This past week American Airlines CEO Doug Parker hosted a Crew News question and answer session with employees. He’s been doing town hall-style employee chats since he was CEO at America West and this was the first one done virtually. Instead of live questions, he had an executive who framed ‘frequently asked questions’ from pilots, and separately from flight attendants.
In the flight attendant session Parker laid out American’s philosophy on pricing which is that they will match low fares in the market, but they will not lead discounting. And he explained they won’t even always match fares anyway – because the people who have been traveling recently are the ones who need to regardless of the fare.
We certainly don’t lead it. To the extent you see low fares on American Airlines, it’s because we’re matching someone else’s low fare. We never, I think I can say with certainty, these very low under-$100 fares that was never put in place by American Airlines. That was us matching some other airline that put those fares in place.
Having said that we’re continuing to look at that in this environment of low demand, those that are traveling may be a little less price sensitive than others and we may not need to – everything about airlines is designed to say look I’m not going to let someone else have a fare advantage over us and we tend to do that. But in this world we’re pulling back from that a little bit and seeing how that effects us.
…We aren’t the ones setting the low fares out there. If we could attract revenue at higher fares of course that’s what we’d do. And we’re not putting people on airplanes at below the cost it takes to carry them or anything like that. If we’re selling a fare it’s because it’s helping us generate cash. We’re doing so in a way first that is matching someone else’s low fare that we wish was higher. In some cases now we’re not even matching that low fare even though we wish it was higher.
I’m reminded that in the immediate aftermath of 9/11, when no one was traveling, airfares actually went up. That’s because the people who needed to travel had no choice, and price wasn’t the binding constraint that kept people home.
There’s been a lot of media in recent days on a report saying airfares are going to go up and several reporters have asked me about this. While grounded planes take capacity out of the system, as flights come back there’s likely to be empty seats in a way there haven’t been in several years. That’s going to mean low fares.
Whether American drops fares first or not, there will be price wars to get passengers to buy tickets on one airline over another. And as we get past the immediate risk of the virus low fares will bring incremental travelers too.
Airlines often run sales during the worst of times, too, to raise immediate cash – and spend it – worrying about how to actually operate the flights later. This was common in 2001-2002 and common in 2008-2009. There’s no reason we won’t see it again.
Parker isn’t quite correct that they only sell fares that earn a profit, a little over a month ago they were selling $16 cross-country fares that were 80% government taxes, almost certainly losing money at $3 each way to fly over 2000 miles. However most of the time what he offers holds.
Two years ago when Parker explained American’s pricing strategies he offered that ticket restrictions were key to their business model and if you wanted the kind of flexibility that Southwest Airlines offers then you should “go fly the cattle car.”