Must-know: An overview of the American Airline Group (Part 5 of 12)
Structural difference in U.S. Airways’ network made Advantage Fare program successful
U.S. Airways operated the Advantage Fares program. The program offered significant discounts on connecting flights. Generally, the legacy carriers, Delta Airlines (DAL), American Airlines (AAL), and United (UAL) follow coordinated pricing for their non-stop routes. Airlines have realized that price wars are detrimental to their interest. If one airline cuts fares in one route, the other airline would respond by similarly cutting fares in another route that is significant for the competitor.
According to the Department of Justice (or DOJ), U.S. Airways has fewer passengers for non-stop services in its hub. As a result, it has to rely on generating more revenue from the connecting services. It does this by offering discounts for connecting services. However, the competitors can’t respond to its price cuts in a way that is significantly detrimental to U.S. Airways. Its non-stop service is limited and the price cuts in those limited number of routes wouldn’t matter much.
How U.S. Airways’ Advantage Fare program benefited passengers?
The Advantage Fare program provided low fare alternatives for price sensitive customers, especially for last minute bookings. The DOJ’s comparison of flight fares, as shown in the following screenshot taken on August 12, 2013 for travel departing on August 13 and returning on August 14 from New York to Houston, shows that U.S. Airways connecting service fare is at a 60% discount to fares charged by legacy carriers’ non-stop service. Compared to low-cost carrier Jet Blue (JBLU), U.S. Airways’ fares are at a 64% discount to its one stop service and 36% discount to its non-stop service. Even Southwest’s (LUV) fares were higher in certain routes.
U.S. Airways offered such discounts in many other routes. In the few routes that U.S. Airways offered non-stop routes, legacy carriers did respond with price cuts. This kept the competitive pricing between airlines alive and proved beneficial to customers.
However, with the merger such benefits won’t exist since U.S. Airways structural advantage of limited non-stop service will be mitigated when it combines American’s large non-stop routes in its network. As a result, any price decrease will instigate its competitor’s, Delta and United, to neutralize the advantage of price adjustments. According to U.S. Airways, most of the benefits of the Advantage Fare program were from routes operated by American, so continuing such pricing in these routes would be detrimental for the combined entity.
Browse this series on Market Realist:
- Part 1 - Overview: American Airlines Group Inc.
- Part 2 - Must-know: U.S. airline industry consolidation and restructuring
- Part 3 - Why the American-US Airways merger was conditional
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