Skift Take

When Delta Air Lines launched Basic Economy, it allowed a free carry-on bag. When American Airlines subsequently launched a similar fare type, it barred free carry-ons, and that has turned out to be a poor decision because American has been losing market share to Delta.

American Airlines will begin allowing a free bag as part of its Basic Economy fare as CEO Doug Parker obliquely referenced the competition — most likely meaning Delta — as the rationale for the change, and directly mentioned Google as factors in the decision.

Until now, passengers who bought a Basic Economy fare, which was rolled out about a year ago in the United States and in the second quarter on transatlantic flights, could only bring one personal item on board without an extra fee. But beginning September 5, a free bag will likewise be permitted in the cabin without charge.

Speaking during American’s second quarter earnings call Thursday, Parker said the airline’s Basic Economy fare had become uncompetitive, and implied that American has been losing market share to Delta, which has long allowed a free carry-on bag as part of its Basic Economy fare.

Parker said “there’s a big airline” that doesn’t charge for carry-on bags and that made American’s Basic Economy fare uncompetitive. Of the three big legacy carriers, only United will still be prohibiting a free carry-on with Basic Economy — unless United decides to match Delta and American.

Southwest allows two free checked bags, and there is no fee for carry-on bags.

Parker likewise mentioned that when travelers search Google for flights, and use a filter to indicate they intend to bring a carry-on bag, then American does not appear in search results because the fare increases by a $20 bag fee.

The result is that price-sensitive consumers find lower fares on “truly competitive airlines,” so American took that into account in deciding to change Basic Economy in order to get aligned with the competitive market, Parker said.

Officials said that 80 percent of coach passengers view the choice of buying Basic Economy, and that about 60 percent of passengers opt to buy the more expensive main cabin fare.

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The toughest quarter since the merger in 2013

Beyond Southwest’s apparent gains, Parker said he doesn’t believe that American is losing market share to Delta or United, adding that American’s business travel revenue climbed 10 percent in the second quarter.

“We don’t view this as a share loss other than the Basic Economy issue,” Parker said.

In prepared remarks, Parker said the second quarter “was perhaps the most challenging quarter for the American team since our merger with US Airways in 2013. We had an operational disruption at our PSA Airlines subsidiary that was extremely trying for our customers and our team members; higher fuel prices increased our expenses by more than $700 million versus last year; and our revenues, while increasing, have begun to trail the rate of increase at our largest competitors for the first time since early 2016. Because fuel expenses are expected to increase by more than $2 billion this year, we expect 2018 earnings to be lower than last year.”

Fuel costs increased 41.1 percent to $465 million in the second quarter. To cope with rising fuel prices, the airline decided to defer the deliveries of 22 Airbus A321neo, which were scheduled for 2019, 2020 and 2021, and will slow capacity growth.

For the second quarter, American’s net income dropped 34 percent to $566 million even though the airline notched its highest quarterly revenue in history at $11.6 billion, a 3.7 percent jump.

American lowered guidance, forecasting 2018 diluted earnings per share, excluding net special items, to be $4.50 to $5. The previous guidance was $5 to $6 per share.

What Now?

During a question and answer session, analysts pressed Parker on whether the airline could still achieve its goals of $5 billion in pre-tax earnings annually on a sustainable basis.

Parker expressed confidence that the airline still can reach that goal but added he couldn’t state which quarter that might happen in. Among steps the airline will take to get there will be focusing on expansion in its most profitable hubs, including Dallas-Fort Worth, Charlotte, and Chicago, where it is adding gates.

“2019 certainly feels a lot better than 2018,” Parker said.

Correction: The original version of the headline and story indicated that Parker must have been referring to Southwest Airlines when he said “there’s a big airline” that doesn’t charge for carry-on bags, and that’s one of the reasons American changed the carry-on provision of its Basic Economy fare. But Parker was more likely referring to Delta Air Lines.


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Tags: american airlines, bag fees, basic economy, earnings, southwest airlines

Photo credit: American Airlines CEO Doug Parker said the second quarter of 2018 was the airline's most challenging since the merger with US Airways in 2013. 229553 / 229553

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