How American Airlines is taking a more ‘spirited’ approach to fare charging
In the highly competitive airline environment, Tom Bacon considers how American Airlines is taking a prudent and selective approach to matching fares
A recent flight search showed American Airlines, United Airlines, Delta Airlines, and Spirit Airlines all charging the exact same fare on an itinerary offered by all four.
Of course, Spirit, as the only ‘ULCC’ (ultra low cost carrier) of this group, was the only one:
To charge for carry-on bags
With a completely non-changeable fare,
With less than a 29-inch pitch
Arguably, American, Delta and United all were offering a much better value for customers. Yet, all the fares were the same. Can’t the largest carriers charge more for their superior (and higher cost) products?
American has said that it must match Spirit because 50% of its revenue comes from infrequent flyers who are presumably more price sensitive and are not totally aware of the differences in fees and product. With the growth in airline fees, many customers have complained about the difficulty of keeping up. And, of course, third-party distribution systems still focus mostly on price with limited information regarding fees and product differences.
Matching a competitor’s low fares because of a lack of customer information is painful. This is particularly true for the new mega-carriers who pride themselves on their superior offering – more locations, more sophisticated revenue management, more corporate links, a better loyalty programme. Naturally, Wall Street has questioned American’s aggressive approach.
But American is not pursuing this strategy without a bit of a safety net. They will ‘match’ selectively and prudently:
1. Fill empty seats
American will not sell seats at ULCC fares unless they believe they cannot fill those seats with higher value passengers, on a flight-specific basis. American typically provides significant connect opportunities to destinations not served by Spirit; thus, half the airplane could be filled with connect passengers where demand is not be impacted by Spirit. And American has strong loyalty and tremendous corporate contacts; again, this demand is unlikely to be impacted. So, American’s focus is only on certain flights – directly competitive with Spirit – where there are many passengers who fly infrequently. American’s revenue management system will forecast demand at various price points and fill planes from the highest fares down, leaving no seats for the Spirit-match fare on many flights.
2. Merchandise aggressively
If customer information is part of the problem, American will continue to step up its merchandising, tapping into its loyal frequent flyer base, leveraging its new branded fares while exploiting its global presence and dominance in certain markets.
3. Introduce a ‘bare bones’ product
American has announced that it is working on a lower content product to reduce the cost of offering the same fares as Spirit. Delta has a Spirit-match product that is non-refundable, non-changeable and does not permit pre-reserved seats; the discount for this may be just $10-$15 versus its standard product but this still helps limit the cost of matching and promotes some sell-up. Spirit charges $35 for carry-on, which is free on Delta so there is still room for Delta to reduce content further on its Spirit-match fare. American is expected to release its version of a lower content product early in 2016.
These three actions work together to reduce the profit impact on American. As American reduces the features in its Spirit-match fare:
The cost of offering such low fares decreases
The incentive increases for American’s customers to buy up to the standard fare
The value of clearly communicating product differences increases
Aggressive merchandising and customer communication will work together for American.
Thus, American’s ‘match Spirit’ strategy is designed to maximise profitability when its schedules operate in direct competitive with Spirit. It will only apply to otherwise empty seats, it will likely exclude some features that are currently included in American’s lowest fares, and American will aggressively communicate the benefits of its higher fares in its merchandising.