Airfare Reform Eludes Majors

American Trans Air, British Airways, BMI British Midland and Scandinavia's SAS became the latest carriers to fundamentally alter their fare structures in recent weeks, while the six largest U.S. carriers have not materially changed their fares.

Despite a continuing cry from buyers for U.S. airfare reform and increasing recognition of the need by major airline executives, profitable solutions are elusive. Undermining profitability is increased use of alternate business fares and extremely low leisure fares.

According to New York-based Harrell Associates, leisure fares in the first and second weeks of this month were down year over year 16 percent and 8 percent, respectively. The average lowest unrestricted business fare in both periods basically was unchanged (see chart below).

By a different measure, the average cost of a domestic PNR last month was $519, compared with $559 a year ago, according to corporate airfare auditing company Topaz International in Portland, Ore. Similarly, the average cost per domestic segment in May was $253, down from $282 a year ago.

New Air Transport Association figures showed the average ticket price in May dropped 9.5 percent year over year.

It is not the average fare levels that continue to frustrate corporate travel managers, but rather the structure of the whole system. Travel buyers and executives at corporate travel agencies still are concerned with the growing differential between business and leisure fares—now a five-to-one ratio, according to American Express—and airlines' renewed efforts to segment business travelers into higher-price buckets.

"At the end of the day, leisure fares have to be far more representative of the cost—i.e., higher," said Andrew Winterton, vice president of supplier relations at American Express.

However, carriers are reluctant to push higher fares on the most elastic and discretionary segment of their business. Though three broad fare hikes this year were floated in an attempt to quickly grow revenues, all were torpedoed.

Deutsche Bank Securities analyst Susan Donofrio, in a recent note to investors, said the failed hikes were a result of "differing management opinions over what the market can bear" and that carriers remain concerned "that demand is still very tenuous and highly price-sensitive." Donofrio added that near-term fare hikes are made less likely by the expected pressure on fares applied by JetBlue Airways.

Aside from attempted fare hikes by the majors, America West's fare restructure this March (BTN, April 8) and recent pricing adjustments by smaller carriers AirTran Airways and American Trans Air, the U.S. airline industry has yet to configure a workable solution. Alternate business fares—those that have fewer traditional restrictions—are proliferating, but have not lured back business travelers to sustainable levels.

"The yield management science we invented back in the 1980s has been amazingly successful in many respects, but it's hard to defend a system whereby the average fare we in the industry collect has—in nominal, not inflation-adjusted terms—declined over the past 10 years," said AMR chief Don Carty in a speech earlier this month at the Merrill Lynch Global Transportation Leaders Conference in New York. "At the same time, many of our best customers feel as if they're being cheated." He also noted the "financial bloodbath" the sector experienced a decade ago when American Airlines attempted to force a simplified pricing structure on the industry. "Today, it is clear that something dramatic needs to be done, but it is too early to know what that something is exactly. The only thing we know for sure is that the status quo is not an option."

The current fare environment certainly cannot support the industry. Airlines in recent weeks informed Wall Street of the expected severity of second-quarter losses.

"The industry at present has no pricing power," said Delta Air Lines chairman and CEO Leo Mullin, also speaking at the Merrill Lynch conference. He added that Delta expects to lose $170 million for the current quarter.

"If you read between the lines, you can sense desperation and frustration," said one travel buyer at a multinational company speaking anonymously. "In all the recent conversations I have had with the airlines, I can see they are petrified. They are scratching their heads, and time is running out."

Some smaller carriers, free of many unionized labor woes facing larger hub-and-spoke carriers, at least are trying new models. American Trans Air is the second U.S. low-fare carrier this spring to alter its pricing structure and the largest since America West made its move (BTN, April 8). AirTran Airways in April cut many prices and reduced to three the number of business fares available to and from its Atlanta hub.

ATA's June restructure primarily was an across-the-board price cut of 25 percent to 40 percent. The carrier also eliminated fuel surcharges on all flights within the continental United States. ATA said its adjusted fares now are priced more than 60 percent below competitors between major business destinations.

Similar to America West, ATA opted to revamp its fares, in part, because very few of its passengers were purchasing the highest-priced walk-up fares.

Meanwhile, following the adage, "If you can't beat 'em, join 'em," several European carriers also recently altered price structures to compete more effectively against low-fare carriers, and others—including Lufthansa German Airlines—are looking in that direction.

British Airways, which competes with low-fare carriers on 62 percent of its short-haul network, last week expanded cheaper fare offerings. Flights to more than 70 domestic U.K. and intra-European destinations now have no Saturday night stay or advance purchase restrictions. BA will usher in the same pricing revolution for the rest of its short-haul network this summer.

However, not all flights will have ultra-cheap seats: The best bargains will be found at off-peak times, such as early afternoon. There will be several conditions attached to the cheapest tickets, the most important of which are that they are not refundable or interlineable. Conditions become more flexible as the fare rises.

Tiffany Hall, BA general manager for sales in the U.K. and Ireland, said the airline would continue to negotiate deals with corporate clients who want to buy fully flexible fares but expects most corporations to adopt a mixture of full-fare and discounted tickets.

"This does start to change the way we work with corporations," she said. "We are seeing many of them begin to make the trade-off and taking more off-peak flights in return for cheaper fares. It is also possible to mix and match: Business travelers can buy a cheap fare for the outbound flight if they know what time their meeting begins and combine it with a flexible fare for the return if they are not sure what time it will end."

BA is not intending to make any changes to its customer service, which includes meals onboard and the awarding of frequent flyer mileage.

Meanwhile, SAS this month announced it will offer only net fares in Scandinavia as of Jan. 1, 2003, trimming prices "by an amount equivalent to the previous commission," which currently is a 7 percent travel agency payment. As a result, SAS said it and agencies will charge for services and that pricing will vary by distribution channel, with direct Internet bookings cheaper than phone sales, for example.

The redesigned pricing scheme was greeted warmly by the likes of Rosenbluth International, a travel management company that has advocated a realignment of airline distribution costs and shared-risk corporate contracting (BTN, Dec. 3, 2001).

"We encourage the rest of the airline industry to follow suit, particularly in the North American market," said Alex Wasilov, Rosenbluth president and COO, in a statement last week. "The elimination of standard commissions and introduction of transaction fees will go a long way toward eliminating pricing confusion in the industry."

SAS earlier this month switched to a one-class product for all intra-Scandinavian flights (BTN, April 8).

Meanwhile, BMI British Midland earlier this month "completely scrapped its traditional full service fare system" in favor of simplified, one-way prices free of most restrictions. The policy change, similar to BA's and SAS's recent moves, does not affect transatlantic operations.

~Amon Cohen contributed to this article.