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American to Challenge Spirit with No-Frills Fares

On Friday of last week, American released financial and operational results for its 3rd quarter in a conference call with financial analysts and media. Among the highlights:

  • The highest-ever quarterly profit for the company
  • $1.56 billion of stock repurchased
  • Successful merging of the American and US Airways reservation systems

But for travelers, the bigger news came later in the presentation, during the question-and-answer session with analysts and journalists. In response to a question about American’s strategy for competing against Spirit, Frontier, and other ultra-low-cost carriers, Scott Kirby, American’s president, disclosed that the airline plans to begin offering low-priced, stripped-down fares beginning in 2016.

Although he offered no specifics, the unbundled fares would presumably feature a low base fare that doesn’t include such “extras” as seat selection, changeable tickets, frequent-flyer miles, and so on. As with Spirit and Frontier’s pricing, any add-on services would incur extra fees.

Kirby’s reasoning is hard to fault. As he pointed out, “87 percent of the people who have flown American in the past year flew us only one time… And they represent over 50 percent of our revenue. For many of those customers, air travel is a commodity. With 50 percent of our customers up for grabs, we have to compete for them. We can’t just walk away from that size of a business.”

The competitive threat posed by Spirit is apparently very much on the minds of American’s management. Kirby noted that, “At DFW Airport (American’s principal hub), Spirit is our number two competitor, larger than either Delta or United.” And overall, 28 percent of American’s domestic nonstop available seat miles overlap with Spirit’s—again, more overlap than with either Delta or United.

Compelling logic notwithstanding, trying to be all things to all people is hardly a sure recipe for success in business. Spirit is as profitable as it is because it caters very specifically to price-conscious flyers; everyone else be damned. And at the other end of the spectrum, Singapore Airlines profits by stressing service and amenities over price. Focus is a hallmark of successful companies, and American’s new strategy would seem to be a move in the opposite direction.

Reflecting the view of many American loyalists, one poster commented on a related FlyerTalk thread, “AA has to be very careful that in going after half of their revenue represented by once a year fliers they don’t risk losing the other half represented by their loyal frequent flier base, which they’ve tried so hard to protect and expand, and which they view as one of their strongest competitive advantages… It makes no sense to poach fliers from UA and DL only to stick it to them later.”

Wall Street was less than enthused by American’s plans as well. Following American’s announcement, share prices of both American and Spirit dropped.

Reader Reality Check

How do you expect the upcoming skirmish with the ultra-low-cost carriers to affect your relationship with American?

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