United Airlines CEO Scott Kirby has issued a warning to low cost carriers that United will beat them on price. Speaking at a recent Skift forum, he accuses LCCs of not being in control of their pricing model and warns new entrants that they will not survive.
With a number of low cost carriers already in the market and more on the horizon, legacy carriers are always looking for ways to stay competitive. While some are focusing on a much better product, others are looking to knock the bottom out of the market by competing on price.
One such airline is United. According to president, Scott Kirby, United will beat any LCC on price, even if it means offering a really bad product.
How low cost carriers damaged United
The evolution of the low cost carrier has eroded the pricing strategy of legacy carriers. Even on last minute tickets, these carriers were offering super cheap tickets, leaving the major carriers such as Delta, United and American with a problem. Either they found a way to match these fares or they’d soon start losing business. But on the other hand, if they matched these prices, they’d erode the value of their premium margins too.
The way they handled this was with the introduction of basic economy (BE). Cutting out ‘frills’ such as seat selection and checked baggage, let them become competitive on price with the likes of Spirit and Southwest. By making a Saturday stay mandatory for BE fares, they successfully segmented the leisure traveler from the business one, maintaining their biggest profit margins on the corporate side of things.
Low cost carriers can’t succeed
President of United Airlines, Scott Kirby, spoke at a recent Skift Forum in Singapore. During his discussions, he made quite an ‘out there’ statement – that low cost carriers would not succeed because United would beat them on price. He accused them of being ‘not in control’ of their business model and issued a warning to new startups that United would match them on price.
He claimed that United have developed better means to segment the marketplace, with products like basic economy letting them match or even better their low cost competitors. Kirby says that United have the ability to compete in both markets now, catering to those price sensitive customers as well as those who care more about the product they are getting.
Is Kirby right?
While United may well have improved their ability to segment customers, segmentation is nothing new. View From The Wing points out that American Airlines first introduced Ultimate Super Saver fares in 1985, and that basic economy is just another iteration of this same pricing strategy. They also point out that United are effectively eroding their profit margins by attempting to price match true low cost carriers and may not be the first choice anyway.
Take Southwest for example. The US carrier is well known for allowing checked bags, even on their lowest fares. Although there’s no food or drink service included in the price, customers can be sure of a pretty decent service at a price that’s hard for United to beat.
United, on the other hand, not only forbid checked bags with their lowest fares, but have even banned full size carry on for domestic BE passengers. It’s not just Southwest they will be competing with, it’s also JetBlue, American, Delta… all of which are less restrictive on their lowest price fares.
When faced with competition from a low cost carrier, airlines can go one of two ways: compete on price, or compete on product. When Hawaiian began gearing up for Southwest’s entry to Hawaii, they chose to forget about trying to compete on price. Instead, they focused on a premium product, letting customers know that they’d be getting a lot more for their money when they chose to fly with them.
It seems United is taking the other route, choosing to attempt to underprice their low cost competition. How this will work for them in the long run remains to be seen, but it’s certainly a risky strategy.