Posted on: Sunday, July 20, 2003
Business airfare cuts may raise leisure rates
By Lynne Marek
Bloomberg News Service
CHICAGO — United Airlines, struggling to become profitable, took a gamble in January and cut business fares, hoping to attract reluctant corporate travelers and raise revenue.
United reduced prices between 40 percent and 70 percent in its two biggest markets, Chicago and Denver. In doing so, it tested conventional wisdom among airlines that business people fly when they need to, not when they think they can get a bargain.
The move by United, the world's second-largest carrier, rippled across the industry. Other major airlines, facing weak demand and competition from Internet sales and low-cost carriers, were forced to cut their business fares.
"The pricing is starting to converge around this low-price model," said Bob Morris, director of equity investments at Lord Abbett & Co., the largest stockholder of AMR Corp., owner of American Airlines, with 28.6 million shares as of March. "Everybody recognizes that's where they have to go."
Whether United succeeds or fails, high-priced U.S. business fares are headed down, and the leisure fares they subsidized are likely to rise, said analysts and industry officials such as Doug Parker, chief executive of America West.
"We think there's more reform to come," said Jamie Baker, an analyst at J.P. Morgan Chase & Co. in New York, "but the process is clearly under way."
American Airlines, the world's largest carrier; Delta Air Lines Inc., the third-largest in the United States; and the other major network airlines that compete with United matched its discounts on the same routes. America West Airlines, the eighth-largest U.S. carrier, had lowered its corporate fares eight months before United.
Gamble for airlines
United's average one-way business fare between Chicago and Denver fell to $311 in the first week of April, 55 percent lower than the $705 average fare a year earlier, according to the New York consulting firm Harrell Associates.
The airlines are tweaking travel restrictions as they cut prices, clouding the comparison of new and old fares. United's new business fares, for example, are not refundable whereas traditional business fares were refundable, giving fliers more flexibility to make schedule changes. Some airlines no longer require Saturday-night stays and round-trip ticket purchases.
Lowering business fares is a white-knuckle gamble for the big airlines, which are weathering their third-straight year of losses. In good years, business travelers have provided as much as 70 percent of the carriers' revenue and a higher profit margin, the airlines say.
"It's like trying to perform open-heart surgery on yourself," said Dan Kasper, an economist in Boston for the LECG Inc. financial consulting firm of Emeryville, Calif. "In the short term there's a good chance it will be revenue negative."
Business travelers rebel
The airlines may not have much choice.
Business travelers, facing lean times and tight budgets, have rebelled against paying an average six times more than vacationers for the privilege of flying on shorter notice and getting a refundable ticket.
"The business traveler has been supporting the leisure travelers for years, and we don't want to do that anymore," said Colleen Guhin, global travel manager for ON Semiconductor Corp. in Phoenix. Guhin said she had doubled her purchase of lower-price America West tickets. She wouldn't provide figures.
There were about 30 percent fewer business passengers in May 2003 than in May 2000 — before business travel began dropping sharply in early 2001 — and 5 percent fewer than May 2002, according to estimates by the Air Transport Association, the carriers' trade group.
The 10 largest U.S. carriers have lost $20 billion in the past two years, and $11.3 billion in 2002.
$6,000 in savings
United was forced into Chapter 11 bankruptcy protection in December, in the U.S. industry's largest bankruptcy. American Airlines narrowly escaped and U.S. Airways Group Inc. only recently emerged after receiving a $1 billion loan largely backed by the United States.
Whether the lower business fares help the airlines or not, they have been a boon to business travelers.
In Minnesota, Dr. Kevin Harris said he and five colleagues at Minneapolis Cardiology Associates saved about $6,000 when they bought discount business tickets from America West for a flight to San Francisco in October.
"It was really a significant amount of money," said Harris, who bought his ticket just seven days before a meeting at the University of San Francisco.
Corporate travel managers say it's too early to start taking victory laps.
"We're not looking for a short-term sales gimmick, we're looking for a long-term philosophy," said Jack Riepe, a spokesman for the Association of Corporate Travel Executives.
