American Airlines to offer cheap fares to compete with low-cost carriers

Air travelers looking to save money may applaud the news that American Airlines plans to introduce cheaper fares to compete with ultra-low-cost carriers like Spirit Airlines and Frontier Airlines, but Wall Street analysts are not happy.

American Airlines Group Inc. President Scott Kirby unveiled the fares during a recent conference call, when the parent company of American Airlines reported $1.7 billion in net income for the third quarter, an 80% increase over the same period last year.

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Kirby and American Airlines Chief Executive Doug Parker offered very few details on the bare-bones fares except to say that the carrier will introduce them next year. They went on to point out that 87% of their passengers flew American only once in the last year, and those fliers represent 50% of the carrier’s revenue. Kirby and Parker said such infrequent fliers can be lured away by cheap fares from Spirit and Frontier.

“And so, 50% of our customers are up for grabs,” Kirby said. “We have to compete for them.”

Despite the 80% rise in net income for the period, the airline company’s shares dropped 3% on the day of the announcement, with Wall Street analysts saying they worry that the low fares will hurt sales of more profitable upper-class seats.

“How do we know that you guys aren’t totally blowing up yourselves in the process?” Hunter Keay, a senior analyst at New York-based Wolfe Research, asked American executives during the conference call.

Shares of American Airlines Group have since rebounded. The shares rose 36 cents, or less than 1%, to $46.22 on Friday.

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The move by American is not new to a major carrier. Three years ago, Delta Air Lines responded to competition from ultra-low-cost carriers in Detroit by introducing extra-cheap fares, dubbed Basic Economy fares, which are nonrefundable, can’t be upgraded or changed and don’t let passengers choose their seats.

Since then, Delta has expanded the Basic Economy fares to markets across the country because, Delta officials said, the fares have been drawing in travelers who ultimately upgrade to higher-priced fares with more flexibility.

To read more about travel, tourism and the airline industry, follow me on Twitter at @hugomartin.

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