Wednesday, August 30, 2017

United's Fare Cuts Spread, Fueling Risk of Airline Price War

A price battle between United Airlines and heavy discounters is spreading to other U.S. carriers, threatening to derail the industry’s nascent recovery in pricing power.

Competition that heated up this summer in United’s hub cities of Houston, Chicago and Newark, New Jersey, has extended to American Airlines in Dallas and to other carriers, airline executives said. Passenger revenue for each seat flown a mile, a proxy for airlines’ control over fares, had finally started rising this year after a slump triggered by a 2015 price war.

While the fare cuts are good news for travelers, they risk hurting earnings throughout the industry. The pain would be particularly acute at full-service carriers, which face higher costs after boosting wages in recent years. Southwest Airlines Co., the largest discounter, is among the carriers that have been pulled into the fray.

“There is definitely a broad-based discounting amongst certain carriers” that has expanded, Andrew Watterson, Southwest’s chief revenue officer, said in an interview after speaking at the International Aviation Forecast Summit in Las Vegas on Monday. “If one or two airlines go off on a price-cutting binge, other airlines go along for the ride. If one airline moves and another does not, you could lose an awful lot of volume and you’re worse off doing nothing.”

American Airlines Group Inc. and United Continental Holdings Inc. are matching -- and sometimes undercutting -- the heavy discounts of Spirit Airlines Inc., said Robert Fornaro, chief executive officer of the ultra-low-cost carrier. Its base tickets cover a seat and a small carry-on, like a purse. Seat assignments, water and bigger carry-ons cost extra.

American was charging $25 to fly from Dallas-Fort Worth International Airport, its biggest hub, to Denver International on Sept. 3, according to the carrier’s website on Monday. A round-trip ticket was $70. The availability of such fares typically is limited.

Basic Economy

United is using new basic-economy fares to match discounters’ prices, President Scott Kirby said Tuesday.

“Being competitive against anyone that we fly head-to-head against is critical and strategically important,” Kirby said in an interview Tuesday in Las Vegas. “A lot of our customers are price sensitive. Not all of them, but many of them.” A basic-economy ticket includes fewer amenities than a typical coach seat and usually requires passengers to board last and pay extra for more than one piece of carry-on luggage.

He said United is selling only “a handful of seats” at, for example, $20 and expressed doubt that ultra-low-cost carriers can remain viable if they take on the big airlines at their hubs.

“They are out of growth opportunities. The problem is, customers do not want to fly a ULCC if they can get the same price on a different carrier,” Kirby said.

An S&P 500 airline index has tumbled 18 percent since reaching a 16-year high on July 7. The gauge slid less than 1 percent at 3:30 p.m. in New York.

Frontier’s Shot

One of the initial salvos in this year’s fare war came in June as Frontier Airlines Inc. prepared to more than double its number of routes. Kirby responded at the time with a vow to stave off any attempt by Frontier to grab a bigger share of the Denver market, the discounter’s headquarters city and United’s most profitable hub.

If American and United undercut the ultra-low-cost airlines, “it’s a sign of a full-blown price war and is going to hurt earnings at all U.S. carriers,” said George Ferguson, a Bloomberg Intelligence analyst. “The full-service airlines and Southwest are more vulnerable than the smaller, low-cost and Alaska because they have already agreed to higher wages for their crews.” The big carriers’ price cuts indicate the importance of U.S. routes.

“Most of them are focused on expansion in the domestic market as it has the highest yields of any of their markets,” Ferguson said. “International markets are far too competitive.”

‘Strategic Asset’

American Airlines executive Don Casey said its pricing strategy hasn’t changed since mid-2015, when the company said it would match any fare in its hub airports, including those of ultra-low cost carriers.

“Our hubs are our most important strategic asset,” said Casey, senior vice president of revenue management. “We’re going to defend them all the time.”

Basic economy has given the largest airlines a weapon they lacked during the 2015 price war. It has allowed the carriers to limit the number of deeply discounted tickets and encourages customers to purchase more expensive fares to gain features like advance seat assignments.

Original article can be found here ➤

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