Price Is Right at AMR

A year after it reduced ticket prices as part of a fare restructuring that altered decades-old pricing patterns, American Airlines says the move has strengthened its appeal to business passengers and improved its financial performance.

"A certain group of our passengers had defected because they saw big price differences between what we were charging and what someone else was charging," said Scott Nason, American's vice president of revenue management, in an interview. "Now they have come back."

One example: Between 2002 and 2004, domestic passenger boardings at Miami International Airport, where American operates a hub, grew 4%. During the same period, boardings at nearby Fort Lauderdale-Hollywood International Airport, a favorite of low-fare carriers, grew 20%.

Since American restructured its fares, Miami boardings have increased 2.5%, despite a 6% decrease in capacity, while Fort Lauderdale boardings merely kept pace with capacity increases, growing 7% with 8% more capacity.

American, a unit of AMR (AMR) moved to restructure its fare system in January 2005 after losing nearly $6 billion during the previous four years. It followed the lead of Delta Air Lines (DALRQ) by reducing the highest business fares, eliminating the Saturday-night stay requirement for budget fares and cutting the number of available fares on each flight.

The moves by two of the three biggest airlines reflected the reality that low-cost carriers were setting prices in the airline industry. In particular, American and Delta were under attack, with American facing intense low-fare competition from JetBlue (JBLU) and others on its transcontinental and Florida-Northeast markets, while AirTran (AAI) was eating away at Delta's traffic in Atlanta. Other majors followed in select markets.

The price change's effect on business travel was profound. In many markets, the cost of high-end tickets typically purchased by business travelers fell dramatically. For instance, the cost of a round-trip Dallas-La Guardia ticket, purchased on the day of departure, fell to $1,198 from $2,190.