Airline Pricing Alert: America West's Fare Changes Rile Competitors

America West Airlines' move late last month to reconstruct its pricing has not triggered the far-reaching airfare reform advocated by many throughout the travel industry, but it has served as a wake-up call to other U.S. carriers forced to match lower fares and further dilute their revenues.

Last week, also in response to domestic low-cost competition, British Airways axed Saturday night stay and advance purchase restrictions on its domestic flights from London's Heathrow and Gatwick airports.

Both provided a glimmer of hope—albeit small—for travel managers eager to see more rational and simpler airline pricing.

America West, which had derived only 5 percent of its revenues from full fare business travel bookings, said its undertaking was not aimed at changing the world. "We think this is a structure that makes sense for us and not the rest of the industry," said Scott Kirby, America West executive vice president of sales and marketing.

Nevertheless, larger network carriers are impacted. "AWA looked at business traffic and said, 'We are not participating in it anyway.' So, from their standpoint, it is all positive. But for the rest of us, it is devastating and speaks to the instability of the industry," said United Airlines president Rono Dutta, last month at BTN's Corporate Travel World in New York. "But if it were not America West, someone else would have tried something."

What AWA has tried, and insists it will maintain, is a complete elimination of Saturday night stay requirements and a reclassification of all fares into four one-way categories: walk-up, three-day advance purchase, seven-day advance purchase and 14-day advance purchase. Fares also were reduced by as much as 70 percent. The across-the-board pricing action, described by UBS Warburg analyst Sam Buttrick as "potentially the single most important pricing move in the past decade," ironically came just two weeks shy of the 10th anniversary of American Airlines' infamous value pricing initiative.

"The major carriers are petrified. They know the number of markets in which they can extract huge premiums is getting smaller each year," Buttrick told CTW attendees. "They will try to cling to high business fares, but they ultimately will drown."

The major carriers did not react kindly to America West's move, immediately firing back with heavily reduced fares on flights in and out of Phoenix. Continental Airlines took it a step further, severing its codeshare and frequent flyer relationship with America West.

Retaliation by competitors was not unexpected. "It certainly hurts," Kirby said, "but this is a permanent fare change and we are absolutely committed. We know this is right for an airline our size."

Corporate travel managers applauded America West's move but feared it will be short-lived. "It is interesting what AWA has done, but unfortunately today it is not enough just to be right," said a corporate travel manager whose company uses the carrier. "Being in the financial position they are in, they won't be able to drive the industry and will have to fold the pricing structure." He added that "corporate travel managers should support folks that have reasonable pricing structures," including Frontier and JetBlue, "but in the real world, the big guys always dominate."

Tony Occhipinti, director of corporate travel worldwide for New York-based Omnicom, said AWA's move, while refreshing, is nothing new and also pointed to such carriers as JetBlue, with $289 transcon roundtrip flights.

"The smaller carriers with less overhead and less expenses are doing things like that," he said, "but based on what I am seeing, the big guys are only saying they want to come up with creative solutions but really aren't doing anything."

United's Dutta acknowledged the "confusing, unfair and broken" nature of the airfare structure. The fare structure was designed to accommodate flexibility of choice for business travelers, he said, but "you're still not coming. You, the managed customer, are showing signs of fatigue. You need to procreate more vigorously."

Pricing is confusing, Dutta said, because of the different demand characteristics of airline customer segments, including leisure, unmanaged business and managed business travel. Pricing is particularly unfair to individual business travelers who do not have the negotiating leverage of managed programs, he said. "It's not because business fares are too high, but leisure fares are too low," Dutta said, calling "unfair" the growing gap between leisure and business fares.

The gap again is highlighted in the latest data from the American Express Business Travel Monitor, which showed the average fare paid by American Express corporate travel customers in the fourth quarter of 2001 was 45 percent below the typical business fare. The Business Travel Monitor, which tracks fares across 329 North American routes, showed the typical business fare—representing the lowest fully refundable economy class ticket with no more than a three-day advance purchase—declined just $4 from the third quarter and actually rose 1 percent year over year. In stark contrast, the lowest discount fare fell to just $92 in the fourth quarter, down 16 percent year over year, as carriers slashed leisure fares to entice leisure travelers back onto planes after Sept. 11.

Despite that gap and the outcry from corporate clients and others to rationalize pricing, other airlines, desperate for higher yields from business passengers, are reluctant to follow America West and knock down the primary "fence" between business and leisure travelers—the Saturday night stay requirement.

America West cannot be accused of sitting on its hands as industry revenue and yield figures remain well below profitable levels. It is the only carrier to have tapped into $15 billion in federal funds earmarked for airline loan guarantees (BTN, Jan. 21), though niche player Vanguard Airlines also has asked for a piece.

AWA also is the first airline to formalize an agency compensation program, which now has more than 5,000 enrolled agencies, in the wake of the industry's move to eliminate base commissions. Incidentally, Kirby said AWA still will negotiate customized agency deals, although the formalized program is extremely important as the carrier "gets away from reliance on other distribution channels."

In fact, as part of its fare restructure, AWA decided to stop selling "bottom of the barrel junk" through online channels. "Part of the problem with the fare structure wasn't that top end fares were too high, but that bottom end fares were too low," Kirby explained. "We had become dependent on giving discounts through Internet distribution channels to drive market share. It became a spiral, with fares going lower and lower until it reached the point where it became impossible to make money by selling fares through those channels."

As a result, AWA predicted its average fare will increase because of changes to the mix. "We will have more business travel at $700 transcon fares and less Priceline travel at $200 transcon fares," Kirby said.

"Maybe airlines are starting to favor simplification and will stop dumping fares on the Internet," said Ed Gilligan, group president of American Express Global Corporate Services, also speaking at Corporate Travel World. "There is some common sense creeping in. AWA never will be Southwest, but they are trying to bring rationalization into the system."

According to one corporate buyer, AWA's restructure won't stick unless other majors match or the carrier drives enough incremental traffic to offset fare reductions by competitors. "Unfortunately, I do not see either one happening," he said.

Instead, other major carriers were quick to launch a counterattack in an attempt to force America West to withdraw. UBS's Buttrick said AWA's competitors were "shocked and angry and throwing rocks at Phoenix." Indeed, major carriers dramatically dropped fares into and out of AWA's primary hub, but according to Buttrick, AWA will retain "a huge pricing advantage in all connecting markets."

Deutsche Banc Alex.Brown analyst Susan Donofrio also told investors of retaliatory activity "whereby many network airlines have targeted nonstop America West markets and undercut their business fares with very low fares," a development that "may force America West's hand in perhaps rethinking its new pricing structure."

"It's a huge structural change that is having a major effect," said Dave Hilfman, Continental vice president of multinational accounts and revenue programs, speaking last month at CTW. "This is not just a fare skirmish. AWA is breaking down the walls of segmentation."

The reason Continental decided to wipe out its AWA relationship was twofold, according to a Continental spokesperson. "One, AWA has become more leisure-oriented in their product and market position, which is less consistent with our focus primarily on the business travel market. And two, incremental revenue attributable to the AWA codeshare agreement had been declining and approaching zero, and the pricing change had the effect of eliminating what little remained of the marginal benefit."

Codesharing between the two carriers, which in late 2000 had been pared down to exclude hub-to-hub flights, will end May 1, significantly ahead of the original 2004 expiration date. Frequent flyer and airport lounge reciprocity will continue through Sept. 24.

Kirby said AWA now will pursue other codeshare and/or alliance opportunities but would not convey interest in any specific carriers.

Meanwhile, U.K. travel managers greeted the BA initiative with enthusiasm, especially as they have just been hit by an indirect fare increase following the reduction of the airline's Fresh Approach booking payments to travel agents. "It is welcome to see some genuine price reductions on the back of the changes to Fresh Approach," said Kevin Watts, chairman of the Business Travel Liaison Group representing the U.K.'s largest buyers. "It is a long time since I have been able to use the threat of moving to air when negotiating with the train company that runs the Manchester-London route."

However, it is low-cost carriers rather than train operators that are the prime target of BA's price-cutting strategy. EasyJet and Ryanair airlines have never imposed Saturday night restrictions on their fares. "We want to compete profitably and intelligently alongside the no-frills carriers by adopting what they do well, online bookings and pricing simplicity," said BA head of U.K. and Ireland sales and marketing Tiffany Hall.

More changes are expected as European airlines restructure their short-haul services in response to no-frills competition. Last month, SAS announced it will move intra-Scandinavian flights to a one-cabin service from June 1 (see story, page 10).