How Will United Continental Benefit From Segmentation And Fee Bundling?

To bring United back to its past glory days, CEO Oscar Munoz has laid down a comprehensive path to improve its long-term earnings growth through a number of strategic initiatives, aimed at commercial enhancements, and improving cost and operational efficiency. The new strategy is expected to generate $4.8 billion incremental earnings by 2020 for United. This article is part of a series of articles we are writing to discuss United Continental’s varying strategies to add $4.8 billion to its earnings.

In this article, we talk about United’s segmented product offerings and how they benefit the company.

Segmentation

Historically, airlines used three parameters to differentiate themselves.

1. Brand: The brand meant the level of customer experience and services on offer, as opposed to low cost carriers. The brand also meant differentiation on the basis of network reach and destinations covered by the particular airline.
2. Fare rules: The fare rules include refund options, advance purchase options, and change in fees option.
3. Class of Service: This used to be a simple differentiation between the first class and the economy class.

However, owing the increasing consolidation in the aviation sector over the last few years, segmentation is changing.

1. Brand: The offerings made by airlines are much broader than before, while the number of brands are fewer.
2. Fare rules: A number of airlines do not provide advance purchase fares or refund options.
3. Class of Service: The class of service is increasing from the conventional two, to include premium economy and basic economy.

Class of service is the dimension across which the maximum change has occurred. From a basic segmentation between first and economy to a number of segmentations now exist. Following are the different classes being offered and how they differ from one another.

1. Basic Economy while providing the cheapest fares, doesn’t give the passenger the right to choose or change his seat. The passenger is also not eligible for any upgrades.
2. Economy is a core product at competitive prices. Here, the passenger is able to choose a seat, earn credit towards premier status, be eligible for upgrades, and even change the flight by paying a fee.
3. Premium Economy provides the passenger with enhanced seating amenities such as extra legroom and improved drinks and food, while providing all the benefits of the economy class.
4. First Class is the most expensive of the services and provides the customer with a high-end experience. The food and drinks are complimentary, and the entire check-in and security process is handled on priority, which means no queues and wait time.

In its recent investor call, United used the call to add another class of service in addition to its Economy Plus (Premium Economy, as per the above classification). This class of service, called the Basic Economy, is targeted towards the price sensitive customers. The Basic Economy will allow the travelers to only pay for those services that they value. The move can be seen as a way to compete with low cost carriers such as JetBlue and Alaska Airlines. The launch date of Basic Economy is the first quarter of 2017, and will be available for the booking of Q2’17 onward. We expect this to add considerably to the company’s top line and even ancillary revenues.

The following table talks about the points of difference between the two economy classes: Basic Economy and Economy.

Other Improvements

In addition to introducing a new class, United will be offering enhancements to its Mileage Plus program. These enhancements are expected to improve customers ability to redeem miles. Other improvements include upgraded food and beverage services, renovating clubs, adding area in key markets, investments in hubs at key areas such as Newark and Los Angeles, construction of a new terminal at Houston, upgradation of first class service on domestic flights, and the introduction of Polaris (First Class) for international flights.

Accretion To Earnings

United expects the introduction of Basic Economy and enhancements to its Mileage Plus program to become accretive to earnings in 2017 and 2016, respectively.

Have more questions about United Continental (NYSE:UAL)? See the links below:

• United Continental Q3’16 Earnings Review: Unit Revenues Remain Under The Pump
• United Continental Q3’16 Earnings Preview: Capacity Cuts To Partially Offset The Decline In PRASM
• How Did United Continental Perform Operationally In September?
• What Is United Continental’s New Fleet Plan?
• Is China The New Growth Market For United Continental?
• How Did United Continental Perform Operationally In August?
• Why Are Airline Manufacturers Witnessing A Slowdown In Commercial Orders?
• How Is United Continental Driving Cost Efficiency?
• What Has Led To A 15% Fall In United’s Stock Price Since The Beginning Of The Year?
• What Factors Could Likely Affect United’s Unit Revenues In The Upcoming (Third) Quarterly?
• Is A Turnaround In The Cards For United Continental?
• United Witnessed A Decline In Q2’16 Earnings, Despite Substantial Fuel Cost Savings
• United Continental Q2’16 Earnings Preview: Higher Oil Prices & Declining PRASM To Weigh On Results
• How Will United’s Equity Value Be Impacted If The Crude Oil Prices Rebound To $100 Per Barrel By 2018?
• How Will United’s Equity Value Be Impacted If The Crude Oil Prices Average At $50 Per Barrel In 2018?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for United Continental

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