honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser

Posted on: Sunday, December 8, 2002

Several airlines test reduced business-class fares

American Airlines tests business fliers on lower walk-up fares

By Marilyn Adams and Dan Reed
USA Today

Frequent flier Eric Peterson is thrilled that such airlines as Delta and American are finally cutting some of their steep, last-minute fares to woo back customers like him.

He just hopes they use an ax, not a chisel.

Last month, Peterson, an Atlanta-based software architect, had to book a last-minute trip to see a client in Albany, N.Y. Delta's round-trip fare was $1,200. The boss said no. So Peterson found a $400 flight to Newark, N.J., where he rented a car and drove three hours to Albany.

Although Delta is testing a new 20 percent discount on some of its most expensive tickets in many markets, "A 20 percent decrease is hardly perceptible on a fare that's outrageous to begin with," says Peterson, whose software company is clamping down on travel costs because sales are flat. Besides, Delta hasn't brought its new test fares to hub airports like Atlanta.

Still, its experiment, and one by American Airlines, may be the start of the next big thing in business fares. After decades of employing byzantine fare structures that charged their best customers — business fliers — heart-stopping prices, traditional airlines may be on the brink of rolling out changes. The goal: attract business fliers back to higher-fare tickets that can be booked close to the trip date with fewer restrictions than leisure-fare tickets carry.

American said last month said it is testing a simplified, four-fare structure in two dozen major markets, including 12 routes in and out of Dallas/Fort Worth, its home base. The four classes include walk-up, the most expensive coach fare; 14-day advance purchase; 30-day advance; and first class.

Walk-up, which used to mean a fare available the day of flight or a couple of days before, extends to 13 days before a flight under American's new definition. American has knocked 40 percent off old walk-up fares on test routes and made them refundable.

At the same time, the cheapest fares in the American test markets, those bought 30 days in advance, appear to be 10 percent to 15 percent above recent fare-sale levels. The gap between high and low fares has narrowed.

"We believe this new structure provides the value, simplicity, price and flexibility that today's travelers are demanding," says American spokesman Tim Kincaid.

"This is definitely a very big deal," says fare analyst Bob Harrell of Harrell Associates in New York. "You don't have to be a travel manager to notice when American cuts its walk-up fares by 40 percent."

American is testing its new fares on routes where it is the dominant carrier, minimizing the likelihood of a fare war.

Delta, meanwhile, is conducting a broader test, offering lower business fares in hundreds of less-busy routes across its system — such as Boise to Portland, Ore.; and Richmond, Va., to San Diego. The routes don't touch any airline's hub airports, a move designed to avoid competitive backlash.

Delta's test has nine levels, which include seven-, 10- and 14-day advance-purchase fares. None is refundable. Unrestricted walk-up fares in the markets aren't part of the discount test. But new fares aimed at business travelers are about 20 percent lower than Delta's unrestricted fares, according to a report by J.P. Morgan analyst Jamie Baker. And they appear to have fewer restrictions, like a Saturday night stay, than leisure fares usually do.

After the new fares were introduced, Delta saw a double-digit increase in revenue on those routes, Baker's report says.

Last week, Delta added 1,500 markets to its initial test group, bringing test fares to 2,000 markets total, about 2.5 percent of its system.

Citing federal antitrust restrictions, neither airline will discuss its test results or next steps. But analysts and travel managers welcome the hints of reform.

"Simplicity and value have been lacking" in airline pricing, Baker says. "I'm more impressed with what American's doing right now because it's simpler and reduces the top end (of fares) by a significant degree."

He expects American or Delta to roll out a simplified fare structure systemwide next year.

Signs of customer revolt have been clear: American Express Corporate Services, for example, saw use of discounted, non-refundable fares by its business clients jump to 40 percent during the first half of this year from 25 percent in 2000, says spokeswoman Melissa Abernathy.

That's because the average non-refundable ticket price was $440 round trip, vs. the average refundable fare of $1,144.

The defection of business travelers to discounted tickets or low-fare airlines is costing the traditional airlines billions in revenue.

What American is doing with its fare testing is "similar to what we're doing: trying to make things more convenient and simple for customers," says J.C. Penney travel manager Mike Spooner.

Penney's is based in suburban Dallas, American's home base.

"We wish them luck" in their testing, says Spooner.

The risks for American and Delta are potentially huge. The new, lower business fares might not attract enough additional passengers to offset the revenue lost by cutting prices. That could cause additional losses in a year when the industry already is expected to lose more than $7 billion.

Or competitors, either traditional carriers or discounters, could undercut the new fares. That likely would force American and Delta to abandon the new fare structures, leaving business travelers again having to choose between paying for a high fare for flexibility or a low fare with tight restrictions.

All the talk about cutting business fares sounds familiar to America West. In March, the Phoenix-based carrier restructured business fares systemwide, cutting refundable, walk-up fares and loosening restrictions on business fares bought in advance.

Other major airlines quickly retaliated, matching or undercutting America West's new fares. Even so, the airline says the fare changes are driving traffic and revenue growth.

"Business travelers are demanding changes," says America West spokesman Jim Sabourin. "Other airlines are beginning to get the message."