American to launch bare-bones airfare in 2016 to rival Spirit

[October 24, 2015]  By Jeffrey Dastin
 
 (Reuters) - American Airlines Group Inc <AAL.O>, the world's largest airline, on Friday said it will roll out bare-bones fares in 2016 to battle U.S. budget carriers, overshadowing a surge in its third-quarter profit.

American's stock fell nearly 1 percent.

American will match competitors' prices on any nonstop route, its president, Scott Kirby, said on an investor call.

The airline's move to sell cheap fares with more restrictions highlights how competition is intensifying between the largest U.S. airlines and low-cost rivals, such as Spirit Airlines Inc <SAVE.O> and Southwest Airlines Co <LUV.N>.

Shares of Spirit, which has made its mark with ultra-low fares with heavy restrictions, fell more than 8 percent.

Some 87 percent of American's customers flew the airline just once last year, comprising more than 50 percent of revenue, according to Kirby. He said these are customers "for whom air travel is largely a commodity," meaning they will switch to a competitor if American charges more per ticket.

Sterne Agee CRT analyst Adam Hackel said American's vow to compete may have made investors jittery. He added that American may restrict the number of the cheapest fares it will roll out in 2016 so that some customers will buy higher-priced tickets.

Starting in 2014, Southwest and Spirit have ramped up service from two of American's hubs, Dallas and Chicago, at times exceeding demand and pushing down fares.

The budget phenomenon has mimicked competition in Europe, where low-cost airlines such as Ryanair Holdings PLC <RYA.I> now carry the most passengers.

Next year American will sell a larger array of tickets that are priced according to certain restrictions, Kirby said.

The company waited to make the change until retiring the brand and bookings site of subsidiary US Airways, which it did on Oct. 17.

For the third quarter, American reported earnings jumped 80 percent to $1.7 billion, on lower fuel prices. The results topped analyst estimates.

American said passenger revenue, as a percentage of capacity, will fall between 5 and 7 percent in the current quarter from a year ago. The measure fell 6.8 percent third quarter.

The company said it expects pre-tax profit margin between 12 and 14 percent in the fourth quarter, up from 10.6 percent a year earlier.

For 2016, American plans to grow service 2 to 3 percent.

(Reporting by Jeffrey Dastin in New York; Editing by Leslie Adler)

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