American, Delta and United airlines are testing a narrower gap between business and leisure fares in certain markets. Partly meant to gauge price sensitivity of business travelers, these experiments could lead to a simplification of the convoluted fare structure. Of course, United Airlines' seemingly imminent bankruptcy filing complicates matters and has the potential to pressure fares throughout the United States.
Meanwhile, some major network carriers, notably Delta, are crafting low-cost operations—similar to models at existing low-fare carriers in the United States and increasingly in Europe—that will use simplified pricing schemes.
"It is not just tinkering anymore. By now, the message has begun to sink in," said Brent Garback, CEO of Troy, Mich.-based Total Travel Management, citing business traveler interest in low-fare carriers, corporate aircraft and tech-enabled travel substitutes. "The window is shutting in terms of how quickly they have to move."
Though it is too early to draw conclusions, travel managers generally favored the experimentation and encouraged the airlines to expand the new models to more markets. "We are doing lots of analysis now to see if it would be better for us to move to less restrictive tickets from nonrefundables, considering the 'use it or lose it' policies," said one Dallas-area travel manager.
American's test touches two dozen markets, including a handful of heavy business routes from its Dallas Ft. Worth hub. In those test city pairs, the carrier cut the number of fare types from 15 or more to five, including a 40 percent discounted walk-up fare. With the next fare level a 14-day advance purchase, the intent is to have more business travelers booking walk-up fares.
Unlike American's, Delta's testing includes more fare levels and is focused on 2,000 smaller-market city pairs. According to J.P. Morgan Securities analyst Jamie Baker, "Delta's test walk-up fare is now 35 percent below typical full-Y levels, versus an earlier, blended 21 percent discount."
United's latest experimentation, advertised late last month as "No reason to drive," eliminated all advance purchase and minimum night stay requirements on many short-haul markets from the carrier's Chicago O'Hare hub. Sources indicated United has been playing with fare levels in Chicago since the summer of 2001.
Test Pattern
All these tests are the latest in the never-ending cat and mouse game that is airline pricing. Northwest Airlines prodded the industry with its fare restructure a year ago
(BTN, Nov. 12, 2001) and in March, America West threw down the gauntlet with its complete pricing redesign
(BTN, April 8).These more recent tests either may represent modest bilateral efforts to prop up revenue numbers or a more widespread industry evolution reminiscent of the value pricing experiment of the early 1990s. Unlike that ill-fated effort, however, there are no indications that the new models eliminate corporate discounts.
Aside from the discounted walk-up fare, American's test includes a 14-day advance purchase peak fare, a 14-day advance purchase off-peak fare and a new 30-day advance purchase fare discounted by as much as 70 percent. Advance purchase tickets fall into the nonrefundable category, according to a memo American sent to travel agents.
However, consultant Rolfe Shellenberger, based in Palm Desert, Calif., suggested the airline specifically had targeted certain routes on which it enjoys dominance. "The airline is approaching it much better than last time, in that they're only limiting it to a few segments and they're not segments where the ire of a competitor is likely to become a serious factor," he said. "They're gingerly stepping into this."
Delta's tests also avoid competitors' stronger routes. According to Baker, the 2,000 "pure connect" city pairs now being examined, which generally are one-stop services connecting two smaller markets, represent 2.5 percent of domestic capacity.
"Delta certainly has been active," noted Mark Williams, director of Americas travel and meeting management for PricewaterhouseCoopers. "Lo and behold, it is showing that revenue can be positively impacted, so we will see more."
Last month, J.P. Morgan's Baker said that the first phase of Delta's experiment, which since August has included routes from Charleston, S.C., Spokane, Wash., and Tri-Cities, Tenn.—470 in all, had revenue-positive results between 10 percent and 15 percent in the first seven weeks.
Yet, Scott Kirby, executive vice president of sales and marketing at America West, late last month dismissed the recent tests. "Delta left all its old fare types in, and they did it in small markets," he said. "It is hard for me to understand how they will get a good result from this experiment."
Kirby noted that American's test, while "more significant" than Delta's, does not eliminate "new anti-consumer ticketing policies," such as restrictions on nonrefundable fares and standby flying. As for Continental's and United's recent fare modifications, Kirby suggested they are "no different than what has gone on for two years," and primarily are simple matches to fares offered by low-cost carriers.
Continental, for example, last week continued to test lower fares on certain business routes, such as Cleveland-Los Angeles and Houston-Los Angeles. "We have made fare adjustments to be more competitive with low-cost carriers—not matching completely, but getting close," said Dave Hilfman, Continental vice president of multinational sales and revenue programs. "It has been fairly revenue-neutral, but the results still are inconclusive."
Throwing much into doubt, including the outcome of recent fare activity, is the situation at United Airlines (see story, page 4). "While significant pricing experiments are underway at United's primary competitors, we don't expect UAL to act recklessly," J.P. Morgan's Baker said.
Phil Dunphy, senior manager of global travel at New York-based Pfizer Inc., agreed. "United is conservative. My gut feeling is they would not initiate a price war in a post-Chapter 11 environment," he said. "Maybe other carriers would initiate it to put further pressure on United."
Opinions Not United
Speculation from others has United either attempting to lower fares as it works through restructuring, prompting the necessary competitive response even as fare levels remain quite low, or indirectly applying upward pressure on fares as it cuts capacity in various markets to varying degrees.
Bob Harrell of New York-based Harrell Associates predicted the troubled carrier will favor price cuts. "There is a psychological aspect of avoiding a bankrupt carrier," he explained. "When a carrier sees softness across the board, the first impact traditionally is lower fares."
However, data from the Harrell 100—which examines fares offered by the seven largest U.S. carriers in their 20 largest markets—show that US Airways' business fares drew closer to those of the other six carriers after its August bankruptcy filing. "If you are in trouble, there may be a tendency to raise business prices and US Airways is doing that more than the other guys," he said.
National Business Travel Association president Kevin Iwamoto expected United to seek a middle ground. "They will have to cut fares on the leisure side, but they also have to try to work something out with the court to preserve what they have in the high-yield market," he said.
No matter how the United situation plays out, the industry as a whole clearly is taking reactive measures to mend ineffective pricing principles.
"We continue to believe that simplified, lower fares will eventually go nationwide, eclipsing what can otherwise be viewed as an arcane, business unfriendly fare structure," Baker said. "We would expect the next step—Phase II at American—to occur sometime early next year."
"Somewhere between four and nine fare types is on the money and could end up being the 'killer app' that simplifies it all," said WorldTravel BTI president Danny Hood. "But it is not a slam dunk that all airlines will match. There will be lots of experimenting in next year's first and second quarters, and it could turn into quite a pricing game."
~Annalise Bomenblit contributed to this article