American Airlines wants to be like Spirit Airlines with a component for low-budget fares, which Delta Air Lines already introduced this year through its tiered pricing system that includes a Basic Economy fare, which JetBlue emulated with branded fares, which Southwest has basically been doing for decades.
Confused?
Welcome to the wonderful new world that American wants to create, where the major airlines compete with the low cost carriers (LCCs).
So how do customers sort out fares when airlines are making it more and more complicated? This has been the conundrum in the industry. The airlines, which only now are becoming more transparent with ancillary fees at purchase points such as their websites, are trying more and more to lure customers to their own ticket-selling channels - witness Lufthansa's controversial charge of 16 euros if tickets are booked through a third party such as a travel agent or online travel agent.
According to a new survey conducted by CarTrawler.com and IdeaWorksCompany, Global Distribution Systems have been trying to catch up and only recently are making limited progress on creating parity between what is sold on airline websites and GDS screens.
The survey also noted that travelers don't always seek the lowest fare. A surprising number willingly pay a premium for more comfort and convenience. JetBlue implemented a branded fare strategy this year and expects it to produce annual revenue gains of $200 million. Management knows a significant number of JetBlue passengers choose the carrier's Blue Plus or Blue Flex fares in lieu of the lowest priced Blue fare, and many will pick the Blue Plus fare simply because it's in between - or the average fare, plus fees and amenities - between the highest and lowest priced.
Yet, interestingly enough, American's logic for creating a price structure similar to Spirit in competing markets is to target the infrequent flier. American Airlines president Scott Kirby said that half of his company's revenues come from the 87 percent of American passengers who fly just once a year.
Their purchases are based solely on price.
"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. In fact, while many analysts and pundits have made a big deal out of American's announcement during its earnings call that it wants to compete with Spirit, the carrier might actually be late to the game.
As mentioned, Delta and JetBlue have already inaugurated low fare structures. United and Volaris have utilized yearly subscription plans to engage customers. United has done so with annual subscriptions for checked bags, Economy Plus seating and airport lounge access. Volaris has done so with overall memberships for $49, which gives customers first crack at the best fares and seats.
But will this all affect the bottom line? Based on early returns, it doesn't appear so. Delta's third quarter earnings were $2.2 billion in pre-tax profit, up 33 percent year over year. It increased paid first class load factor by 8 points to 56 percent and expanded its Basic Economy product to over 450 markets.
JetBlue reported net income of $198 million in the third quarter, or 58 cents per share, up from $79 million, or 24 cents per share, compared to last year's third quarter.
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