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Making Fares Fairer

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

Costly labor contracts, for example, force most major carriers to charge higher-margin business fares. Labor accounts for 40 percent of total expenses at American, for example, versus 30 percent at Southwest and 25 percent at Frontier. So airlines soon will have to negotiate more employee givebacks. Frontier cuts costs and increases pricing flexibility by using a single jetliner model instead of the varied fleets of most rivals. And the hub system can also be a cost albatross, requiring multiple crews, baggage handlers, and gates to remain idle while awaiting connecting flights.

American’s latest plan involves eliminating all 74 Fokker 100 jetliners and “de-peaking” its Dallas-Fort Worth hub. De-peaking its Chicago hub last April increased productivity by spreading connections throughout the day. Senior vice president and CFO Jeffrey Campbell says the changes allow fewer aircraft to be used and cut the need for gates. He adds that in other cost-saving changes being reviewed, “there are no sacred cows.”

How fares will fare in the future is uncertain, especially with the bankruptcy scenarios unfolding before us. Much may depend on whether there are mergers and capacity reductions to go with the cost cutting. And while experts expect a fundamentally different pricing approach to emerge within two years, they debate whether airlines or Washington will initiate the changes.

“The government has already stated that it is a matter of public policy to have a robust aviation system in this country,” says Tate. Stepping in to force price changes, however, “would be a de facto admission,” says Mitchell, “that airline deregulation was a dismal failure.”

Lori Calabro is a deputy editor of CFO.

Gotta Fly

Airline financial woes, experts predict, may soon squeeze the discount programs companies now enjoy.

Traditionally, airlines “leverage loyalties and [give upfront] discounts,” says Cheryl Hutchinson, president of the Association of Corporate Travel Executives. But going forward, companies will “have to commit to a certain amount of volume” and carry through on the commitments to win those discounts. By year-end, Hutchinson estimates, airlines will start asking major customers to pay penalties if they fall short of volume commitments.

This would force CFOs to become involved, she predicts. “If travel managers have to commit X amount of money, CFOs will have to sign off.”

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