OP-ED: Entrants Good News To Biz Travel Buyers
<B> OP-ED: Entrants Good News To Biz Travel Buyers</B>
By Kevin P. Mitchell
<i>Kevin P. Mitchell is chairman of the Business Travel Coalition, Lafayette Hill, Pa.</i>
Momentum behind a national debate over airline industry competition problems received an enormous boost recently as Chrysler and General Motors signed five-year contracts with Detroit-based Pro Air. The automakers likely realized that for competition to exist at Detroit, a portion of their purchasing dollars had to be designated for supporting new entrant airlines.
This industrywide debate is being led by business, community and government officials concerned with declining competition levels and skyrocketing business airfares, especially at hub airports. Thoroughly overlooked in this debate, however, is a major symptom of the competition problem: the misuse of yield management systems in the absence of competition.
Yield management is a useful tool that helps a business provide a specific product to a targeted customer at a price the customer is willing to pay. For airlines, automated yield management systems allocate and adjust seat inventory and set fare levels for numerous market segments according to historic and current customer demand. The tool also aids in scheduling aircraft, crews and maintenance.
However, concern arises when airlines commanding monopoly market positions are yield managed to extract ransom-like prices from business travelers. Understanding the nature of yield management misuse can shed light on the urgent need for individual business travelers and corporations to follow the lead of Chrysler and General Motors and support new entrant airlines.
Looking at an example of yield management used in a pro-consumer manner in another industry can illustrate how it is sometimes misapplied in the airline industry. In Robert G. Cross's best seller, Revenue Management, published in 1997, the author describes a barbershop where the wait on Saturdays sometimes approaches two hours. On Tuesdays the shop is nearly empty. Employing yield management techniques, the owner raises prices 20 percent on Saturdays and lowers prices 20 percent on Tuesdays. Some customers gladly pay a premium for time-efficient access to the haircutting service on Saturday, others appreciate the discount on Tuesdays: The owner enjoys increased profits! In yield management parlance, the barbershop owner provided the right customer with the right product at the right time and price.
However, what protected those who paid a Saturday premium against potential yield management abuse were options of midweek access to barbershops and alternatives on Saturdays--including haircuts by appointment with little wait time. Customers freely chose to pay the premium.
Unfortunately, airlines' deployment of yield management--in the absence of competition--has often resulted in Win-Lose outcomes. A businessperson needing to meet a customer in a distant city usually has a time-specific constraint, and thus, is relatively inflexible as to the day of week and time of day he can take a trip.
Airfare rules and restrictions are purposely designed to limit the ability of business travelers to access the more deeply discounted fares available to leisure travelers. Most affordable fares require a Saturday night stay. Clearly, the most pernicious effects of yield management abuse are felt by business travelers.
Consider this. Detroit business travelers can easily pay premiums of 300 percent over what leisure travelers pay. That's right, $860.00 versus $200.00 for roundtrip travel between Detroit and New York City. Adding insult to injury, even a Detroit business traveler who books a trip 30 days in advance still pays an obscene premium over a leisure traveler who purchases a ticket on the day of departure.
A leisure traveler can purchase a roundtrip ticket from Detroit to Minneapolis on the day of departure, Saturday, returning the next day for $656.00. In vivid contrast, a businessperson taking a trip the first Monday of every month for a company staff meeting, despite booking 30 days in advance, pays $934.00, or a whopping 42 percent premium over the leisure traveler who purchased his ticket at the very last minute!
Some premium for access to a product which is needed and available on short notice is appropriate. But a corporation paying a huge premium becomes concerned when it discovers the premium is due to lack of competition caused by barriers to entry. And when an incumbent airline is found to be unmistakably bent on protecting its monopoly market position by destroying new entrant competitors through scorched earth, predatory competitive practices, concern can turn into outrage.
Detroit is merely one example of a city where business travelers feel maligned. And Detroit stands in sharp contrast to other cities with large airports enjoying robust competition, great nonstop services, affordable airfares, profitable airlines and happy business travelers.
A recent Business Travel Coalition analysis of U.S. Department of Transportation data shows travelers in Detroit pay up to 84 percent more than travelers in Los Angeles, Seattle or Kansas City--cities with airports that provide excellent nonstop services. Worse, because DOT data are averaged, the much higher premiums business travelers pay are masked.
Lack of competition is why business air fares are excessively high at Detroit, not the robust economy, strong demand for air travel or number of nonstop flights. The market share of the leading airline at Los Angeles, Seattle and Kansas City is 30 percent, 31 percent and 20 percent, respectively. At Detroit, the dominant airline has a 75 percent share!
What is the solution? Competition can solve many problems, including the misuse of yield management systems. For dramatic proof, one only has to look to where competition does exist in Detroit. The walkup roundtrip airfare on a Monday morning from Detroit to Baltimore was $1,114.00 before Pro Air entered the market. Today that fare is $163.00 on Pro Air. Similarly, Northwest's fare is $166.00!
Moreover, a business traveler booking travel 30 days in advance for a Monday morning trip from Detroit to Baltimore on Pro Air will pay $163.00--the same price as the next day walk up fare because there is no discriminatory Saturday night stay requirement.
And surprise, surprise, surprise! A traveler booking the identical trip 30 days in advance on Northwest--you guessed it--will pay $163.00! That's because there is competition in that city-pair market.
Where major airlines face aggressive competition, they cannot discriminate against the business traveler and abuse the yield management tool. The example above shows deregulation and the free marketplace can work, and it underscores why businesses of all sizes must support new entrant competition in all markets for their own long-term self interest.