Companies to airlines: We don't want your cheapest fares

Key Points
  • Corporate travel providers say their clients are blocking basic economy fares.
  • Basic economy is generally the cheapest fare available but is highly restrictive.
  • Large airlines are expanding these fares internationally.
John Rowley | Getty Images

Companies often go to great lengths to keep a lid on costs, but here's one place where many won't skimp: airfares.

Corporate travel providers tell CNBC that many of their clients are asking them to block airlines' basic economy airfares. These are usually the cheapest seats on the plane, where in exchange for the lower airfare, passengers often cannot select a seat ahead of time, upgrade, make changes or get a refund. In some cases, passengers cannot use an overhead bin or check a bag.

"I flat out told them not to [book basic economy]," Andrew Davis, an airline analyst at asset manager T. Rowe Price, a major airline investor, said he explained to his colleagues, regarding work travel. "This is my rule: If it looks really, really cheap, there's a reason."

Airlines say the fares are aimed at the most price-sensitive customers, who would give up perks that used to be free in exchange for a good price. Airline executives haven't been shy that they measure the product's success by how many passengers pay higher fares to avoid basic economy. That companies are opting to block basic economy from travel systems is great news for airlines.

Businesses that haven't blocked these fares may need to remind travelers exactly what they're getting as airlines expand these restrictive fares to international routes. Getting it wrong could mean both an unhappy employee and getting stuck with a big bill if the traveler's plans change.

Many companies aren't taking chances.

"As the airlines have introduced them, we have blocked them," Cathy Moulton, manager of travel services at Robert W. Baird, said through a spokeswoman. The investment firm has 3,400 associates, half of whom travel at least once or twice a year, and some every week, she added. "All along, we have viewed them as more suitable for leisure travelers and did not feel they met the needs of our business travelers."

Paying more to save money

Let's say a meeting runs late or a late-afternoon meeting is canceled. A business traveler on a basic economy would have to purchase a whole new ticket at the last minute, which is among the highest fares. That means that the cheapest fares can end up costing companies a lot.

In December 2016, about two-thirds of American Express Global Business Travel's clients opted to block basic economy, the company said. That rose to 75 percent by July 2017.

That shift occurred as United Airlines and American Airlines joined Delta in rolling out basic economy airfares. The no-frills fare offered by American and United prohibits passengers from using overhead bins on domestic flights.

Egencia, the corporate travel platform of Expedia, said none of its clients display basic economy fares to their employees.

"For now our conclusion is that basic economy is, by design, not business traveler friendly," said Mark Hollyhead, Egencia's COO. "We know plans often change so flexibility on business is key."

The company estimates that about 11 percent of business travel changes mid-trip.

SAP Concur, which has more than 38,000 customers, estimates that about 42 percent of its clients worldwide have blocked basic economy fares.

Corporate travel managers and travelers themselves who travel internationally aren't exempt. American, Delta and several of Delta's European partners recently unveiled basic economy fares for transatlantic flights, which include fees for checked bags.

At a J.P. Morgan Chase conference on Tuesday, Delta's president, Glen Hauenstein, said most of the airline's corporate clients have walled off basic economy fares and that it's focused on the next level of upsell: to Comfort+, seats with more legroom that he estimates cost about $30 to $40 more per segment than regular economy.

Jamie Baker, an airline analyst at J.P. Morgan, said basic economy fares at the bank are "walled off. That fare is dead to me."

Travel booking platform Lola blocks basic economy fares entirely. One of its clients, Larry Zoll, an associate director at Sensory Interactive, which makes LED advertisements and other large displays, said he travels frequently and that basic economy doesn't work for him.

"Most people who travel for business aren't doing it just for fun," he said. "The perks help make the time away worthwhile."