Fare Wars Are Back. Thanks, Delta And Spirit!

Oops, they did it again. Just a few months after the airlines were able to brag about increasing pricing and profits, the industry started to do what it does best: attack each other. And the fare wars are only to your benefit.

Delta And Spirit Disappoint Investors

Delta Airlines

For the most part, the airline is a zero sum business. If one airline wins, the other will lose.* If one company feels like another is intruding on its turf, then they both start acting like a couple of kindergarteners and throwing tantrums. The plus side is, passengers benefit.

Today, both Delta and Spirit Airlines reported monthly RASM numbers and revised their estimates for the calendar quarter downward.** Delta started off the morning by announcing that third quarter RASM would be up 2-3%, which is lower than its guidance just last month (2.5%-4.5%). Hey, at least it’s up. Low-cost competitor Spirit had already expected numbers to go down, having told investors to expect 2-4% declines. Today, they dropped that number to a dip of 7-8.5%. Ouch.

How can fortunes turn so quickly in the industry? It’s easier than it sounds. An airline can add seats to a market faster than it can get new passengers. And if it wants to go head-to-head with a competitor, the best way to do so is to lower prices in an attempt to win market share. Airlines are going to fly every seat on the plane, regardless of whether there is a passenger in it, so you might as well get at least a few bucks out of it. Something is better than nothing.

The bad news for passengers is that airlines tend to work through these little spats relatively quickly, particularly in an environment where demand is pretty good. Take advantage of it while you can.

 


*Okay, that’s not entirely true. Airlines are often able to stimulate business from people who otherwise wouldn’t fly by dropping fares that are too good to pass up, such as the $8 fare from Boston to Baltimore that Spirit just filed. But in the long run, there is only a certain number of potential customers. They’re not all going to buy tickets on two airlines at the same time.

**Beginner’s Hint: “RASM” is an industry term that measures unit revenues. Huh? Essentially, it is a measurement of how much money an airline earns to fly one seat one mile, whether that seat has a passenger in it or not. You could measure the average price that passengers paid, but it would be easy to game that number by selling only a few seats at a very high price. Likewise, you could measure how full the planes are (load factor), but an airline could sell tickets at very low prices to fill aircraft. RASM is a combination of the two, multiplying price times load factor.

 

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