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  • CFO Magazine

Making Fares Fairer

Why airline pricing can't be fundamentally changed without an overhaul of industry cost structures.

The airlines’ own affair with technology, meanwhile, only complicated matters. Sophisticated inventory-management tools now provide “the mousetraps for complexity,” says Mitchell. And meanwhile, cost-conscious business travelers have turned to low-fare airlines (which now account for a fifth of domestic air capacity) or they book early, like the leisure crowd does.

Still, airlines have been cautious about cutting the walk-up fares that are so vital both to them and to business travel. They fear sacrificing that high-revenue potential–or being the first to try it. Being first hurt American badly in 1992, when its “value pricing” structure last attempted to narrow the gap between business and leisure fares. “Value pricing didn’t work, because American just did it without consulting its corporate clients,” says Cheryl Hutchinson, president of the Association of Corporate Travel Executives. Rivals, led by Northwest Airlines, refused to go along, leading to a massive pricing war and forcing American to abandon the program in seven weeks.

Following Frontier

This time, there are at least signs that some airlines may be game for another attempt. In March, America West announced it was simplifying its everyday fare structure, eliminating the Saturday-stay requirement and lowering unrestricted walk-up fares by 50 percent to 75 percent compared with its major rivals.

America West could afford it, according to CFO Bernie Han, because full walk-up fares account for only 5 percent of its total revenue. There was “greater-than-expected retaliation by competitors,” he says. But for the Phoenix-based carrier, the plan seems to be working; second-quarter revenue fell only 7 percent, half the plunge of the large airlines.

Meanwhile, Frontier Airlines narrowed the gap between its low- and high-end fares in July, and was immediately followed by United, part of what was then seen as a rare experiment by a major airline to gauge the effect of cutting business fares. At the end of the month, however, $445 million Frontier announced its first quarterly loss in four years, $2.9 million in the red, compared with a $7.7 million profit the previous year.

CFO Tate, however, maintains that Frontier can offer significantly lower fares going forward because of its lower cost structure. In the March quarter, “our break-even load factor was 55 percent, which means we needed to fill 55 percent of our available seats on average on every flight in order to break even. United’s was 91 percent.” United’s handicap is that “it’s very difficult to build up an economies-of-scale-type infrastructure when you try to be all things to all people.”

What Won’t Fly

Universal appeal, of course, is what attracts business travelers to the major airlines, and why those carriers can charge more. Their hub systems meet scheduling needs, and frequent-flier programs inspire loyalty.

To date, few majors have copied the fundamental price restructuring of America West or low-fare leader Southwest. Doing so, says Gillespie of Travel Analytics, means fundamentally addressing “the three major costs to an airline: fleet, labor, and jet fuel.” While fuel cost may be beyond an airline’s control, he maintains that airlines can influence the other two factors.


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