In overhauling its nationwide pricing structure, Delta Air Lines is de-emphasizing corporate discount programs across its domestic system. For now, Delta stands alone among legacy carriers, but many throughout the industry are watching to see if the move to simplify will trigger long-awaited fare reform across the industry.
Delta filed the new fares last night. Like the new pricing introduced last summer in Cincinnati
(BTN, Sept. 6, 2004), fares in the contiguous 48 states were reduced as much as 50 percent and do not exceed $499 each way in coach and $599 each way in first class. Such restrictions as the Saturday night stay requirement were dropped and ticket change fees were halved to $50. At the same time, the carrier added nonrefundable fees to tickets purchased through telephone reservations centers and at airport locations, following a trend initiated last summer by Northwest Airlines
(BTNonline, Aug. 24, 2004).
UBS analyst Robert Ashcroft said Delta last night replaced 393,000 fares in 17,000 markets with 245,000 fares generally sorted into eight fare types-two in first class, three one-way types in economy class and three roundtrip types in economy class. "It's difficult to make generalities," he said of the number of fare variations in the market and actual published prices, "but the direction is clearly down, and sometimes significantly so."
Northwest, a Delta marketing partner often perceived as a contrarian among legacy carriers on pricing strategies, yesterday criticized Delta's move. "Fare simplifications of the sort being described are revenue negative," the carrier said in a statement. "Such an initiative, if it becomes general, would immediately, adversely and significantly affect industry revenues."
Ashcroft, however, said Northwest-along with American, Continental and United-is likely to match Delta in head-to-head markets. "Nationwide adoption of value pricing by legacy major airlines was likely just a matter of time, so we think the most Delta has done is bring us to this destination a little faster than some expected," he said. "The test will be in markets where another legacy has an edge-for instance, where it's the only carrier offering nonstop service. The temptation will be to continue to charge high walkup fares in such markets."
Meanwhile, J.P. Morgan Securities analyst Jamie Baker said he expects "a significantly hostile industry response," to Delta's initiative. For example, Continental Airlines, another Delta marketing partner, cannot "maintain $970 one-way fares between Houston and Newark while Delta offers first class via Atlanta for $549." He also said struggling US Airways' business plan likely did not consider nationwide fare reform at such an early date.
"This move will cascade through the industry," said Helane Becker, analyst with The Benchmark Co., "putting additional pressure on already weak airlines operating in Chapter 11, including US Airways which we do not believe will emerge from Chapter 11, and United Airlines which is having difficulty putting together a plan of reorganization."
This afternoon, Tom Parsons, CEO of Bestfares.com, in a statement said both Northwest and US Airways already had matched Delta in select markets. He expected all legacy carriers to follow suit in short order.
Delta chief marketing officer Paul Matsen said the new pricing was designed solely as a Delta solution-one that recognizes the carrier's East Coast exposure to the likes of AirTran and JetBlue. "This is not an industry solution," he said. "That was part of the failing of [American Airlines' attempt at value-pricing in 1992]. We intend to stay the course."
While acknowledging short-term revenue dilution from the simplified pricing strategy, which analysts have estimated as high as $1 billion, Matsen said the hit eventually would be offset by increased traffic, distribution cost reductions as customers migrate to delta.com, improved telephone customer service driven by simpler fare rules and other efficiencies derived from Delta's network transformation.
Meanwhile, the impact on corporate programs likely will be dramatic, with corporate discounts either eliminated from many more fares or cut to correspond with reduced fare levels. "With the significant reduction in fares, the majority of unpublished programs on the corporate side will be obsolete in terms of the offering to the customer," said Delta vice president of sales and distribution Pam Elledge, noting that all existing corporate programs would be honored through the end of contract terms. "There are going to be some lanes, such as our transcontinental lanes and other specific markets, where unpublished pricing programs will be as preferable as Simplifares." Programs covering international routes also will remain a key element of Delta's corporate relationships.
Elledge also suggested that corporations would benefit from lower travel agency costs. "The complexity of what the agency had to do on behalf of the corporation could, and potentially would, increase the transaction fees that would be charged by that agency," she said, "but this approach is so simple and easy to understand versus the previous structure."
Delta plans to maintain its Corporate Data Solutions group, including use of a data-aggregation and decision-support tool furnished by the Prism Group, but Elledge said the new fare structure will remove much complexity from the contracting process. Delta also is in the midst of transforming its sales organization.
On the travel agency side, Delta said relationships have not been modified, though Elledge said there would be changes as a result of revenue reduction. She also hinted at a new agency incentive program to be announced later this year.
In all, Delta plans to review and eliminate thousands of unpublished programs, including those covering group travel, tours, cruises, consolidator agreements and other programs within leisure and segmented sales. "It was staggering to see that we had 6,000 unpublished programs out there," Matsen said.
"On meetings, now that we don't require a Saturday night stay, retail fares are more accessible to convention goers, instead of us having to offer a special program," added Harlan Bennett, vice president of revenue management.