After ultra low cost airlines expanded in some of American Airlines’ core markets a few years ago, American took an aggressive approach. Instead of reacting passively and allowing discounters to gain share, it matched prices, flooding the market with cheap fares.
In the short term, this was costly to American, which, like other U.S. airlines, is earning less revenue from ticket sales than last year. But on the carrier’s second quarter earnings call Friday, American President Scott Kirby said the strategy is working.
“They aren’t growing in our markets anymore, at least to a large degree,” Kirby said.
American has higher costs than Frontier Airlines and Spirit Airlines, the two largest U.S. ultra low cost carriers. But Kirby told analysts American never seriously considered not price-matching. American has been especially aggressive with Spirit, as it has a large operation at American’s Dallas/Fort Worth hub.
“There is no choice but to compete and match prices with nonstop carriers,” Kirby said. “It’s not a matter of being vindicated or anything of those words. It is what you have to do.”
Later this year, American expects it will finally implement a strategy that will allow it to match discounted fares without giving up too much revenue. Like Delta Air Lines and United Airlines, American is introducing ‘Basic Economy fares, a bare-bones product that likely will come without some of the extras, like free upgrades for elite customers and advanced seat assignments, that legacy airline customers generally expect. The fares will appeal to the most cost-conscious consumers.
American is also introducing a new international premium economy section, which it says will also permit it to better segment customers. In short, according to American, the more passengers pay, the better experience they will have.
“I wish we could have done that by snapping our fingers, and that as ultra low cost carriers grew, we could have immediately effected change, but we couldn’t,” Kirby said. “We have had to compete first, and then we will get to segmentation, starting with basic economy later this year and premium economy next year.”
In other matters, Kirby painted a slightly rosier picture of the U.S. industry than American’s three main domestic competitors, all of which had already reported earnings. Like the others, American is facing revenue pressures, with passenger revenue per available seat mile — a closely-watched metric measuring how much revenue an airline earns for each mile it flies — decreasing 6.3 percent on a year-over-year basis.
But unlike its competitors, American said its domestic franchise is performing reasonably well, with American reporting its last-minute ticket revenue has mostly held steady. Tickets sold just before departure are some of the most profitable airlines sell, and they’re generally purchased by business travelers. Like Delta, United and Southwest airlines, American reported it is selling some cheap last-minute fares, but Kirby said the situation is not dire.
“We have been less involved in some of the pricing issues going on between airlines,” Kirby said. “We have been involved on the periphery, but some others have been more involved in lowering fares in each others markets than others.”
In an attempt to improve its unit revenue, American said it will increase capacity by only 2 percent this year. Earlier in the year, it had predicted 3 percent growth.
On Thursday, during Southwest’s earnings call, CEO Gary Kelly said his airline did not believe it was prudent to cut flights already loaded into the schedule. But Kirby said he disagreed, saying it is not too late to make cuts for 2016. The goal is to get reduce less profitable flying.
“We think it’s the right thing to do,” he said.