Lower Fuel Costs Could Create Price Wars For U.S. Airlines

Budget airlines like Spirit Airlines Incorporated (NASDAQ: SAVE) and Frontier Airlines have laid out aggressive expansion plans powered by ultra low ticket prices.

These two airlines offer customers the bare-bones flying experience by charging for things like assigned seats or printing their boarding passes at the airport. However, with fuel prices at record lows, carriers that typically stay out of price cutting wars are beginning to lower their own rates in an effort to ramp up passenger numbers.

Price Competition

Big name carriers like American Airlines Group Inc (NASDAQ: AAL) and United Continental Holdings Inc (NYSE: UAL) used to keep their fares relatively constant regardless of competitors like Spirit or Frontier. However, large carriers have begun aggressively discounting their fares to compete with the budget carriers and fill their aircraft.

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Falling Fares

A study by Expedia Inc. showed that one-way fares in the United States declined by around 4 percent in the third quarter of 2015. However, data from Harrell Associates LLC, which tracks around 300 domestic routes from American, United Continental and Delta Air Lines, Inc. (NYSE: DAL), showed December fares were down an average of 24 percent from the previous year.

Why Compete?

In the past, bigger, full-service carriers were unwilling to compete based on price, as they catered to business and higher income travelers who were willing to pay a bit more for their travel experience. However, according to American Airlines President Scott Kirby, the number of passengers who are price sensitive is on the rise, making competition based on fare prices an important part of the company's strategy going forward.

Fuel Prices Hit Revenue

While lower fuel prices take airlines' operating costs down, they have also brought fares down significantly, which in turn has driven most airlines' revenue lower.

To compensate, many companies have begun adding extra seats to existing planes and added no-frills ticket options that allow passengers to pay less for fewer benefits.

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