MIAMI —Last week, American Airlines (AA) announced that they would be introducing a new fare class, eliminating most frills offered to passengers. They are doing this to compete with Ultra Low Cost Carriers (ULCCs) which have cut into AA’s profit. American joins Delta Air Lines (DL) as the only two legacy carriers to have this fare class. Furthermore, American Airlines promises to match the fares of any ULCCs on competing non-stop routes.
ULCCs have taken over large markets across the country. Frontier Airlines (F9), Spirit Airlines (NK), and Allegiant Air (G4), America’s ULCCs, each compete in similar markets with American legacy carriers. Each airline has found it profitable to charge passengers for carry-on baggage, seat assignment, drink, and other conveniences found on all other airlines. Legacy carriers have not really had a profitable way to compete with ULCCs until now. Scott Kirby, CEO of American Airlines, said, “Given that 50 percent of our revenue is up for grabs in these markets, and these carriers have had so much success when they weren’t matched. We know that we have to match their fares.” ULCCs have invaded hubs of legacy carriers, forcing them to drop prices and lose money, or hope that passengers will be loyal to their hometown airline and pay a more expensive fare, but get all the conveniences usually associated with air travel. The three ULCCs operate a total of 78 routes from American Airlines’ hubs alone, mainly out of Dallas/ Ft. Worth (DFW) and Chicago O’Hare (ORD). Most of these routes only started within the past 4 years.
Right now, oil prices are the lowest they have been in years. Taking advantage of this decline, American Airlines can afford to make money on such routes. However, when oil prices rise again, will American Airlines still offer their new basic fare class, or will they secede from the market and allow the ULCCs to continue with their large profits?