Don't hate American Airlines if it unbundles fares on some transatlantic routes. By flying discounters like Wow Air and Norwegian, travelers have shown how much they like cheap no-frills airlines. American needs to give the people what they want — $99 one-way fares to Barcelona.
For decades, American Airlines has sold roughly the same services to all economy-class travelers headed to Europe. For the price of the ticket, passengers have gotten seat assignments, a checked bag, food and even booze — all for free.
But some of that could end as soon as next year, Don Casey, American’s senior vice president of revenue management, said Monday during a discussion at the Boyd Group’s International Aviation Forecast Summit in Las Vegas.
The airline, he said, could start selling few-frills fares on transatlantic flights as soon as next year. If it happens, they may be similar, though perhaps not identical, to the Basic Economy fares American now sells on many domestic flights to compete with carriers such as Spirit Airlines and Allegiant Air. On American, travelers who buy Basic Economy cannot bring a large carry-on bag into the cabin, nor can they choose a seat in advance. And if they are frequent flyers, they are not eligible for free upgrades to first class.
“The strategy of unbundling the product and creating sell-up opportunities is something that will work in more markets than just domestic,” Casey said. “We would expect over time, like hopefully some time in 2018, we would have a form of this product on the transatlantic.”
It might be easy to blame American for cutting free extras, but Casey said the carrier is considering making changes to cheap fares only because its customers — or people it would like to be its customers — now fly on no-frills airlines. These include Norwegian Air, Wow Air, and Air Europa, between the United States and Europe. Wow Air, likely the cheapest of the bunch, announced $69 one-way fares on Monday from many U.S. cities to popular European destinations, with a stop in Iceland.
The discounters tend to have different models, and some of them charge for some extras but not others. But in general, on their cheapest fares, they have more fees than U.S. airlines, with some carriers charging for everything from seat assignments, to bags, food and drink.
“We want to make sure we are competitive with their price offers in the marketplace, with products that are both bundled and unbundled,” Casey said.
The discounters are cutting into American’s margins. On transatlantic flights, American’s yield — a rough measure of ticket prices — decreased 9.1 percent in the second quarter. Casey called the threat from airlines like Norwegian “material,” and said American’s competitors, led by discounters, have been increasing transatlantic capacity 7-9 percent per quarter this year. “That’s a lot of extra seats,” he said. And many can only be filled at cheap prices.
Late last year, Casey said, American and its European partner airlines — British Airways, Iberia Airlines and Finnair — “started getting more competitive” with low-cost airlines to maintain market share, leading to what he called a “weak” pricing environment in coach. For American, the good news is that low coach fares haves been offset, Casey said, by “quite strong” demand for premium traffic, which accounts for at least 45 percent of transatlantic revenues.
For now, American is content to lower its coach prices and offer customers more free extras than discount airlines. But ultimately, Casey said, American may choose to sell a product more consistent with what discounters sell.
Interestingly, American has more data on no-frills fares than its U.S. competitors. American has antitrust immunity with Iberia, which now operates a separate no-frills brand called “Level” under its operating certificate. Both Iberia and Level are controlled by International Airlines Group, or IAG, which also owns British Airways and the Spanish low-cost airline Vueling.
“[IAG] believes quite strongly that this low-cost model is sustainable and it will over time have a material share of the transatlantic business,” Casey said. “They want to make sure that they have a piece of that low cost carrier market.”
With two airplanes, Level began flying earlier this year with four destinations from Barcelona — Buenos Aires, Oakland, Los Angeles and Punta Cana, Dominican Republic. It charges most customers for many extras, including bags, food and alcohol, and by many accounts, passengers are fine with it.
Casey said it’s too soon to know if American will go so far if it unbundles its transatlantic further in 2018.
“I’m not sure that is going to be the right model for us at American Airlines, but certainly in this low-cost carrier space, we have a partner of ours that is doing it,” he said.
Asking specifically if American’s possible fare might include a charge for the first checked bag, now free on every fare to Europe, Casey demurred.
“Level, they have bag fees,” he said, “so if we introduced a ‘Basic’ product, who knows?”
As for expanding unbundled fares into other international routes, Casey said it will be a market-by-market decision.
“We are looking at where we think it is appropriate based on the competitive situation in that market,” he said.
Photo credit: An American Airlines Boeing 787 on the ground. American is considering adding more a la carte pricing on European routes to compete with discount airlines. American Airlines