Delta Air Lines' decision last month to jettison a complex pricing structure from its Cincinnati hub drew a positive reaction from local travel managers but left in doubt the mechanics of future corporate contracting. It also marked a significant development in ongoing domestic airfare reform.
Given the changes to business traveler purchasing patterns, the price control enjoyed by low-cost airlines and the ongoing financial crisis faced by major network carriers, many industry observers expect fare simplification to gain momentum. Plenty of speculation has been directed at American Airlines, which sources said is poised to make its own pricing announcement. The carrier, as per industry protocol, would not discuss any future pricing actions.
"For several years, major companies in Cincinnati were saying they had no choice but to send people through Dayton or Louisville. For $600 or $800 savings, the one-hour drive was worth it," said Bobbi Huber, manager of corporate travel services for Cincinnati-based Federated Department Stores. "We never mandated the use of alternate airports, but we urged travelers to consider the options. So this shows that Delta is listening and renewing their focus on the customer. I feel good about that."
Delta vice president of sales and distribution Pam Elledge said the carrier will "maintain corporate agreements and still will have a limited discount structure," though the specifics of that discount structure remain unclear. In the immediate term, Elledge said, Delta "separated out fares to and from Cincinnati with a 'best value' designator" and now is working individually with each corporate account "to build back the overall discount strategy."
"Delta will maintain some sort of corporate program because there is something to be said about companies that can move marketshare," Huber said, "but preferred deals won't look the way they look today."
"This time around, the smart airlines will first figure out how to segment their customer base," said Larry Restiano, director of the customer value program and consulting group for American Express supplier relations, referring to value-pricing initiatives that failed more than one decade ago. "A high-volume global player does not belong in the same category as a $3 million account."
Delta said it chose Cincinnati—its second-largest hub operation—partly to recapture as many as 2,500 daily travelers who drive up to two hours to use lower fares offered at surrounding airports. "This is a great opportunity to stimulate business demand," said Paul Matsen, Delta chief marketing officer. "We also expect to improve the business mix by introducing a three-day fare that did not exist before and by bringing down first class fares."
The new pricing structure is branded SimpliFares and includes eight levels—two in first class and six in economy—down from 20 or more in certain markets. Fares never require a Saturday night stay and, in some cases, are priced as much as 60 percent below previous levels. Within the contiguous 48 states, last-minute one-way economy fares are capped at $499 and one-way first class fares are capped at $599. Ticket change fees were cut from $100 to $50. Unlike simplified pricing structures at some other carriers, however, Delta's SimpliFares may require a roundtrip purchase.
Regarding the impact on codeshare services, Matsen said, "If a flight is Delta-operated, our alliance partners have to match the pricing. If it is partner-operated, we have to match theirs." He added, however, that "it remains to be seen" how the pricing changes specifically would impact Delta's cooperation with domestic partners Continental and Northwest airlines.
Like other major competitors, Delta's foray into fare reform has been limited, first involving experimentation in specific markets and now a formal repricing in just one hub, which represents a much smaller portion of system revenue than its massive Atlanta operation. Elledge said Delta would "look closely at customer feedback and measure market stimulation and revenues" as it considers expanding the new structure to other markets.
Rolling out new pricing only on a partial basis can be dicey, according to executives at other carriers. "It is hard to have 'gotcha' fares in some markets and 'go' fares in other markets," said one, referring to sky-high walk-up business fares at one extreme and simpler, lower fares—such as those now being introduced by US Airways—on the other.
"We first tried limited tests and they were unsuccessful," said Steve Jarvis, Alaska Airlines vice president of e-commerce and distribution. Alaska in February announced a complete revamp of its pricing structure
(BTN, March 15). "Taking the leap and going systemwide allowed us to get out and advertise the move and for customers to experience it across our system. If you have simplified fares in one market but not another, it breaks the bond of trust with the customer."
Jarvis added that Alaska's new pricing also came with its fair share of risk, "but so far it's working very well for us."
Alaska joined America West Airlines as the only major carriers in the United States thus far to enact complete fare reform. US Airways continues to bring its simplified pricing format to more markets, while the likes of United and Delta offer simpler pricing in markets served by their low-fare subsidiaries Ted and Song, respectively. Southwest Airlines always has had a simple approach to pricing.
Beyond that, major airlines are tinkering with pricing strategies to stay competitive. "Each of the airlines is doing its own research," said American Express' Restiano. "No one wants to lead because it is too revenue-negative in the short term, but when someone else does, they want to be prepared."