New American Discount Carrier?

[Jester]

"American Airlines plans to offer a version of the low-fare, no-frills approach to flying that is boosting profit margins at discount carriers.  Officials at American, the world's biggest airline, say they need to fight back against small but fast-growing rivals including Spirit Airlines and Frontier Airlines, which are known for cheap fares, lots of extra fees, and poor service."
 
http://news.yahoo.com/american-airlines-beats-3q-profit-forecasts-111203984--finance.html

 

[dfw gen]

Yep in a few years we will be the biggest shi*ties discount airline.

 

[IORFA]

Probably the same thing Delta does in markets they compete with Spirit out of Detroit. They just sell cheap HIGHLY restrictive fares that come with nothing. Add ins for everything, including a seat assignment. Not a bad approach. With loads the way they are, that means they get all the middle seats most likely. Gotta try something. They aren't going to do an American "lite" or Americanjet. Those were both colossal failures.

 

[Hatu]

Probably the same thing Delta does in markets they compete with Spirit out of Detroit. They just sell cheap HIGHLY restrictive fares that come with nothing. Add ins for everything, including a seat assignment. Not a bad approach. With loads the way they are, that means they get all the middle seats most likely. Gotta try something. They aren't going to do an American "lite" or Americanjet. Those were both colossal failures.

Sounds like it:
So beginning next year American will offer tickets with "less frills" but a "really cheap price" where it competes on nonstop flights with discount carriers, Kirby said.

Why they are doing it:
87 percent accounting for half of American's revenue fly the airline no more than once a year, and they buy airline tickets based on price, he said.

"We have to compete for them," Kirby said. "We can't just walk away from that size of the business."

Some disagree:
Some analysts are skeptical about chasing bargain travelers. Wolfe Research analyst Hunter Keay told American executives they were "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.

But in the end:
The low-cost carriers have more influence on prices as they add new destinations and routes. Kirby estimated that prices on 85 percent of American's routes are affected directly or indirectly by the discount airlines.

http://news.yahoo.com/american-airlines-beats-3q-profit-forecasts-111203984--finance.html

 

[jcw]

The other option is to stick your head in the sand and let the business go else where and start shrinking the airline then start layoffs

 

[Dog Wonder]

Competing with low cost carriers on fares requires lowering costs or losing money..

 

[jimntx]

Sounds like it:
So beginning next year American will offer tickets with "less frills" but a "really cheap price" where it competes on nonstop flights with discount carriers, Kirby said.

Why they are doing it:
87 percent accounting for half of American's revenue fly the airline no more than once a year, and they buy airline tickets based on price, he said.

"We have to compete for them," Kirby said. "We can't just walk away from that size of the business."

Some disagree:
Some analysts are skeptical about chasing bargain travelers. Wolfe Research analyst Hunter Keay told American executives they were "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.

But in the end:
The low-cost carriers have more influence on prices as they add new destinations and routes. Kirby estimated that prices on 85 percent of American's routes are affected directly or indirectly by the discount airlines.

http://news.yahoo.com/american-airlines-beats-3q-profit-forecasts-111203984--finance.html

Funny, for the longest time, they used to say "60% of our revenue comes from 20% of our passengers."  When did that change?
 
Agree with the Ruth's Chris analogy about chasing cheap fare seekers; however, I would not say that business travelers would never board a discount airline.  They said the same thing when they started cutting non-stop flights from STL to LAX, SFO, SEA, BOS, LGA, etc.  Southwest picked up a LOT of business travelers when we did that by starting non-stop service to a lot of those cities--SEA, BOS, LGA.  I commuted on Southwest a lot in those days (Love Field is 15 miles closer to my home than DFW).  When you walked through the East Terminal (all Southwest) at STL and looked at the boarding lines for their flights, the "willing to pay $25 to board first" line was full of suited passengers with computer bags and briefcases.
 
One of our STL EPs said to me "if American thinks I'm going to spend my life changing planes in  DFW or ORD, they have another think coming."  The FF'ers may not be wild about "no frills" flying, but they are even less happy about any lack of non-stop flights.  Time is important to them, and they do NOT want to spend it sitting in the large hubs waiting on their connecting flight.

 

[WorldTraveler]

Probably the same thing Delta does in markets they compete with Spirit out of Detroit. They just sell cheap HIGHLY restrictive fares that come with nothing. Add ins for everything, including a seat assignment. Not a bad approach. With loads the way they are, that means they get all the middle seats most likely. Gotta try something. They aren't going to do an American "lite" or Americanjet. Those were both colossal failures.

nice story but it just isn't reality.

DL passengers with the economy basic fare get the same onboard services - drinks, snacks, in the same seats.

The only real difference in terms of product features is there is no advance seat selection.

Fares are more restrictive but that is true throughout the product line for many carriers.

DL has also noted that they have very low percentages of passengers who actually choose to stay with the economy basic fare when presented with the restrictions; most passengers "buy up" to higher fare products.

AA's competitive situation is very different from DL's. The ULCCs don't have the presence in DL major markets that WN has in AA markets. AA has had ULCC competition at DFW and other hubs for years but AA's yield took a nosedive when WN started expanding service at DAL which is one of the markets that has been repeatedly noted by all carriers as being under significant yield pressure. The others are Chicago and MCO.

The article incorrectly says that airlines don't report average fares when in fact they do. AA's average fares at DFW have dropped by 25% in markets where WN has added nonstop service from DAL.

AA's solution might be similar to DL's but they have a very different set of competitive pressures that they have to address and may/may not ocme up different strategies.

 

[jcw]

Last time I checked US was very effective against WN in PHX and the same folks are driving revenue at AA

Interesting how some think Adam is immune to low cost competition

 

[WorldTraveler]

last time I checked, US doesn't exist anymore

Instead it has merged with AA which is a higher CASM carrier and AA added to their CASM by giving out pay raises to SOME labor groups in order to get the merger done.

If AA execs say they need to compete with low and ultra low cost carriers, I suspect they know what they are talking about.

and feel free to show us evidence that ULCCS have sent AA's RASM down anywhere close to what has happened with WN's expansion in DAL and MDW. The ULCCs are certainly part of the problem but the LCCs and esp. WN have had a far larger impact on AA than NK or any ULCC.

It is also noteworthy that AA says that more than 70% of its passengers had not flown AA before or in the past year - which says that for many passengers, there is little loyalty.

 

[700UW]

An airline within an airline doesn't work.

Delta Express
Song
Shuttle by United
Metro jet
Cal Lite

 

[jcw]

what laughs today - AA has the largest FF program and has the least loyal customers - it's amazing the analysis that is done on this site

 

[FWAAA]

Funny, for the longest time, they used to say "60% of our revenue comes from 20% of our passengers."  When did that change?

It may not have changed very much. Here's exactly what Kirby said during the conference call:

Essentially what we're doing is anytime that we are competing with a nonstop carrier, nonstop-to-nonstop, we're going to compete and match their prices. And the reason is because those carriers are relevant, and we have many customers who are willing to fly them. A statistic that when I told people they find somewhat amazing is that 87% of the people that have flown American Airlines in the last year flew us only one time. So 87% of our unique customers fly us one time for a year or less, and they represent over 50% of our revenue.

http://seekingalpha.com/article/3599046-american-airlines-group-aal-william-douglas-parker-on-q3-2015-results-earnings-call-transcript?part=single

If 13% of the passengers account for just under 50% of the revenue, then that's not all that far off from the old saying of 20% of the passengers account for 60% of the revenue.

If AA offers a few extremely restricted bargain basement fares and is successful in up-selling some of those passengers who buy them, then it may not be a money-losing strategy.

Thing is, that doesn't solve AA's problem at DFW, and that is that Spirit already has a 20% market share in every market it serves from DFW, according to management:

In those 25 routes in Dallas that Spirit flies, they have 20% market share, huge market share. But you have to understand this, when Spirit flies a flight, they carry all local passengers. So one Spirit flight is the equivalent of about three American Airlines flights, because we carry so many connecting flights. So if they fly a market twice a day, that's the equivalent of American Airlines flying six times a day in terms of the amount of passengers that they carry.

http://seekingalpha.com/article/3599046-american-airlines-group-aal-william-douglas-parker-on-q3-2015-results-earnings-call-transcript?part=single

With Spirit grabbing that much of the O&D, can AA stem that outflow of revenue even if it matches Spirit's fares?

 

[robbedagain]

good question FWAA   Id say if more folks are p..ed off at Spirit with everything they charge for then yes   but on the other hand if Spirit charges cheaper than AA  or any other air carrier  then it could go the other way too.   I think the bottom line is peeps are going to go after the cheapest fares to get to where their going

 

[WorldTraveler]

it says that ALL of the big US airlines MUST aggressively compete for every passenger. Far too many people here have tried to assume that business class and loyal coach passengers are all that AA and other legacies must carry to survive. When 70% of passengers are not loyal at all and see AA or any other legacy as simply a bus company that they choose based on fare and schedules, then the highly competitive coach market is one that carriers have to pursue.

They aren't motivated by NK's unbundling because they look at the bottom line for their travel. They have little experience with those companies as well and only get burned and complain when they have a problem. Even with much lower levels of customer service, ULCCs as well as LCCs such as WN deliver their service to the vast majority of customers.

some of us said years ago that AA would face this hyper-competitive environment which would be targeted at AA's core network and that is exactly what is happening. DL made a step that seems to be delivering what they needed. Whether the same type of strategy will work for AA is up to AA execs to decide.

If AA's cost structure is too high or they don't have the products to compete with ULCCs and even some LCCs, then AA has to change - AA execs said as much. what is clear is that AA has to compete for every passenger.