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.

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