Price wars in U.S. may derail airlines’ recovery
A price battle between United Airlines and heavy discounters is spreading to other U.S. carriers, threatening to de rail the industry’ s nascent recovery in pricing power.
Competition that heated up this summer in United’s hub cities of Houston, Chicago and Newark, N. J ., 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 travellers, 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 Monday. “If one or two airlines go off on a pricecutting 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 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 US$ 25 to fly from DallasFort Worth, its biggest hub, to Denver International on Sept. 3, according to the carrier’s website on Monday. A round-trip ticket was US$70.
United is using new basiceconomy fares to match discounters’ prices, president Scott Kirby said Tuesday.
“Being competitive against anyone that we fly head-to-head against is critical and strategically important,” Kirby said Tuesday. “A lot of our customers are price- sensitive. Not all of them, but many of them.” A basic- economy ticket includes fewer amenities than a typical coach seat and usually requires passengers to board last and pay extra for more than one piece of carry-on luggage.
He said United is selling only “a handful of seats” at, for example, US$ 20 and expressed doubt that ultralow-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.
One of the initial salvos in this year’s fare war came in June as Frontier Airlines 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
If American and United undercut the ultra- low- cost airlines, “it’s a sign of a fullblown price war and is going to hurt earnings at all U.S. carriers,” said George Ferguson, a Bloomberg Intelligence analyst.