This Could Send American Airlines Stock Soaring
Low-cost commercial carriers (LCC) like Spirit Airlines, Inc. (NASDAQ:SAVE) have capitalized on their ability to undercut competitors thanks to an aggressive cost structure and lower-than-average fares. However, Spirit Airlines may become a victim of its own success because some of the majors have been looking for ways to get into this market. As of now, Spirit Airlines can count on the mighty presence of such airline sector giants as American Airlines Group Inc. (NASDAQ:AAL). Holders of American Airlines stock can rest assured that not only is it catching up with LCC fare offerings, but it is also matching its competitor’s price and could potentially even beat them.
In October, during an enviably good quarterly results presentation, American Airlines announced the establishment of a new fare level to help confront competition from low-cost carriers like Spirit. American Airlines stock gained, as it was propelled back to the mid-$40.00s. Scott Kirby, AAL’s CEO, said the “product” would be marketed in 2016, without providing much more detail. (Source: “American Airlines to offer cheap fares to compete with low-cost carriers,” LA Times, November 1, 2015.)
Spirit Airlines shareholders can be proud that an airline as powerful as AAL has launched a special product to deal with the competition from Spirit, which has become a very serious competitor in Dallas, an AAL hub. That said, AAL’s stock performance will now also depend a bit on Frontier Airlines, which changed its business model to adopt a more “ultra low-cost” approach, a la Ryanair, as a threat, accelerating its evolution.
Chart courtesy of www.StockCharts.com
The vast majority of American Airlines’ passengers travel once a year on average on one of its routes. The airline’s executives interpret this as a sign that they are passengers who choose to fly according to ticket price, even if these account for half of the company’s sales, according to Kirby. This is the market that AAL stock’s performance will also be watching now, the one around which Spirit Airlines and other LCCs have built their whole business model.
AAL’s new low-cost product will include “less service” but also come at a “really low price.” However, it will only be available on routes where American Airlines has to fight against a competitor such as Spirit. As if Spirit shareholders aren’t worried enough, Delta Air Lines, Inc. (NYSE:DAL) is proposing a similar strategy with its new “basic economy” product.
Increased Threat of Terrorism Affecting Air Travel
Meanwhile, Spirit and other airlines may have to further temper growth projections because of the crash of Russia’s Metrojet Flight 9268, killing 240 people over the Sinai just after taking off from the Egyptian resort of Sharm el-Sheikh. The investigation is ongoing, but governments are not taking chances; the U.K. has already ordered a suspension of flights to Sharm El-Sheikh, given its inclination toward the likelihood of a bomb, and therefore terrorism, downing the Airbus A321, which was similar to the aircraft used by Spirit.
While Egypt’s economy and stability are one of the main victims, the latest incident may influence air traffic. The crash, believed to be an act by the Islamic State terrorist group, has raised concerns of more, similar actions in the future.
American Airlines New Plan Has Little Risk
One of the aspects that American Airlines stock will have to confront in order to be fully successful and capitalize on the low-cost model opportunity for shareholders is to consider the level of stress on aircrews imposed by ever more stringent cost control measures.
It is a fact that airliners and commercial aviation have never been safer, according to data from the International Air Transport Association (IATA); 650 people died in air accidents in 2014 (not including Malaysian Airlines 017 in Ukraine; it was shot down). Technology is ever more refined, ensuring greater safety for passengers and aircrews. Yet there are cases of pilots warning that financial pressures are inevitably leading to rules that exceed the boundaries of good practices.
It must be stressed that the problem has nothing to do with the safety standards themselves, which are the same for all airlines regardless of class or category. Indeed, LCC airlines in Europe EasyJet and Ryanair have been shown to maintain excellent safety levels and more with its human resources.
Pressure for higher safety standards and growing competition among low-cost carriers will give American Airlines stock more opportunities to maneuver the markets, compared to its purely LCC carriers, as it will be able to adjust margins and even abandon the venture altogether if the profitability does not match investors’ expectations, leaving the core business unaffected. That’s something stockholders should be pleased about in 2016.