American Air President Says Airlines Should Price the Way Hotels Price

Airlines need to be more like hotels, which have mastered the art of differentiating their products, said American Airlines (AAL)  President Scott Kirby.

"Hotels have done a better job {than airlines} of creating brand where they can run a 50% occupancy and that's OK," Kirby told a Wolfe Research investor conference on Wednesday. "They don't feel like they have to match a hotel somewhere down the road {because} people who want to stay at a Marriott property won't stay at Hilton."

Also, Kirby said, "When Starwood Group or Marriott Group compete for customers, they don't compete at a single property, they do it at multiple properties."

By contrast, he said, "We haven't done that." In other words, the airline industry has not yet found a way to segregate passengers willing to pay more for a coach seat from passengers who want to pay the absolute lowest fare.

But now it is trying to. American is moving to introduce a basic economy class, offering cheap seats with fewer amenities, later this year. Last week, Kirby said, "The economic impact certainly is in the hundreds of millions -- I personally will be disappointed if it's not in the billions for an airline of American's size."

United (UAL) also plans to offer basic economy later this year, while Delta is expanding its basic economy product.

"We're moving to a world where we're going to segment customer demand via features," Kirby said. "Customers who care about 'give me the lowest price possible,' we will be able to offer {that}. For customers who want a better product, we'll be able to offer those customers a better product.

"In coach, we treat every customer exactly the same," he said. "We're going to move to a world we have more products on the shelf to sell. It's a much better place to be, but it's going to take some time to get there."

Kirby credited the ultra-low-fare carriers for driving change in the industry because they have carved out a niche where it turns out that the once standard coach product -- with assigned seating, free drinks, frequent flier miles and carry-on bags -- becomes something of a luxury.

"In every environment, competitive forces drive evolution," Kirby said.

In a subsequent presentation at the investor conference, United's Chief Information Officer Jim Compton said that in the past, the principal "fence" or quality that distinguished the lowest-fare categories was the requirement to stay over Saturday night. That is no longer the case, he said.

"The industry has shifted to minimum stay and advance purchase," Compton said. "It begins to blur the higher fence of Saturday night stay."

As the distinction has blurred, he said, "travelers who would be willing to pay more at a higher price are purchasing at a lower price." In such case, airlines leave money on the table because they are not effectively differentiating higher value products from lower value products.

Kirby noted that basic economy is a step on the path to positive passenger revenue per available seat mile, a goal that has Wall Street's full attention.

American's "results from a financial perspective, earnings, are still quite good," Kirby told the Wall Street analysts who gathered at the conference. "We understand that all of you are going to be much more focused on PRASM.

"We are as well -- we are doing everything we possibly can to get back to positive PRASM," he said. "Basic economy {and} premium economy are the ways to make it positive."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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