Second quarter earnings reports have come and gone, and there were two particularly interesting pieces of news coming from American. First, American announced it will begin allowing Basic Economy travelers to bring regular carry-ons onboard. And second, American isn’t growing much, but what growth it has will be focused on two places: Charlotte and Dallas/Ft Worth. It might not sound like it, but these two initiatives have one thing in common. They’re both an effort to catch up to Delta.
Basic Economy Gets Less Basic Thanks to Delta
Let’s start with the Basic Economy move. When American introduced Basic Economy, it, like United just before it, put a carry-on bag restriction on the fare. Anyone who bought Basic Economy (with a couple exceptions) could bring a small personal item to fit under the seat but nothing more. This wasn’t competitive with Delta, which rolled out Basic Economy long before American and United but never had a carry-on bag restriction.
American says Basic Economy is doing great, and in fact, 63 percent of American travelers who have the option to buy Basic Economy choose to buy up to regular coach. These fares were designed to make people pay more to get what used to be considered a standard benefit, and from that perspective, it’s working. The problem is, there are a lot of people who apparently aren’t buying American tickets in either cabin because, well, because Delta exists. CEO Doug Parker explained in the earnings call:
…for prices to the customers who are the buyers of this, there’s a big airline out there who doesn’t charge for the carry-on and there are now filters on things like your Google search that ask you if indeed you want to bring a carry-on or not, and if you say yes, all of a sudden the American flights don’t show up nearly as high as they did before because it adds $20 to our fare. Nothing wrong with that, that’s accurate. But when you get yourself in a position in this business where price-sensitive customers find themselves with lower fares on truly competitive airlines like that, we have to take that under consideration. And that’s what it is. We put this product out with a different model than others had done in the past, and we’ve gotten to the point where we think the right thing to do is to get in line with the competition.
True, Southwest also has no restriction on carry-ons for its lowest fares, but that’s not the “big airline” that Doug’s talking about. You can’t easily compare Southwest to American online since Southwest doesn’t participate in any of those sites. But Delta does, and when you go to Google Flights you see a lot of filters, including one for carry-on bags that gives Delta a big advantage.
When someone flips that switch, Delta will be able to show its Basic Economy fare including carry-ons while American can’t. And that is apparently hurting American enough to get it to change its policy.
This will have some negative financial impacts. The airline’s head of Revenue Management Don Casey thinks this policy will drop the percentage of people who buy-up to regular coach from 63 to about 50 percent. But American will now be able to attract those low-fare hunters who were increasingly choosing Delta. United doesn’t agree so far, and it says it isn’t changing, but as online travel shopping sites get better (ever so slowly) at showing product differences, the airlines will lose their ability to win on confusion. It sounds like thanks to Google Flights having that simple carry-on filter, American had to rethink this.
You could probably see pretty easily how this was Delta-influenced, but what about American’s growth plan? That’s a bit more subtle.
American Chases Atlanta
American talked about this a lot in its most recent earnings call, but I think Doug Parker said it best.
If you look at where our growth has been over the last year at American, it’s not been in our most profitable hubs. Indeed, we’re building up LAX, which is the right thing to do. Long term strategic, it was some growth in Philadelphia in response to some competitive incursions there to make sure that we were competitive. But not in places like Dallas and Charlotte, and not in places like our strongest hubs, which some of our other competitors did.
Apparently in the last year, American has focused on what it would call strategic growth. It may not be the most profitable place to put airplanes, but it’s still important for one reason or another. That’s done. Now American is going to focus on where it makes the most money, and that is in Dallas/Ft Worth and Charlotte.
This might sound obvious, and really, it is. American is getting 15 new gates at DFW and 7 in Charlotte so it has the room to start growing further in the places where those airplanes can make the most money. Go figure.
What does this have to do with Delta? Well, Delta’s already done that. Atlanta is the holy grail of hubs with an incredible amount of throughput, and American wants to create an Atlanta at DFW. Charlotte won’t get nearly as big, but it has room to get bigger and bigger in a very profitable way.
In short, American will continue to grow in its hubs so it can try to get an Atlanta-like position. Meanwhile, Delta has moved beyond its hubs to try to cultivate new frontiers. We’ve seen Delta start to build up Boston into a focus city. Raleigh/Durham is now one as well. And there’s talk of Austin being the next place Delta goes. So while American tries to get bigger in its hubs, Delta gets broader in strategic markets, chipping away at the loyalty people in those cities have to other airlines.
None of this is to say that American is doing the wrong thing. What American is doing makes sense. As usual, however, Delta is ahead in this race.