Just in time for consumers looking for cheap airfares for the summer, U.S. airlines may be entering into a fare war.
Southwest Airlines lowered its domestic fares by $5 one-way on Tuesday for fares purchased within seven days of departure. On the same day, Delta Air Lines raised almost all of its domestic fares by $5 one-way.
The movements by these two airlines, which comes a week after Delta tried to hike its fares by $10 one-way, is troubling to J.P. Morgan analyst Jamie Baker.
“For starters, we can’t recall any prior, plain vanilla fare decrease by a large airline, nor could any of the industry executives we spoke with last night. Second, yesterday’s effort essentially reverses the Southwest-initiated February fare increase, at the time its second broad-based increase in 2016. Lastly, we suspect, but can only offer our opinion, that Southwest’s effort may be in response to other competitive fare gyrations, potentially signaling a more hostile pricing stance,” Baker wrote in an investor note on Wednesday morning.
Baker surmises that Southwest’s fare decrease could be in response to American and Delta placing Advantage Fares back in the market after halting them during the first quarter. When the fares weren’t there, Southwest picked up market share on some routes.
Advantage Fares were originally launched by US Airways several years ago where the carrier would offer deeply discounted fares on connecting routes compared to a competitor’s nonstop route. Eventually other airlines in the industry adopted the practice, but by the beginning of this year, those types of fares had largely disappeared, as noted by American Airlines executives on their first quarter earnings conference call.
“We went for about three months with no AAdvantage fares in the market. That three month period actually coincided with the relative decline in revenue expectations across mostly all airlines. So we were starting to wonder if our decision to cancel AAdvantage fares was really the correct revenue decision,” said American president Scott Kirby.
Kirby added that the fares had been reintroduced to the market by a competitor and by American which has strengthened demand.
American and United Airlines appear to have matched Southwest’s fare decrease although Delta has not. It remains to be seen if this fare decrease, or increase by Delta, will stick.
“Pricing spats occur from time to time, though usually limited in scope and well outside the market’s purview,” Baker wrote. “But this effort feels larger to us.”
The average airfare in the U.S. declined 3.8 percent in 2015, when adjusted for inflation. According to the U.S. Department of Transportation, the average fare was $377 for 2015, down from $392 the year before. It is the lowest annual average fare since 2010.
Fares continued to drop in the fourth quarter, declining 8.3 percent to $363, also the lowest level since 2010, the report said.