) legislate the types of squeezing we’ll tolerate (as the EU is doing) Companies that invest in R&D need to start winning to kickstart growth again. Big companies can do it - eg. Google Gemini is topping leaderboards. While you wait for a return to R&D, contemplate the miracle of the complex economy that led us to the point where lower middle income people can have a Basic Economy seat on a tin can in the sky.
- sandspar 1y agoI broadly agree, but airline engineers are already inventing their little hearts out as fast as they can. Airlines are being squeezed in a hundred different ways every day, whereas building a better engine takes decades.
- legitster 1y agoVery unpopular opinion, but I personally find price discrimination somewhat appealing. Both me and the richest person on the plane get to the same destination at the same time. And yet he payed 4x as much for the same privilege. It's one of the few forces left in the economy that actually reduces inequality (somewhat). I'm an absolute cheapskate and I love flying, so I never really fall for the need to upsell. I'll fly with my family and not pay for assigned seats (I've joked with gate agents "I dare you not to sit me next to my children" - in reality they are happy to make sure you sit together anyway). I get that people value different things differently, but with so much price discrimination the value gets more efficient and you increasingly get exactly what you pay for - no more or less. Which just unlocks the hacker ethos in me. At the end of the day, you are paying for insanely fast travel across the sky. It's a miracle, let alone at the insanely low prices you can get these days.
- tossandthrow 1y agoI don't think it is an unpopular opinion at all. The airline sector had this memory of its "hey days" - but the price has conviniently been forgotten. From my perspective I would love if the airlines would skip entertainment systems and food on long haul flights. I use my phone for l entertainment, and see the value of airline food as a negative value (i try to fast when I travel, but I am bad at declining food).
- tines 1y agoI too was initially wondering what the problem was with price discrimination---it seems like it's just offering a worse product for less money, so everyone gets to choose. But from what I understand, the article is saying that the problem is that the worse product is _artificially_ worse, in a way that is not commensurate with quid pro quo consumption like we're used to. If I pay less for a Macbook with worse specs, that's "good" price discrimination, because Apple gets to give me something of intrinsically lower value that it cost them less to produce, and I give them something of lower value (less money) that it cost me less to acquire. But an airline _creating_ a bunch of hoops for you to jump through (the article lists "no advance seat assignment, no ticket changes, last boarding group, baggage restrictions") in an effort to cause people whom they can juice for a little more cash to identify themselves, is scammy and scummy behavior. I don't want to see companies purposefully making my life worse in order to juice me for as much as they can.
- stego-tech 1y agoSo aside from potentially allowing more price-limited consumers the ability to fly via Basic Economy fares, it’s just enshittification of the Aviation Industry: worse products at higher prices. We really need to step up regulation to disincentivize “infinite growth” as a mindset and prioritize stable returns over time (e.g., dividends and profit sharing). Everything is slowly getting worse and more expensive, and contrary to (seemingly) popular belief there is no “floor” to reach in this foolish pursuit. Businesses and capital will always pursue more money for themselves no matter the cost to consumers, workers, vendors, or governments, unless something incentivizes more societally-healthy behaviors.
- wagwang 1y agoAren't flights at an inflation adjusted all time low and most airlines operating at a razor margin? Seems like the market doing their job. Also price discrimination sounds a lot worse than what it really is? Idk, I don't like that air travel is so easily accessible but, the pricing stuff is the least of our worries.
- kelnos 1y ago> Also price discrimination sounds a lot worse than what it really is? I usually think of price discrimination as the first- or third-degree types (how they define them in the article), that is, charging people different amounts based on how much you think they are willing to or can pay, not on any differentiation of the product. That practice always sounded dirty and dishonest to me. I wasn't aware that something like basic economy could be considered (second-degree, using their terminology) price discrimination; to me that's just offering a different product, with different features and different quality, at a different price. That honestly seems entirely reasonable to me; basic economy is just a different class of service, similar to how business class is different from economy class. I don't think of biz/first class as price discrimination; to me it's just selling a different, higher-quality product for a higher price.
- dkjaudyeqooe 1y ago> Aren't flights at an inflation adjusted all time low Yes, due to improved technology and equipment and because prices have been historically very high. > most airlines operating at a razor margin No, many airlines operate in imperfect markets and reap excessive profits compared to other airlines.
- os2warpman 1y ago>No, many airlines operate in imperfect markets and reap excessive profits compared to other airlines. Which ones? Practically all airlines are public companies with easily accessible financial data. All of the one's I've looked at are barely scraping by with single digit profit margins. Delta is around 6% and Emirates is among the if not the best at around 9%. Which airlines are "reaping excessive profits"? I would like to invest in them.
- TheJoeMan 1y agoWith the oligopoly situation, us Americans don't usually have a point of reference, so here's one from a trip I've taken: Indonesia to Malaysia (DPS to KUL), an international 3 hour flight one-way, for $62 on Air Asia [1]. There is enough leg room that you can cross your legs, and they will feed you a meal! There may be some regional differences in "labor" like the US Major airlines claim, but I don't think enough to match the reality of their scalping. [1] https://www.google.com/travel/flights/search?tfs=CBwQAhoeEgoyMDI1LTExLTIxagcIARIDRFBTcgcIARIDS1VMQAFIAXABggELCP___________wGYAQI https://www.google.com/travel/flights/search?tfs=CBwQAhoeEgo...
- kelnos 1y ago> With the oligopoly situation I saw the article use the term "legacy carrier", and was curious about its actual definition, and while skimming its wikipedia article read that we went from ten major US carriers in 1991 to just four today (Alaska/Hawaiian, American, Delta, United). Oof. While many great things did come from deregulation, US airlines' tendencies to race to the bottom and consolidate are not among them. To be fair, though, the more consolidation, the less competition, and the less of a need for that race. So I'm not sure. Certainly labor costs elsewhere contribute to significantly lower-cost routes, and flights in the US are way cheaper than they were in the 80s and prior, and I think, inflation-adjusted, they're still historically very low, perhaps at their lowest. So what's more expensive in the US? Labor, certainly. Regulation imposes a cost, perhaps more of one here than elsewhere? Are many carriers in other places in the world heavily subsidized by their governments, so they can offer cheaper fares and better service?
- AlotOfReading 1y agoIt's not scalping. Airlines are a low margin business. Southwest is 2% margin. Delta is 6%. AirAsia is one of the higher ones at over 12%. Most airlines can't do what they do though. AirAsia went out and built a parallel supply chain in Malaysia. They're not only getting lower crew costs, but lower labor costs at every level of operation. They're also paying less for fuel, less for planes, less to acquire customers, less in compensation fees because their planes are punctual, etc. It's not a model replicable by American carriers.
- hnburnsy 1y agoA masterclass that has had no discernable affect on revenue, in fact revenue for the airlines is down over the past 10 years, but I guess it has kept those revenue analysts employed. >Inflation-adjusted PRASM (Passenger Revenue per Available Seat Mile) for major U.S. domestic carriers from 2015 to 2024, all expressed in 2024 dollars for consistency: Year Delta (¢) American (¢) United (¢) Southwest (¢) Alaska (¢) JetBlue (¢) Spirit (¢) 2015 14.8 14.6 14.3 13.5 13.9 13.0 11.3 2016 14.2 13.9 13.7 13.0 13.4 12.5 10.9 2017 14.5 14.1 13.9 13.2 13.6 12.7 11.0 2018 14.7 14.3 14.1 13.4 13.8 12.9 11.2 2019 14.9 14.5 14.3 13.6 14.0 13.1 11.4 2020 13.2 12.5 12.6 11.8 12.1 11.0 9.7 2021 13.5 12.8 12.9 12.0 12.4 11.2 9.9 2022 14.0 13.2 13.4 12.5 12.9 11.7 10.3 2023 14.3 13.4 13.6 12.7 13.1 11.9 10.5 2024 14.1 13.5 13.8 12.3 13.0 11.5 10.4 > Note: These are inflation-adjusted estimates based on CPI data and publicly reported PRASM figures. Actual values may vary slightly depending on methodology and data source.
- thehappypm 1y agois prasm the best metric though? It doesn’t take into account costs, for example, airlines have gotten more efficient over the years with planes like the 737 max so you can make more profit off of less revenue. Likewise, non-passenger revenues, like taking delivery cargo in the cargo bay, can be masked
- hnburnsy 1y agoAgreed but the article was about price discrimination which would affect revenue. If it is not increasing revenue than what is it doing?
- sandworm101 1y ago>> Third-Degree Price Discrimination: The seller charges different prices to different groups of consumers based on identifiable traits or segments, often tied to different demand elasticities. Common examples in airlines include offering discounts to seniors, students, or military, or more broadly, the use of market segmentation by travel purpose. Military discounts are not a marketing trick. Some companies actually want to be nice to those who serve. Many a corporate leaders are themselves vets.
- valleyer 1y agoTeachers, nurses, and janitors also "serve". I agree: it's not price discrimination. It's jingoism.
- sandworm101 1y agoThe difference is that teachers/cops/firefighters arent subject to "unlimited liability". They cannot be ordered to do things that will cause thier deaths. Cops can say no, or quit and do something else. Soldiers cannot.
- Zaylan 1y agoI used to think Basic Economy was just airlines making things uncomfortable on purpose. Then I realized it’s really about separating customers based on how much they’re willing to pay. They’re raising revenue without changing the base price. You see this more and more now. The default option keeps getting worse, not to cut costs but to make upgrades feel worth it. I’m not sure if people will just get used to it or eventually start pushing back.
- sershe 1y agoOne nice thing about basic economy and price discrimination is you actually get a better experience if you pay more. Instead of free exit row seats distributed via luck and timing, trying to get in early to ensure overhead bins are not full due to ridiculous size and amount of stuff people bring, checking seatguru for best laptop compatible seats etc. you can pay 30-150 bucks for exit row and have guaranteed comfort and early boarding. Or you can save money with the baseline experience. Previously your only improvement option was business/first class at bazillion dollars. Same for bags, I almost never check bags and I have run into competing fares where one is X+Y, bag included, another ~X with Y bag fee. They should disaggregate more!