Photo courtesy of American Airlines
The world's biggest airline, which just made a $1.69 billion profit in the third quarter, wants to be like one of the country's most berated airlines.
How's that for a twist?
In what might seem like a "strange but true" documentary topic, American Airlines President Scott Kirby tempered the company's quarterly earnings call by telling analysts it plans to introduce low fare options. This, he said, is to offset a big chunk of the flying public that chooses budget carriers such as Spirit Airlines - which annually comes in at the bottom of customer service surveys but also has one of the highest profit margins in the industry - and Southwest.
American plans to start these fares in 2016.
Kirby's announcement caused some serious fluctuation in the market on Friday despite the initial news that American had a 80 percent increase year-over-year on net profit in the third quarter. Shares of American dropped 4.7 percent as investors were wary of the plan to cut prices and increase capacity, although the airline did gain most of that back by today. The stock was trading at $46.33 as of 2:30 p.m., a three-month high, albeit down from a high of $55.69 in January.
Shares of Spirit Airlines dropped eight percent on the news to a year-long low of $38.10 this morning at 10 a.m. before rallying slightly.
Kirby's words shouldn't have been that much of a surprise, however, given the way the industry has gone of late. For instance, Delta Air Lines earlier this year introduced a tiered fare system that includes low fares, or basic economy, as it calls them.
The reason for Kirby's thinking? The infrequent flier.
He said 87 percent of passengers fly American just once a year - accounting for half the company's revenues - and their purchases are based solely on price, meaning if low-budget carriers such as Spirit, Southwest or Frontier serve the same market, the passenger will choose the lowest price no matter which airline it is.
"We have to compete for them," Kirby said. "We can't just walk away from that size of the business."
He said that also extends to international flights against low-budget carriers like Volaris in Mexico and Ryanair in Europe.
"We will do more to disaggregate and really do more to have a product that has less frills," Kirby said. "That will allow us to offer a product that is competitive on price with ultra-low-cost carriers, but also customers who want a better product and are frequent fliers, who want a better seat on the airplane - we can give them the choice of not paying that fare and having a better product."
How many less frills fliers will have to do without remains to be seen, as Kirby did not elaborate. But CEO Doug Parker reiterated the plan and said "We will compete on non-stop service. We're extremely comfortable with what we're doing."
Also of interest, Kirby said American will change its frequent flyer program next year, but also did not elaborate.
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