Price Is Right at American Airlines

A year after it reduced ticket prices as part of a fare restructuring that altered decades-old pricing patterns, American Airlines says the move has strengthened its appeal to business passengers and improved its financial performance.


A year after it reduced ticket prices as part of a fare restructuring that altered decades-old pricing patterns, American Airlines says the move has strengthened its appeal to business passengers and improved its financial performance.

"A certain group of our passengers had defected because they saw big price differences between what we were charging and what someone else was charging," said Scott Nason, American's vice president of revenue management, in an interview. "Now they have come back."

One example: Between 2002 and 2004, domestic passenger boardings at Miami International Airport, where American operates a hub, grew 4%. During the same period, boardings at nearby Fort Lauderdale-Hollywood International Airport, a favorite of low-fare carriers, grew 20%.

American, a unit of AMR (AMR:NYSE) moved to restructure its fare system in January 2005 after losing nearly $6 billion during the previous four years. It followed the lead of Delta Air Lines (DALRQ:OTC BB) by reducing the highest business fares, eliminating the Saturday-night stay requirement for budget fares and cutting the number of available fares on each flight.

The moves by two of the three biggest airlines reflected the reality that low-cost carriers were setting prices in the airline industry. In particular, American and Delta were under attack, with American facing intense low-fare competition from JetBlue (JBLU:Nasdaq) and others on its transcontinental and Florida-Northeast markets, while AirTran (AAI:NYSE) was eating away at Delta's traffic in Atlanta. Other majors followed in select markets.

The price change's effect on business travel was profound. In many markets, the cost of high-end tickets typically purchased by business travelers fell dramatically. For instance, the cost of a round-trip Dallas-La Guardia ticket, purchased on the day of departure, fell to $1,198 from $2,190.

Additionally, the requirement that a passenger stay over Saturday night to get a low fare, long lamented by business travelers, largely disappeared.

American says that the percentage of its passengers who stay over Saturday night has decreased to 47% from 49%, representing about 2 million people a year.

"These are changes that business travelers had been clamoring for," said Bob Harrell, president of consulting firm Harrell Associates. He said the airlines revised a pricing system that had essentially been in place since the mid-1970s, when improvements in global distribution systems enabled carriers to expand the number of "inventory buckets," or ticket-price classes, to about 10 from three previously.

The average one-way fare on the top 40 routes for seven major hub carriers (including America West Airlines) fell to $411 in mid-January 2005 from $576 in the first week of December 2004, Harrell said. The fare climbed back to $448 by late January 2006.

While it was Delta that moved first to restructure, it was American that benefited.

Like other carriers, American reported high load factors last year. In fact, American reported record load factors for every month of 2005. But what is unique, Nason said, is that in American's case, the trends were more pronounced.

"We moved from an airline with below-average load factors, and above-average yields, to one with load factors that were average or above average and yields that are still near the top of the industry, but not as much above the average," he said.

American said its 2004 load factor was 3.7% below the industry average. But in 2005, its domestic load factor increased 4.7 points to 79.8%, even as domestic capacity shrank 2.3%. The industry's average load factor through August was 77.5%, the airline said. Remaining Seated Change in domestic revenue per available seat mile for first three quarters of 2005United8.7%American8.5%Continental6.2%Average4.1%Northwest-1.1%Delta-0.1 %US Airways-5.1%Source: Eclat Consulting

This content continues onto the next page...

We Recommend