American Airlines' (AAL) new basic economy fares are working as envisioned, providing a boost not only to the carrier's main cabin fares but also to the fares charged by competitors, according to an airline analyst's review.

"If network airlines can pull this off in larger scale, which we think they can, it is a potentially enormous synthetic fare increase -- though it will take time," Wolfe Research airline analyst Hunter Keay wrote in a report. "It also makes some of this new capacity growth even more tolerable.

Keay said he tracked American's basic economy fares in 10 markets every day for five weeks. The fares were introduced during the first quarter.

He found that in the week to two weeks before travel, the availability of basic economy fares diminished and the level of main cabin fares "increased sharply." In fact, he said, American's lowest priced main cabin fares rose by an average of 117% during the period.

Additionally, he said, "As soon as the basic economy fares went away, {ultra-low-cost carriers} Spirit (SAVE) and Frontier raised their own fares, eventually by 62% on average, three days later."

In the Miami-New Orleans market, for example, American's basic economy fare on Feb. 22 stood at $122, with the main cabin fare at $142 while Spirit was in the market at $59.

Around March 7, American began to lower its fares and Spirit began to raise its fares.

"The lowest ULCC fare gradually crept up to AAL's basic economy offering about three weeks before the day of travel," Keay wrote.

As the ultra-low-cost carriers raised fares, American was reducing its inventory of basic economy fares, so that on the day before travel the fares were available in just two of the 10 markets Keay was tracking.

"This means AAL cut off inventory close to the day of travel rather than adding more BE seats available for sale," Keay wrote. "This is literally exactly what's supposed to happen.

"The ultra-low-cost carriers seem content to allow American to set the pace of the market," Keay said. "{And} they seem willing to raise fares aggressively as long as AAL allows them to do so."

He cited immediate price increases "literally the same day AAL pulled back on BE availability."

The markets Keay surveyed included Charlotte/Orlando; Dallas to Baltimore and Tampa; Miami to New Orleans and Tampa; and Philadelphia to Charlotte, Dallas, Fort Lauderdale, Fla., Miami, and New Orleans.

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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