AWA: Fare Change Pays Off

America West Airlines' March fare restructure thus far has not been a catalyst for widespread industry airfare reform, but, according to the carrier's executives, the strategy is beginning to pay off. Unit revenue declines this spring have been narrower than the industry average, bookings within 14 days and seven days are on the rise and overall traffic figures for May and June actually showed year-over-year gains.

However, like all other major carriers, AWA yields still are depressed, a direct result of depressed business travel levels.

"Nevertheless, we have seen some of our best performance in years, relative to the industry," said Scott Kirby, AWA executive vice president of sales and marketing. "All of our internal benchmarks indicate the fare structure is performing well, in spite of retaliation by competitors." Of course, AWA had the necessary breathing room to alter its pricing structure after it received federal loan guarantees worth $380 million in late December (BTN, Jan. 21). Still, the carrier insists it will stick to its guns as retaliation continues to draw Phoenix-bound travelers away from AWA and toward $198 roundtrip fares to and from many business destinations.

Additionally, AWA began recalling the last of its furloughed pilots, continued to reinstate flights and recently launched new service to Raleigh/Durham. In the wake of Continental Airlines' decision to end a bilateral alliance, AWA also is on the hunt for new a partner. In terms of corporate sales, the carrier realigned its corporate salesforce while it prepared to pay agencies tiered commissions based on quarterly performance.

The airline's customer service rankings continue to improve. For the 12 months ending May 31, it was third in on-time performance among the nine major carriers and tops in May. The latest U.S. Department of Transportation report, issued earlier this month, also showed AWA lowered the number of denied bookings, customer complaints and mishandled baggage incidents.

"They have come a long way in the past 18 months," said Gerry Williams, director of travel and expense reporting at Minneapolis-based Medtronic, one of AWA's larger corporate clients. "Frankly, they had been lousy, but have since improved their service and continue to meet our needs." However, Williams said Medtronic's new AWA contract has been on hold and that an older contract still is being used in the interim.

"The main deliverable, if you are a passenger, is reliability and AWA has dramatically improved," added a West Coast-based travel manager. "In terms of the pricing structure, business travelers see that AWA is not sticking it to them."

Still, vice president of sales Ron Cole conceded that communication efforts must be stepped up to attract new corporate business and that the new fare structure no longer supports the model of deep discounts off "heavily inflated fares." To that end, the carrier realigned its corporate sales structure into three groups. "We now have a team of people concentrating on large strategic accounts, like Intel and Boeing, another team solely responsible for making all other accounts work and a third group prospecting for new corporate accounts," Cole said.

In regard to the more popular fare structure, Kirby added that "corporations always have asked for a hammer and the airlines gave them screwdrivers and other tools. Now we give them a hammer and the other tools are somewhat irrelevant." But he acknowledged that the distinction between business and leisure travelers is as blurred as ever. "Because most of our fares now are one way, we have to change the definition of 'business travel,' " he said. The finalized definition will be announced during the carrier's earnings call later this week.

At that time, AWA expects to announce second-quarter losses of roughly 56 cents a share, according to Thomson First Call. The First Call consensus of analysts also predicts nearly a $3 per share loss for the full year 2002, though AWA executives have said the climb back to profitability won't be as steep as it will be for most competitors. The carrier has not finished in the black in nearly two years, since it squeezed out a $1.3 million profit in the third quarter of 2000.

Meanwhile, AWA's decision to knock down the proverbial fences built to keep business travelers away from leisure fares immediately prompted competitors to attack. Months later, much of that pressure remains. "It is pretty clear the competition is selling below cost," Kirby said, suggesting the industry's unit revenue performance in May suffered by as much as a full percentage point as a result. "It is not a profit-maximizing strategy, but simply a make-AWA-reverse-course strategy. It hurts and is costing us lots."

As part of the fare reconfiguration, AWA, for example, lowered the roundtrip walk-up fare between Boston and Phoenix from $2,500 to $800, but competitors reacted by bringing in $198 walk-up fares.

"The most frustrating aspect is that AWA operates in a far more competitive environment than most majors, yet the majors are persecuting them with these ridiculous fares," said Rolfe Shellenberger, an independent consultant.

However, citing the cost and time that would be necessary, the carrier is not moving forward with legal proceedings. "AWA is wise not to pursue a predatory pricing suit at this time," said Business Travel Coalition chairman Kevin Mitchell. "It is virtually impossible to prove and the word in legal circles is to not waste your time." Instead, AWA hopes competitors will reconsider. "They have other problems," Kirby said, noting United's efforts against creative ticketing (see story, page 1) and "smaller brush fires" flaring up between the big five carriers as they bring low fares into each other's markets.

Shellenberger noted a similar situation that played out on the West Coast in the mid-1990s, when United launched lower-fare shuttle operations against Alaska Airlines. "United undercut Alaska's fares, but Alaska managed to compete, survive and retain a favorable relationship with the market," he said. "I see AWA surviving against the brutes in much the same way."

Sam Buttrick, UBS Warburg airline analyst, said AWA competitors already have backed off somewhat. "After the initial flurry of punitive fares into the Phoenix market, it has been remarkably quiet," he said, noting the carrier still has a price advantage in many transcon connecting markets. "They are better off having that advantage in the hundreds of markets in which they now do, and taking the hit in the local Phoenix market, than facing a full-fledged competitive match."

However, AWA also is under pressure from low-fare champion Southwest Airlines. In its June traffic report, which showed a 2.3 percent traffic increase, AWA estimated its revenue per available seat mile fell at the same rate as the industry average—unlike April and May which showed narrower declines—due to "aggressive Southwest Airlines pricing impacting America West markets beginning in late May."

Though Continental Airlines ended its alliance with AWA, the two carriers through September will share airport lounges and maintain frequent flyer program links. AWA also still maintains marketing agreements with British Airways, Northwest Airlines and Virgin Atlantic, but continues to hunt for a new and deeper partnership.

Meanwhile, AWA has enrolled thousands of agencies in its Agency AWArds program, the only structured agency compensation system formally announced by a major U.S. airline since the industry eliminated base commissions. "We are seeing some share movement from the one point level to 12 points, which results in the maximum pay-out," Cole said. "It is not a traditional override program, but a pay-for-performance program beginning in the third quarter, with an upfront commission based on second-quarter performance."

Additional share shifted to AWA will be reflected in the following quarter's upfront compensation. The airline also is developing direct booking products for agencies as a means of avoiding GDS fees, which Kirby called "outrageous by any reasonable measure."