Domestic airfares generally continue to decline in spite of predictions of modest airfare increases in the months ahead and record-high oil prices crippling the airline industry. Though lower average ticket prices help corporations meet their travel budgets, they also call into question the future structure of negotiated discount agreements and the viability of struggling network carriers.
Meanwhile, Irish carrier Aer Lingus claimed a first last week when it lowered and simplified its transatlantic fare structure, including premium pricing. Some industry observers speculated the development could serve as a catalyst for revamped transatlantic pricing.
Stateside, another attempt to raise fares and offset fuel costs failed last week when a $10 roundtrip price hike by American Airlines garnered only a partial competitive match. Analysts said the latest attempt nearly succeeded and expected major carriers to try again.
A successful fare hike cannot come soon enough for beleaguered U.S. carriers. In the latest data available from New York-based Harrell Associates, the average one-way business fare in the domestic market fell 11 percent for the week of Sept. 20, compared with the same week one year earlier. Much of the decline was driven by significant price competition in transcontinental markets. On a week-to-week basis, however, the average business fare industrywide increased a few dollars since mid-August.
US Airways and United Airlines showed the largest annual declines, 36 percent and 27 percent, respectively, as they brought lower business fares to routes between primary hubs and certain business destinations. American Airlines' fares also were down double-digit percentages. Delta Air Lines was the only carrier in the latest report with higher year-over-year business fares. Its average increase, 14 percent, stemmed partly from double-digit percentage price jumps between Atlanta and such business markets as Boston, Chicago, Los Angeles, New York and Washington. Overall, the average business fare has been under $600 for most of 2004. For years leading to mid-2003, it had not sunk below $650.
Though the latest American-led fare hike ultimately failed, it drew support from other carriers, including some low-cost operators. "We hung onto the increase as long as we could, competitively," said an American spokesperson last week before press time, noting that the increase remained in "a small number of fare classes."
"This one gained a little more traction, and perhaps the trend is that a slightly modified version would hold," said Robert Mann of R.W. Mann & Co., an airline industry consulting firm in Port Washington, N.Y. He pointed out that other transport companies—air cargo and logistics, charter operators, foreign passenger airlines and even car rental companies—can levy fuel surcharges whereas domestic passenger airlines have had little success. "The pricing is so complicated to begin with, and covered by so many fees, that adding one more fee may be over the top," he said. "But the real issue is that carriers flat out need to increase fares."
With oil prices pushing $50 a barrel last week, low-cost carriers more willing to raise fares in certain circumstances, business travel demand showing signs of life and load factors running at or near records around the industry, many expect to see average ticket prices eventually reverse course and finally increase
(BTN, Sept. 20).A US Airways liquidation likely would hasten such a development. J.P. Morgan Securities analyst Jamie Baker said network carriers, and possibly AirTran Airways, "would intoxicate themselves on pricing power" in the event of a US Airways failure. Fledgling Independence Air also would be positioned to raise fares since it flies to many of the same markets as US Airways.
Low Fares Flying Over The Atlantic
If Aer Lingus becomes a trendsetter, carriers operating transatlantic routes soon could be forced to lower fares in what has been a comparatively lucrative market. The Irish carrier last week announced a new pricing structure that includes dramatic reductions for business class bookings. "It is time to bring the low-fare concept now prevalent in the U.S. and European domestic markets to transatlantic travel," said executive vice president Jack Foley.
In addition to cutting in half most business class fares, Aer Lingus removed advance purchase, roundtrip and Saturday night stay requirements, capped at $503 all one-way economy fares and standardized fare rules. For example, all itinerary changes cost $30 per segment and name changes cost $60 per ticket.
Foley said affordable fares without restrictions, particularly in the premium cabin, would improve the carrier's relationships with corporate accounts. "We are going out to corporate accounts to redo partnerships," Foley said, explaining that new fare levels are lower than previously negotiated corporate rates. "We'll talk volume and marketshare, but now accounts know where the price points are. We won't have situations with hidden discounts."
Aer Lingus has set up a corporate help desk and focused efforts on small and medium-size companies, as well as professional associations representing numerous individual firms. Foley acknowledged the carrier's travel agency relationships would change because "there is very little room" for deals that include pass-through payments from agencies to corporate accounts.
It remains to be seen if Aer Lingus' fare changes force other transatlantic competitors to adjust pricing strategies. Aer Lingus only operates in a handful of nonstop markets—between cities in Ireland and U.S. gateways in Baltimore, Boston, Chicago, Los Angeles and New York—leaving the vast majority of nonstop transcontinental routings devoid of low-cost competition.
Aer Lingus, however, anticipates a surge in connecting business through Dublin and Shannon to destinations throughout the United Kingdom and continental Europe, which could force competitors to react. "We never had more than 3 percent or 4 percent of connecting traffic to Europe," Foley said, "but now we have an expanded network and brand awareness, and considering the reception we have received in the past few days, that number could go as high as 15 percent or 20 percent."
Several other U.S. and European carriers have altered short-haul products and pricing to compete with lower-cost alternatives, with some on both sides of the pond launching separately branded operations. Aer Lingus recently decided to eliminate business class on intra-European routes
(BTN, Sept. 20). Such lower-cost development, however, has not yet penetrated transoceanic routes as most carriers still offer higher-touch premium services at higher prices.
Indeed, along with other international regions, transatlantic has remained strong for major U.S. airlines while domestic yields continue to erode. The latest data from the Air Transport Association showed more than 5 percent improvement in both Atlantic yield and revenue per available seat mile for August, as well as 9 percent increases in traffic and capacity. All four metrics have been recovering for many months.
"Pricing has been increasing to London over the past six months because there is not a lot of competition on those routes," said Chris Staal, vice president of global sourcing strategies for Stamford, Conn.-based Thomson Corp. "I would be surprised if any of the bigger carriers followed Aer Lingus."
Mann, however, cited the evolution of the low-cost sector in the U.S. market as precedent for potential change on transatlantic. "Ten years ago, even Southwest Airlines was not a big factor," he said. "These things tend to start small and then the dam breaks."