Is American Airlines Shooting Itself in the Foot With Price Matching?

Is American Airlines’ strategy of matching competitors’ prices paying off?

As oil prices have fallen during the past year, pricing pressure in the airline industry has steadily increased. Markets targeted by low-cost carriers like Southwest Airlines(NYSE:LUV)and ultra-low cost carriers like Spirit Airlines(NASDAQ:SAVE) have seen some of the biggest impacts.

Incumbent carriers have reacted to these threats in various ways. American Airlines(NASDAQ:AAL), the largest airline in the world, has made a bold bet on price matching. Yet it has suffered significant unit revenue declines for the past few quarters. Does this mean its strategy is backfiring?

Pricing pressure heats up
American Airlines was one of the first airlines to report pricing pressure in a handful of domestic markets beginning in late 2014. It attributed the pressure to capacity growth by a number of low-cost carriers.

Airline American Airlines Plane Aal


Most notably, Southwest Airlines has dramatically expanded its capacity at Dallas Love Field since the expiration of the Wright Amendment last fall. This has affected pricing at nearby Dallas-Fort Worth International Airport: American’s largest hub.

Meanwhile, ultra-low cost carrier Spirit Airlines was a small niche carrier just a few years ago, but it has been growing extremely quickly. In 2015, Spirit expects to increase its capacity by 30.3%, while adding 15 planes to its fleet. As a result, Spirit Airlines has added capacity in markets across the country.

This explosion of low-cost carrier and ultra-low cost carrier capacity across the country has led to extremely cheap fares on certain routes, especially on off-peak days. This includes roundtrip fares of less than $100 on routes like Chicago-New York, Chicago-Washington D.C., and Dallas-New York.

Fighting back with price matching
American Airlines management first mentioned that it was matching low-cost carriers’ prices on the company’s Q4 earnings call in January. As the year has progressed, the company has become even more aggressive, though.

In July, American Airlines President Scott Kirby told a Wall Street analyst, “I think we are all-in now in matching everywhere.” Kirby asserted that this aggressive posture was working — markets where the company had started matching competitors’ prices were outperforming on a relative basis.

On the other hand, this hasn’t appreciably improved American’s unit revenue trajectory in the domestic market, where it faces the most competition from discount airlines. Passenger revenue per available seat mile, or PRASM, declined 1% on domestic routes in Q1, and then declined 6.2% in Q2. The company expects a fairly similar performance in Q3, and on the Q2 earnings call, Kirby opined that PRASM could continue declining until the second half of 2016.

There’s no good alternative
American Airlines has stated that routes where it’s matching prices are outperforming other routes. However, it’s possible that unit revenue would be higher still if it had, instead, cut capacity in markets where it’s facing the most competitive capacity growth in order to prop up fares.

The problem is, while that strategy might have bolstered unit revenue in the short term, it would have created even bigger problems in the long run. If American Airlines were to retreat in every market where Southwest, Spirit, and their peers are expanding, those carriers would be even more profitable than they are now. Those excess profits would likely be reinvested in future capacity growth.

In essence, American Airlines would be aiding the growth of its competitors. Additionally, those rivals would have strong incentives to expand in other American Airlines markets going forward, knowing that the latter would pull back to avoid a collapse in pricing.

It’s not clear whether American’s decision to aggressively match competitors’ prices will allow it to maximize its earnings in 2015. However, the real payoff will come later on. Hopefully, a bold price-matching strategy today will make competitors think twice before planning big encroachments on American Airlines’ territory in the future.



Suppliers generally offer a discount to customers if they are paid in a timely fashion — i.e., usually before the 30-day period after a payment is requested. Using a bit of lingo: If a supplier offers a “2 percent/10 net 30” timeframe, what that means is that they are willing to offer a customer a 2 percent discount if the customer pays the outstanding amount in full within 10 days.

Conversely, there is no discount applied if the customer pays within the normal, contracted term of 30 days (that is, after the 10-day cutoff). The advantages of such a system lie in the fact that 1) the customer gets a discount, of course, and 2) the supplier gets paid more quickly, which enables efficient cash flow management.

Nowadays, dynamic discounting can offer great flexibility to parties on both sides of the transaction, with a recent whitepaper by iPayables InvoiceWorks stating that both parties benefit from the process.

Under the terms of dynamic discounting, a customer actually initiates the terms of the discount to the supplier, and that discount can change based on when the supplier actually gets paid — and technology is employed in order to keep the process running smoothly. In the event that an invoice is approved, a supplier could, for example, get an email alert that lets them know that the customer is willing to pay as soon as tomorrow for an agreed-upon discount, say, in this case, 1.62 percent.

The discount itself is “dynamically” calculated on a daily basis, and that rate is in turn based on an annual return that is demanded by the customer. The dynamic discounts can also be calculated based on other methodologies, such as when the supplier is allowed to select a preferred payment date and in return they are able to see the discount that is tied to that date. If an invoice is not approved by that date, then the discount is recalculated based on an actual payment date.

In reference to flexibility, according to iPayables, the supplier is able to accept a discount deal when it is needed and leave it when they do not need it. The customer also is able to reap the benefits of raising or lowering the cost of capital according to their own immediate needs — say, when they are short on cash.

With a nod toward technology, iPayables notes that the paper invoicing system is a non-starter when it comes to dynamic discounting, as there is a manual “matching” process that means that invoices wend their way through a long process, and a not particularly efficient one. In fact, iPayables estimates that within larger organizations, roughly 50 percent of invoices that are shepherded through the traditional paper process are already past due upon being entered into the payables system, with “only around 35 percent” entered by day 24. Yet, the firm continues, the average approval time through a system that is automated, say, as with the InvoiceWorks system, is a scant 2.7 days. That’s because the electronic invoices are submitted instantly and matched instantly, and then the effective discount process can be put in place. And, as iPayables writes, “Offering to early pay a supplier at day three is much more interesting than offering to early pay at day 24.” Not surprisingly, research conducted by the firm shows that as the next term nears, the number of discounted invoices declines.

The implementation of a discounted system has a few variables that must be considered by a company, however. Among them are whether the payables system has the ability to store “non-standard terms” and whether dates can be changed after an invoice is created. Otherwise, a firm’s tech professionals can spend an inordinate amount of time and money on new processes.

In a case study centered on JetBlue, iPayables notes that automatic payable systems are able to offer dynamic discounting to certain suppliers and that after suppliers chose early payment options, a discount credit would be generated, with automatically applied coding and discounts reflected in the invoice itself.


The real problem with the iPhone 6s isn’t price, but how we pay for it

Earlier this week, Apple unveiled its latest smartphones, the iPhone 6s and iPhone 6s Plus. The tagline, “The only thing that’s changed is everything” cheekily acknowledges the likeness to its predecessor while immediately brushing off that inevitable criticism.

That its body is largely unchanged, at least at a distance, from its predecessor is unsurprising: every S-branded “tock” cycle has retained the visual identity of the phone that came before it, and the overall spirit of the iPhone line dating back to 2007.

Other than the processor and camera, upgrades over their predecessors that Apple is happy to quantify, the company largely stays away from the specs race. It advertises neither processor clock speed nor memory size, and highlights in its marketing materials only what it believes will help it sell more phones.

And sell phones Apple does. Over the past four quarters, all iPhone models sold a combined 222.5 million units, with the larger iPhone 6 and 6 Plus leading the infusion. Apple’s CEO repeatedly commented that a large percentage of those sales were not iPhone users upgrading to newer, faster models, but Android users dissatisfied with their smartphone experiences.

Apple doesn’t sell cheap smartphones, either: there is a reason the companyaccounts for nearly all of the smartphone industry’s profit. And that truth has never been more evident to Canadians than this week, when it was revealed that the cheapest iPhone introduced, the 16GB iPhone 6s, would cost $899 CAD, $250 more than the equivalent phone in U.S. dollars.

But in the U.S., despite the phone not increasing in price over its predecessor, customers can now purchase the iPhone 6s and 6s Plus using a new monthly financing plan, inspired by similar programs at carriers like T-Mobile, Sprint and Verizon. For a monthly fee of between $32 and $44 depending on the model and storage size, customers get to upgrade to a new iPhone every year, and receive AppleCare+ insurance as part of the deal. Unfortunately, that same financing option isn’t available in Canada despite a weakening dollar and rising smartphone prices.

It’s no secret the Canadian dollar has slumped in recent months, but few industries refresh as quickly as mobile, so we’ve seen the effects of that downturn laid bare in the price of new gadgets. The cost surge isn’t unique to the iPhone either: Samsung’s latest Galaxy products are approximately 20 to 30 percent more expensive than their previous generations. It’s just that Apple is more transparent about its pricing; it sells the iPhone unlocked from its website, so when it makes changes that subsequently filter down to the carriers, the public is wholly aware.

When currency depreciation raises the prices of consumer goods, companies try to hedge in advance, building in protections in case of a correction or, at worst, a further drop in valuation. Sanjay Khanna, Senior Mobile Phones Analyst at IDC Canada, believes that by pricing the iPhone 6s and iPhone 6s Plus as it has — $150 to $210 higher than the iPhone 6 when it debuted, and $60 more than the refreshed cost from March — Apple has hedged against further weakness in the Canadian dollar.

“The hedge that has been built into the price protects against further downside in the Canadian economy in the run-up to Christmas and into the first half of 2016,” he said. But, he believes, there is still room for the iPhone to grow in Canada despite the price increase.

Part of the issue with the iPhone’s pricing is that the standard subsidy model, where carriers discount up to $500 over two years in exchange for 24 months of consistent revenue, is no longer suited for technology of this price. While Apple offers high-interest financing options for its unlocked devices through a partner, carriers have yet to adopt the increasingly popular interest-free financing model that is finding success at U.S. providers like AT&T, T-Mobile and Verizon, and at smaller Canadian outfits like Wind Mobile, SaskTel and Eastlink.

The Big Three carriers, and to some extent their flanker brands, feel less pressure to move away from the two-year subsidy model, because it reinforces their place in the purchasing cycle.

But Canadian customers desperately need a similar option when buying expensive smartphones like the iPhone 6s. Not only does it make paying for the device more manageable by spreading the damage over two years, but it disentangles the cost of the phone from that of the smartphone plan, allowing carriers to charge less per month. After the phone is paid off, that extra $20 to $30 per month drops off the end of the bill, leaving the plan that was presumably cheaper to begin with, since it didn’t factor in subsidy bloat from the start.

Wind Mobile recently justified its reduction in device subsidies by capitulating to the rise of BYOD. It would rather keep plan prices down, it says, than maintain the often profit-reducing nature of device subsidies.

There is no question that the iPhone 6s and iPhone 6s Plus are expensive phones, but the reality is that their price hasn’t increased in the U.S., nor in countries where currencies are stable against the Greenback. Canada’s economic lot is affected by the rise and fall of oil prices; Apple, like most OEMs, is merely responding to that reality.

So when the new iPhones go on sale in just under two weeks, on September 25th, iPhone loyalists and Android defectors alike looking to upgrade will need to consider whether the current financing options — purchasing a phone outright for around $1000 and saving $20 per month on his or her phone bill; or on-contract for around $500, with a higher monthly cost — is cost effective. With the stipulation that phones purchased with subsidies must be tethered to a share plan, many Canadians just emerging from their iPhone 5 contracts (Double Cohort notwithstanding) will be faced with more costly phone plans alongside drastically higher upfront phone prices.

The good news is that even those looking to stick with the iPhone need only to look at last year’s models for significant discounts; and if Android, BlackBerry or Windows Phone devices are in contention, there are plenty of great options there, too.