Executives at United Airlines' major competitors have said the carrier's recent business fare initiative
(BTN, Jan. 20) will not drive enough incremental traffic to avoid being significantly revenue-negative, certainly not in the short term. Yet, sources indicated that United's priority is to protect marketshare, and the carrier last week told Business Travel News it is "very satisfied" thus far with the performance of its sharply reduced walk-up fares.
Meanwhile, some travel managers have made adjustments to take advantage of the lower pricing.
"We have seen an impact in that we now have more reason to connect through Denver," said Suzanne Fletcher, director of travel and meetings for Federal Way, Wash.-based Weyerhaeuser Corp. "Also, we recently moved a meeting to Denver that had been scheduled for elsewhere because of the lower fares."
Fletcher added that the nonrefundability of the new walk-up business fares is not enough of a factor to preclude use. "Travelers really understand there are no waivers and favors, so the travel department can't help," she said. "Every day, travelers get smarter and understand the nonrefundable rules."
As such companies as Weyerhaeuser shift traffic to United, the carrier is achieving an important goal of retaining customers and corporate relationships as it works to restructure.
The fare redesign also has forced competitors to match on head-to-head routes, even as they question the economics of the strategy.
In response to rival United, Frontier Airlines last week became the latest to declare a simplified pricing structure, capping at $499 most domestic one-way fares to and from its Denver base. Business-oriented fares were slashed between 25 percent and 77 percent.
Frontier's new pricing design consists of six fare categories based on availability, but does not require roundtrip purchase or Saturday night stays nor does it include separate peak pricing.
Frontier CEO Jeff Potter last week said, "We continue to be tested in the area of stimulating demand and improving unit revenue." United's pricing decision affected Frontier most directly because the two carriers both have hub operations in Denver.
Meanwhile, Alaska Airlines last week announced tests in many markets that cut its business fares by up to 50 percent. "We're going to test the theory that the convoluted nature of airline pricing is a major deterrent to flying," said Alaska executive vice president of marketing and planning Gregg Saretsky.
Yet, the other major carriers cannot or will not strike back against United the way most did against America West Airlines nearly a year ago
(BTN, April 8, 2002), partly because United is a much larger competitor and partly because the industry cannot afford a prolonged fare war.
Also, United's competitors may be considering similar strategies to protect their share. Nevertheless, some sounded off on United's new pricing.
"It is revenue-negative more than any share shift we are seeing," said Tim Griffin, Northwest Airlines executive vice president of marketing and distribution, in a conference call last month. "Even the most ambitious in favoring proposals of cutting full business fares 30 percent and 40 percent have held the view that the economics are negative until behavior changes. Stimulating 40 percent more passengers clearly won't happen in the first year."
American Airlines CFO Jeff Campbell, also during an analysts conference call last month, said United's fare changes "clearly" are dilutive to American. Last week, in announcing a $1.8 billion target for labor cost savings, American said: "Pricing actions by low-cost and bankrupt carriers are putting unrelenting pressure on the company's financial situation."
Delta Air Lines is continuing its own fare experiments, and as of mid-January had "not drawn any long-term conclusions," according to president Fred Reid. "There will be some revenue impact to Delta from the United pricing action," he said, "especially if United does not correspondingly reduce corporate discounts."
According to US Airways, "Recent reductions in business fares initiated by competitors" will cost the carrier $10 million in monthly revenues.
Incidentally, Southwest Airlines CEO Jim Parker said United's new fares "have had virtually no impact" on the low-fare carrier, even at Chicago Midway, since changes affect walk-up fares that, even at reduced levels, generally are well above Southwest's offerings.
Privately, competing airline executives have said United's fare changes would sacrifice hundreds of millions dollars in revenue annually, but Mark Walton, principal at Consulting Strategies in Lincolnshire, Ill., cautioned that speculation likely is off the mark.
"Unless you are inside United, there is no way to gauge impact, because you don't know seat allocation and the exact parameters in terms of mixing the internal yield structure," Walton said. "In any case, they needed a positive move from the public point of view to show a degree a flexibility."
Indeed, many industry groups hailed United's new pricing as a step in the right direction. "There has to be some substantiation as to why a fare is where it is," said Fletcher, who also chairs the National Business Travel Association aviation committee. "We are big proponents for minimizing the fare gap."