<B> AA Ponders Pricing Model</B>
By Jay Campbell
Deeper-than-ever discounts for corporate customers in competitive markets may be leading American Airlines to consider a structural change in its pricing methods.
Asked recently about the failed 1992 Value Pricing initiative (<I>BTN,</I> April 20, 1992), AA's senior vice president of marketing Mike Gunn in mid-June said the carrier is "spending a lot of time looking at alternatives. Are we close to something? No." The airline's revenue management guru, Craig Krieger, followed that by noting, "You hate to be an industry whose best customers dislike your pricing structure."
Those best customers, in fact, are doing everything they can to soften the structure. According to American Express vice president of consulting services Eric Altschul, "There is some really heated bidding, and discounts have gotten really big for corporate business in some cities, like Boston, Chicago, Los Angeles and New York."
While the major carriers are "really duking it out by being extraordinarily aggressive in select competitive markets, at the same time there are lowered discount levels in some noncompetitive markets. The carriers aren't going after each others' hubs," he said.
This is not to say that the increased discounting is making up for rising fares. Indeed, some believe heavy discounting can actually push fares upwards.
"When corporations come in and say, 'Hey, we're only getting 30 percent from you guys while United is giving us 35 percent,' we have to give them the 35 percent," said American chief executive Don Carty. "Then we see our average prices going down, and we have to raise the list prices."
AA vice president of passenger sales Peter Bowler clarified Carty's comments by noting that it's not necessarily clear which comes first, discounting then higher fares or higher fares then discounting. "But it is one of the factors," he said, noting, as he has previously (<I>BTN,</I> Sept. 15, 1997), that AA is watching closely the trend of increased corporate discounting.
United's head of pricing, vice president of revenue management Greg Taylor, said, "There is no direct link between corporate discounts and pricing, and I don't recall ever making a pricing decision based on a corporate deal we signed."
Taylor did acknowledge, however, that customer impressions about the complex pricing structure are "something we're all concerned about. We think the fare structure serves the needs of our different types of passengers, but it's not good if it's viewed as being fundamentally flawed."
Addressing the greatest characteristic of that perceived flaw, the rift between business and leisure fares, yet another American Airlines exec, CFO Gerard Arpey, said he would "love to raise the leisure end and reduce the full fare, but I don't know how to do it."
Airlines like American can't afford to alienate the price-sensitive vacationers who make up the greatest portion of their passengers and the greatest potential for growth. But to keep them, they have to match the rock-bottom fares being offered by the likes of Southwest Airlines and others. So, while published business fares remain high (see accompanying story), airline yields are up only 1.6 percent in 1998, according to the Air Transport Association.