Competition from abroad squeezing U.S. air carriers
Already under pressure from discounters at home, major U.S. airlines are facing a tighter squeeze abroad as low-cost rivals ramp up service across the Atlantic.
At American Airlines Group Inc., a measure of trans-Atlantic fares just plunged 9.1 percent, the most since right after the recession ended in 2009, as European budget carriers such as Norwegian Air Shuttle ASA added more flights.
Delta Air Lines Inc. also recorded a sharp drop in the same yardstick. United Continental Holdings Inc. eked out a tiny gain.
While that’s great news for bargain-hunting travelers, it’s a blow for traditional airlines. The increased seat supply is dragging down fares in a lucrative overseas market just as a rebound in domestic pricing is starting to look shaky. American and United rattled investors last month when they forecast tepid revenue growth and signaled that an already tenuous grip on ticket prices was slipping.
European discounters can hurt revenue at big U.S. airlines “by taking incremental bookings and forcing them to lower their own fares,” said Michael Bentley of consulting firm Revenue Analytics. “I don’t see any reason why they can’t cause trouble with the major carriers.”
American cited the low-cost competitors as it reported a second-quarter drop in the average fare per mile for Atlantic flights.
“Atlantic is challenging. The fundamentals are challenging,” Don Casey, American’s head of revenue management, said in a conference call last month. “There is excess capacity in the marketplace. The capacity is being driven by low-price carriers.”
The U.S. airlines are likely to fight back by extending overseas the so-called basic economy prices they are offering at home, said Savanthi Syth, a Raymond James Financial Inc. analyst.
Those tickets typically don’t allow passengers to select their seats or choose an upgrade option, while limiting their carry-on items. And they’re helping American, United and Delta to recover from a twoyear slump in revenue per available seat mile that was triggered by the expansion of low-cost airlines in the U.S.
“My expectation is they’ll roll it out in some form,” Syth said. “Right now they’re aggressively matching” the European discounters.
Basic economy enables a traditional airline to meet demand for lower-priced fares without blanketing the market with cheap tickets. It also gives them a chance to coax customers into switching to more expensive tickets when they realize that the discount option offers limited amenities.
Meanwhile, the European discounters are plotting their expansion. In the benchmark month of August, the number of seats departing daily across the Atlantic has increased 29 percent over the past five years, and two-thirds of the growth has come from nontraditional carriers, said Samuel Engel, head of the aviation practice at consultant ICF International.
Discounters now account for a quarter of seats, almost twice the level of five years ago, Engel said. a new chief financial officer, the company reached out to Amazon in April after representatives saw reports that the e-commerce giant had been looking at buying the grocer a year earlier.
Whole Foods shares were trading at $33.06 per share the day before the deal was announced. They have been trading at between $41 and $42 per share since, though shareholders are guaranteed $42 per share if the deal closes.
At least three shareholders have sued Whole Foods since the deal was announced, claiming that the arrangement with Amazon lacks transparency and undervalues Whole Foods.
One of those shareholders, Elizabeth Gieske, who filed the suit from Houston, took issued with Whole Foods’ proxy statement filed July 7 with the U.S. Securities and Exchange Commission. Her lawsuit claims that the document — which lays out the terms of the agreement — fails to show how the company calculated certain financial projections in regards to the deal.
The lawsuit also claims the proxy statement fails to “disclose the timing and nature of all communications regarding defendant (Whole Foods CEO John) Mackey’s future employment, as well as communications involving future employment and/or directorship of any other Whole Foods executives and directors, including who participated in all such communications.”
Other shareholders have also claimed that potential rival buyers don’t have a fair chance at bidding for the company because Whole Foods agreed with Amazon on terms such as Whole Foods having to advise Amazon of any proposals received by other companies.
U.S. lawmakers such as U.S. Rep. David Cicilline, D-Rhode Island, have questioned the potential impact of the deal on consumers and brought up worries of Amazon creating a monopoly on the grocery business. Industry analysts say that will not be an issue because combined, both companies reportedly share less than 2 percent of the grocery market. The Federal Trade Commission will also have to approve the deal before it can close.
Amazon announced that it will sell $16 billion worth of bonds to finance most or all of its buyout of Whole Foods. It’s the first time since 2014 that the $472 billion company has sold bonds.