US major airlines recognise the ULCC threat. Marketplace dynamics will change. But beware cost creep

Recent justifications by American Airlines for the matching of low cost and ultra low cost airline fares in its markets challenge one pillar of Spirit Airlines' business model - that large network airlines are unconcerned about Spirit's market entry, and largely ignore the ULCCs' presence.

American for quite some time has stated that it pays attention to Spirit's movements, and has concluded the ULCC is a formidable competitor. Throughout 2015 American has highlighted the increased competition it faces, but it recently quantified the threat it faces from ULCCs and now finds itself assuring investors that its matching of fares offered by discounters is not permanently threatening its revenue profile.

Spirit has not escaped the effects of American's price matching. Its unit revenue degradation in 2015 has been the steepest among US airlines, and it sees no immediate end to the pricing pressure it faces in the market place. As large US airlines devise strategies to compete with Spirit, it appears that the passenger segment Spirit targets is relevant to airlines operating all types of business models, particularly in an environment where fuel costs remain well below historical highs.