American takes Spirit seriously

The notion that ultra low-cost carrier Spirit Airlines isn’t taking passengers away from major US airlines and isn’t in direct competition with them—promulgated by both Spirit and major US carriers in the past—is no longer germane. American Airlines president Scott Kirby has made clear that American considers Spirit a very serious competitor and, in fact, is planning to roll out a new fare model next year primarily to enable it to better compete against Spirit and other US ULCCs.

First, some pretty amazing numbers Kirby revealed in American’s third-quarter earnings conference call:

• 87% of people who flew American in the last year were flying on the airline for the only time they would fly it during that year. Those passengers represent about 50% of American’s revenue.

• 28% of American’s domestic capacity overlaps with Spirit’s. 11% of American’s domestic ASMs overlap with ULCC Frontier Airlines’.

• Spirit operates 50 flights a day from Dallas/Fort Worth and is American’s number two competitor at DFW. Spirit is American’s number three competitor at Chicago O’Hare.

• For several reasons, most importantly because American is carrying a lot of connecting traffic while Spirit’s passengers are mainly flying point-to-point, one Spirit flight is the equivalent of three American flights in terms of passengers carried.

Kirby believes that those 87% of passengers who only fly American once a year—the infrequent flyers, if you will—view flight tickets as a commodity and simply want the lowest fare. Therefore, these passengers generally have no qualms about flying Spirit instead of American. As a result, American is matching Spirit’s and Frontier’s fares all over the country and believes it has no choice but to do so.

“When 50% of our revenue is up for grabs, we have to compete,” Kirby said. “We can’t just walk away … We know that we have to match their fares. This isn’t something unique to ultra low-cost carriers. We match Delta, we match United, we match Air France. If we’re going to fly head-to-head, we need to match their fares.” Kirby said American operates higher load factors on the routes where it is matching ULCCs, which helps make up for the low fares on the revenue side.

Kirby did not give details, but said American is working on a new fare structure to be rolled out sometime in 2016 with the explicit purpose of countering ULCCs, which offer very low base fares and then charge fees for nearly everything. American will “disaggregate the product and offer fares with a greater suite of attributes that allows us to really compete with the low-cost carriers,” he said.

I noted in March that Southwest Airlines was running a television ad targeting Spirit, treating the ULCC as a legitimate rival. Kirby’s comments are the most explicit I’ve heard from a major US airline executive indicating Spirit is being taken seriously and viewed no differently as a competitor than, as Kirby said, Delta, United or Air France.

The question now is how will Spirit and CEO Ben Baldanza respond?  “We’re carrying different customers than Delta or Southwest is carrying,” Baldanza has said in the past. “In general, our decision about where to fly is about how much new traffic we can generate with our lower fares, not about how much traffic we can take away from X, Y and Z.” But with X, Y and Z now aggressively trying to take traffic away from Spirit, can Baldanza afford to maintain that posture?