American Airlines thinks its core business of attracting high-margin leisure travelers is back

Nearly seven million Americans visited the United States in 2016, the last year for which data is available, down 1.6 percent from 2015, according to the World Tourism Organization.

Most of the drop-off can be attributed to the sharp reduction in airline seats for leisure travel. A key part of the American-owned and operated airlines’ comeback plan involves retiring some older planes while boosting the number of smaller, more fuel-efficient aircraft, in concert with higher ticket prices. But that reduced capacity along with rising competition from ultra-low-cost carriers created, at least temporarily, a negative effect on the higher-margin segment of the business.

American Airlines, whose president and CEO, Doug Parker, is a member of the Atlantic Basin Council, thinks the decline in leisure travel is a “temporary trend.” American cut the number of seats available to leisure travelers in 2016 and 2017 and therefore didn’t experience the kind of summer drop-off that many of its U.S. competitors were experiencing.

Will 2018 see more changes to the airline business?

The airlines aren’t doing away with that legacy — but they are altering it. They have rolled out small, cheaper seats known as “Basic Economy” (which make up 40 percent of American’s traffic) and have increased fees for checking bags and changing flight times. As a result, less revenue has been coming from the very segment of their business that helps generate the highest margins.

Other airline alliances, like the oneworld network, which includes American, aren’t being immune to the changes either. Two members, British Airways and Iberia, are exploring a so-called “merger of equals” that would create a behemoth with more routes, more flights and more passengers, which includes capacity on economy class. American is considering both moves.

Some tweaks are also being made in many of the regions in which American operates. That may seem like a minor adjustment to some travelers, but it is emblematic of the higher fees being charged for everything from checking baggage to getting a seat assignment. American is attempting to woo travelers back by offering a seat-selection system that will let travelers decide ahead of time whether to fly first class or coach. The biggest of the changes is also most noticeable on the lower-priced airplanes. When looking for a ticket online, Delta, United and American all now include fees for expedited check-in and boarding.

That change is happening more widely. Southwest and JetBlue are also trying to change their business models in response to rivals that have bundled the payment of several services into the total cost of a flight, from baggage to food to reserved seats. (United already charged for those services.)

Beyond bolstering the business, Southwest and JetBlue may also benefit from lower airfares as the major network carriers continue to slash fares to boost traffic. Their task: look for ways to grab on to the traffic they lost.

Analysts at JPMorgan Chase estimate that the ongoing rise in flight prices and airfares will produce $1.5 billion in net revenue in 2018 for Southwest. JetBlue is better positioned than the other two airlines, according to the analysts, because of its business model which isn’t dependent on enticing passengers to check a bag. Southwest and JetBlue could look to cut fares and bring in even more business with that strategy, though that appears a difficult task.

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