Alaska and America West airlines last month each made dramatic changes to their published airfare structure, further pressuring the Big Six to find workable fare programs and prompting travel managers to question why their larger, preferred carriers seemingly are dragging their feet. With these developments, a simplified fare structure now is in place at four of the 10 major carriers—including Southwest and ATA airlines—and a group of relatively healthy smaller carriers, including JetBlue, AirTran and Frontier. Meanwhile, the largest carriers continue to match lower fares and ease ticket restrictions on routes where they directly compete against those smaller airlines, but generally not elsewhere.
The Alaska redesign, which it called "a sweeping move to simplify," resembles America West's decision in early 2002 to alter fares fundamentally throughout the North American system. Specifically, Alaska eliminated Saturday night and maximum stay requirements, cut high-end fares and reduced total fare types available in a given market from as many as 15 to an average of six. America West's structure was redesigned with only four types
(BTN, April 8, 2002), while other major carriers, notably American Airlines, recently have been creating new fare types in certain markets
(BTN, Feb. 9)."The traveling public is fed up with convoluted fares and confusing restrictions, and we're doing something about it," said Alaska Airlines executive vice president of marketing and planning Gregg Saretsky. Industry observers suggested the airline also made the move to proactively defend against incursions by low-cost carriers.
An Alaska official told Business Travel News that corporate discount applicability will be determined on a client-by-client basis. "We will be working with our corporate partners to make sure Alaska remains as their preferred carrier," he said.
A notable caveat to the systemwide fare overhaul is pricing on Alaska codeshare flights operated by partner airlines. In those cases, fares are governed by proprietary agreements between the two carriers. Alaska has a mature codeshare relationship with Northwest Airlines, as well as a growing one with American Airlines.
Travel managers generally welcomed the Alaska news, as did J.P. Morgan Securities analyst Jamie Baker. "But I am disappointed to see fare reform only at the small carrier level," he said during last month's Masters Program in Washington, D.C. "There are lots of opportunities for carriers to tighten up the spectrum by symbolically lowering the top end fares that no one buys anyway and squeezing a few more dollars from price-conscious travelers at the bottom end."
Baker, however, suggested the larger network carriers "are afraid of the short-term revenue implications" of far-reaching fare reform as they progress toward recovery, an observation corroborated by several Big Six airline executives. Indeed, major airlines remain constrained by cost structures that cannot yet support a lower-revenue fare structure.
US Airways president and CEO Dave Siegel last month drove the point home during a speech to the Potomac Officers Club in Washington. "Our customers flying out of Reagan National and other important US Airways cities will soon have these lower, simplified fares," he said. "The painful question we are trying to answer is whether they will be served by our employees or by another airline that has competitive costs."
There is some evidence suggesting airlines with lower cost structures successfully can absorb fundamental pricing changes and even improve revenue performance.
In 2003, the first full year of America West's redesigned pricing structure, the carrier saw total passenger revenues jump 9 percent, passenger yield increase 2.3 percent and passenger revenue per available seat mile advance 6.2 percent. While some of those improvements can be attributed to easy comparisons with weak 2002 numbers, AWA was the only major carrier, in addition to low-fare champ Southwest, to produce full year-over-year increases in each of those three revenue categories. More importantly, AWA in 2003 also returned to profitability after two years in the red.
Frontier Airlines, meanwhile, in January capped nearly all domestic one-way fares from Denver at $309, inclusive of a "temporary" $10 fuel surcharge. Frontier CEO Jeff Potter told Masters Program attendees that "in the weeks since we have done this, our average fare has gone up 3 percent to 5 percent."
Yet, the Big Six carriers—admittedly a different breed with a much larger size and scope than those with more progressive pricing policies—remain unwilling to enact change as they try to buy time and cling to their hopes of a revenue recovery, a strategy J.P. Morgan's Baker suggested as short-sighted. "While the temptation to modify fares may lessen as the revenue environment improves, that's no excuse for leaving a broken structure in place," he told BTN. "The dividends paid by a fare restructuring today could include slowing the growth of certain low-cost carriers, as well as delivering a body blow to certain carriers whose rehabilitation efforts are still in question."
Nevertheless, travel managers and other industry observers expect the Big Six to maintain more complex pricing designs in less-competitive markets. Some suggested complexity and fare sophistication can work for buyer and seller, if applied properly.
Therein lies the dilemma. The magic bullet hasn't been found and, at the current Big Six cost structure, may not even exist. "We are experimenting with different formulae in different markets without the freedom on our balance sheet to make bold experiments," said AMR Corp. president and CEO Gerard Arpey, during a conference call late last year.
Instead, the largest carriers will continue matching simplified pricing structures—or at least matching low fares—on routes where competitors are grabbing marketshare, while applying disproportionately high fares elsewhere.
AWA Reforms First Class FaresThe balance between those two types of markets is changing as low-cost carriers embark on rapid expansion plans and trash many of the old rules of airline pricing. America West, for example, recently introduced two new nonrefundable first class fare types—one that requires a seven-day advance purchase and one with no advance purchase requirement—representing up to 70 percent in savings. The goal is to attract new corporate clients and persuade existing ones to trade up from coach, especially small and midmarket accounts with more flexible corporate travel policies. America West claimed early success, reporting first class bookings since the Feb. 17 announcement had doubled.
First class has been one of the last remaining products generally free of low-cost pricing pressures, but most seats are filled with upgraded passengers rather than those paying first class fares, even at America West.
Ron Cole, the carrier's vice president of sales, said the redesigned fare levels already are changing that. "We have gone from selling 6 percent of the seats in first class to selling 15 percent," he said.
Indeed, America West expects the new fares won't dilute revenues—just as the wider fare reform of early 2002 didn't—but Cole acknowledged "some instances where it will be revenue-dilutive for certain accounts." Like Alaska, America West officials said corporate discount applicability on the new fare types will be determined with each existing client.
"We have seen some limited matching of the first class fare structure, but, in most cases, other airlines have tried to look competitive by controlling inventory," Cole said. "We are seeing it only on selected routes like shared nonstops and on some routes where we fly nonstop and they fly a connection."
In other airfare news, Delta said it raised by $4 or $5 each way certain fares for itineraries that connect through airports with particularly high government-imposed passenger facility charges. Delta, which previously absorbed all PFCs on connecting itineraries, would not identify the airports in question.
Delta's decision runs contrary to that of partner Northwest, which in November said it would "selectively reduce" by $9 certain roundtrip fares for flights that connect through its Detroit and Minneapolis hubs in an effort to stay competitive with connecting fares offered by other carriers through other hubs. Northwest, however, said it "selectively matched" Delta's fare hike. Mutual partner Continental in October said it would no longer cover PFCs for connecting flights through Cleveland.
Despite a few new attempts this winter, major carriers still have been unable to successfully push through any systemwide price hikes.