EquityResearch31May2019FOCUSBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE15.Restricted-InternalNorthAmericaAirlinesUnbundlingBasicEconomy;StrategicImplicationsforSouthwestWithnearlyeveryUSairlinenowmarketingalmostalllowpublishedfaresasa‘basiceconomy’unbundledofferings,wesuspectSouthwestwillfacerevenuechallengesgiventhecompany’sinsistenceonabundledproductoffering.Andthedatasupportstheconclusionthatastructuralshiftisunderwaytounbundledconsumerexpectations.Whileitisdifficulttoperfectlyisolatetheimpact,ouranalysisshowsbothnetworkcarriersandultra-low-costcarriers(ULCCs)likelybenefitfromthegreaterproliferationofunbundled,basiceconomyproducts.Likeitornotasaconsumer,basiceconomyisheretostay,withalltheUScarriersinourcoverageofferingorplanningtoofferanunbundledproductbytheendoftheyear,withtheexceptionofSouthwest.WhilethemovetoalacartepricingshouldaideunitrevenueoutcomesforbothnetworkcarriersandthealreadyunbundledULCCs,italsolikelyleavesSouthwestwithrelativelyfewerpricingtools,placingthecarrieratadisadvantagetocompeteoneverlowerentryfaresforhighlypricesensitiveleisurepassengers,withlimitedabilitytorecouprevenueonanancillarybasis.AcommonunbundledproductlikelybenefitsmostoftheUSairlineindustry.Thebenefitstonetworkcarriers,Delta,UnitedandAmericanarestraightforward,astheunbundledmodelallowscarrierstocompetemoreeffectivelywithacomparableproductthatshouldultimatelyhelpboostancillaryrevenuesorsupportbuy-uptomorepremiumproducts.However,wealsothinkitpotentiallyimprovesULCC’spricingpower,ascarriersaremorelikelytocompeteonotherattributesincludingdirectservice,schedule,timeandotherserviceofferings.Further,greateradoptionoftheunbundledmodelcouldincreaseconsumer...
