American would be turning a blind eye to half of its business if it didn't figure out a more effective way to compete with Spirit and other low-cost carriers.
A big merger and cheaper jet fuel are doing wonders for American Airlines.
The world’s biggest airline reported Friday that net income jumped 80 percent to $1.69 billion in the third quarter thanks to a huge drop in fuel spending.
The shares fell, however, after American leaders said that next year they will introduce new fares designed to compete with discount carriers including Spirit and Frontier. Spirit’s stock took an even bigger hit — it was down more than 6 percent at midday.
U.S. airfares rose faster than inflation for several years, but they have dropped this year as airlines took advantage of cheaper fuel to increase flights or use bigger planes. They have cut prices to fill the growing number of seats.
American doesn’t disclose average fares, but yield, or the amount that passengers pay for each mile they fly, fell 9.2 percent. That contributed to a 3.9 percent decline in third-quarter revenue.
The nation’s three biggest airlines, American, Delta and United, depend on high-fare business travelers for much of their revenue. American also wants to target price-conscious occasional fliers. Scott Kirby, the airline’s president, said 87 percent of American customers who account for more than half the company’s revenue fly on American only once a year. Many of them consider flying on the discount airlines, he said.
“We can’t just walk away from that size of the business … we have to match their fares,” Kirby said. He said that when nobody matched Spirit on prices, it grew and is now bigger than United or Delta in Dallas-Fort Worth and bigger than Delta in Chicago.
Spirit and Frontier offer low base fares but charge more fees than most airlines. Kirby said that in 2016 American will introduce tickets priced to compete with the discounters and offer “appropriate” benefits. He declined to provide details.
Some analysts are skeptical about chasing bargain travelers. Wolfe Research analyst Hunter Keay said American was “blowing up yourself” by selling cheap walk-up fares to business travelers who would never board a discount airline. He has said it would be as if high-end steakhouse Ruth’s Chris started a dollar menu to compete with McDonald’s.
American, however, would not be alone among the giant airlines in worrying about the growing market heft of the so-called ultra-low-cost carriers. Late last year, Delta began selling a “basic economy” ticket that doesn’t allow seat selection or ticket changes and may not offer full frequent-flier benefits. It was introduced in a few markets and seen as a response to Spirit.
In midday trading, shares of most U.S. airlines were up, but American Airlines Group Inc. was down 79 cents, or 1.7 percent, to $45.20, and Spirit Airlines Inc. tumbled $3.12, or 7.3 percent, to $39.92.
American said that excluding special items related to its merger and other items such as technology help, adjusted profit was $1.9 billion — the highest in any quarter in American’s history. At $2.77 per share, the results beat the average forecast of $2.72 per share by 15 analysts surveyed by FactSet and nine analysts surveyed by Zacks Investment Research.
The biggest reason for the record was fuel costs, which plunged 43 percent, a savings of $1.46 billion.
Revenue fell to $10.71 billion, just below the FactSet and Zacks forecasts of $10.72 billion.
American announced a $2 billion addition to its program of buying back its own stock over the next 15 months, a move that usually pleases shareholders by making existing shares more valuable. That raises the amount authorized this year for buybacks to $6 billion. The company also declared a quarterly dividend of 10 cents per share.
The company told employees this week that it will build a new headquarters complex near its current one in Fort Worth. The company hasn’t provided a cost estimate.
American retired the US Airways brand, which traced its roots to 1939. American executives said there have been no problems since they combined the reservations systems of American and US Airways last weekend. That technology crossover tripped up United Airlines after its merger with Continental.
Executives also said that American will change its AAdvantage frequent-flier program next year, but they declined to give details.
Photo credit: FILE - This photo July 17, 2015, photo shows the tails of four American Airlines passenger planes parked at Miami International Airport, in Miami. American Airlines reports quarterly financial results Friday, Oct. 23, 2015. AP Photo/Alan Diaz, File / Associated Press