Shift in Business Airfares Helped American Airlines

DALLAS - A year after Delta Air Lines Inc. turned the airline industry upside down by lowering its business fares, officials at American Airlines Inc. think they've come out on top.

Last January, Delta whacked its most expensive fares by more than half in many cases, ending Saturday night stay restrictions and lowering fees for changing tickets.

All Delta's competitors matched the new fares - including American.

And now that the dust has settled, American executives say they think the carrier has ended up better off than they had feared - largely because they tweaked their response in a few key ways.

But at the same time, American didn't cap its priciest tickets at $499, as Delta had done, instead selling its most expensive one-way tickets for $699. (Both carriers later added $100 to their caps, citing soaring fuel costs.)

"Now more than ever we think we did the right thing," said Scott Nason, American's vice president for revenue management.

American executives had worried that with the lower cap, some flights could end up completely sold out well before the day of departure, forcing some corporate fliers to turn to other carriers on last-minute trips.

The cheaper tickets have also resulted in a healthy boost to American revenue, as customers came back after abandoning the world's largest carrier when some of its one-way domestic fares exceeded $1,000.

"It's something we're pretty excited about," said David Cush, American's vice president for sales.

Flying from American's roughly 2,000 major corporate customers was up as much as 10 percent in 2005 over the prior year, and analysts are lauding American's revenue performance compared to its peers.

American's operating margin excluding jet fuel is now pushing over 25 percent, approaching that of Wall Street darling JetBlue Airways Corp, noted analyst Jamie Baker in a note to investors this week.

American is still expected to post a huge loss next week when it reports fourth-quarter earnings, but its shares have soared on hopes it will turn a profit this year.

American's December revenue will be as much as 14 percent better than what it showed last year measured on the money it gets from each seat mile flown, Baker wrote. American has frequently outpaced all its foes in that measurement in the past year.

With major carriers flying about 6 percent less capacity in the domestic market and planning deeper schedule cuts, pricing is going to get even more favorable for airlines, noted analyst Michael Linenberg of Merrill Lynch, in a recent research note.

Analysts had frowned on the short-term effects of Delta's move last January, believing it could have cost American as much as $600 million in lost revenue because its most profitable fares had been chopped in half.

Whether American would have pulled in more revenue in 2005 under the higher business fares of 2004 isn't clear, Nason said, because the fuel price spike cluttered the market and even forced Delta to move its cap up $100. "It hurt us less than we feared," he said.

What's more certain, the American executives said, is that the carrier's strengths - big network, lots of daily flights from major cities - helped snag more fliers toting briefcases.

In negotiating new corporate contracts last year to adjust discounts in the wake of lower fares, American was "seen as an island of stability" in an industry where three of the top six players are now in bankruptcy, Cush said. The new agreements cut corporate discounts that were as high as 40 percent on the old fares to mostly "in the single digits," he said.

The airline said it has pulled more travelers off connecting itineraries and from secondary airports to American's nonstop flights at primary airports, and the trends suggest bookings are still robust. Some fliers have come back from low-cost carriers as well, Cush said.

Delta's "Simplifares" worked as intended and have brought more customers to the carrier, said spokesman Anthony Black.

But Delta's timing could have been better, consultants have said, because the carrier needed every dime as fuel costs rose. Delta eventually filed for bankruptcy protection on Sept. 14.

"The Achilles heel of all of this was fuel prices," Black said.

In theory, the lower pricing ought to hurt Southwest Airlines Co. because the gap between its $299 capped one-way fare and those found on its network competitors has narrowed.

But Southwest officials say they haven't seen much effect from the new pricing.

The carrier's mix of full-fare tickets - the tickets most likely to be bought by business travelers - held steady last year even as it grew about 10 percent, officials have said.

"There would not be any reason to abandon our full fare to go to their full fare unless you're interested in losing money," said Southwest spokesman Ed Stewart.


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