NEWS ANALYSIS : Air Fare War Could Knock Small Firms Into a Tailspin
Travelers jammed airline reservation phone lines this week and advance bookings soared at some carriers as the public responded enthusiastically to a new set of air fares offering dramatic savings.
But that enthusiasm may wane in the months ahead.
The new air fare schedule, initiated Monday by American Airlines, has been heavily advertised as simplifying and lowering the cost of U.S. air travel. But it may also further weaken struggling carriers, say industry observers, allowing stronger carriers to more easily raise fares.
While the number of airlines has already shrunk dramatically, the new fare plan, if it sticks, may speed up the ongoing concentration of power and clout among fewer and fewer airlines. Already, the three so-called megacarriers--American, Delta and United--have gobbled up nearly 60% of U.S. passenger traffic, nearly double their combined share in 1980.
“It’s one more step in what I would call the natural consolidation of the market,” said George Pearson, vice president of information services at Avitas, a Washington-based aviation consulting firm. “If (the large airlines) divert traffic from these other weaker carriers, what they are doing, in so many words, is hastening their demise.”
Such a scenario would repeat the pattern that occurred after deregulation when the big airlines made a major move that ultimately winnowed the competition.
The airlines that have the most to lose under the new fare plan--America West, Continental and Trans World Airlines--are regarded as outlaws by their financially stronger competitors. They have been blamed for triggering costly fare wars to raise cash and they spoiled industrywide attempts to raise fares earlier this year.
The three have adopted various low-cost, low-fare strategies as they have struggled to emerge from Chapter 11 bankruptcy protection from creditors. Offering substantial savings is often the only way a weaker carrier can make up for shortfalls in service or schedules.
With the notable exception of Southwest Airlines, most of the carriers that embraced low-fare strategies have either landed in bankruptcy court or on a long list of airline obituaries. People Express, Midway, Braniff and Pan Am--at one time or another--all flew the low-fare approach to failure.
Many of the price-cutting carriers were products of the federal government’s 1978 move to spur airline competition by eliminating government controls over fares and routes. Deregulation worked--for a time--as numerous airlines were formed, offering consumers a wide variety of routes at low prices.
But the major carriers’ response to the upstarts was the now infamous “hub and spoke” system. Though expensive to implement, the major carriers discovered that they could gain market power by controlling the flow of passengers through a few strategically located airports across the country. From these “hub” airports, the airlines send out flights to quickly gather huge numbers of passengers destined for “spoke” airports.
The system was efficient, but the upstarts never had the resources to build their own hubs and one by one they died, ending an era of low fares for most of the country.
Air fares were continuing to go up until the Persian Gulf War and the recession sent the industry into a tailspin.
Now, the remaining price-cutters have come under new pressure with the new fare structure, which is designed to stimulate sluggish traffic caused by the recession. But the structure erodes the price advantage of America West, Continental and TWA and has forced them in some cases to lower prices even further to attract passengers, say industry analysts.
The fare plan “is also an incredibly strong get-the-riff-raff-out-of-the-market move,” said Barbara L. Beyer, president of Avmark, a Washington consulting firm. “It will guarantee that those carriers will be hit a hell of a lot harder than they have before.”
American Airlines Chairman Robert L. Crandall, who unveiled the new fare schedule that was quickly copied by most of the industry, has been an outspoken critic of the carriers in Chapter 11. But the hard-driving Crandall has strongly denied the new fare plan was aimed at hurting the financially struggling carriers.
The three smaller airlines have denied they will be hurt under the new price schedule. The carriers point out that many of their fares remain below the competition and their low operating costs give them room to cut prices further if necessary to stay competitive.
“In many cases, our highest fares are still lower than what American put in,” said America West spokesman Michael R. Mitchell. “Because we sell so few seats at the full fare coach level, we believe it will have very little impact at our yield.”
However, many industry executives argue that just reducing the price gap will siphon off some of the weaker airlines’ customers, pushing them even deeper into the red. In addition, traditional American or United passengers might be less likely to abandon their carrier and frequent flier miles for a cheaper flight on one of the Chapter 11 carriers.
“You just don’t have to shop as much . . . and you can fly a perceived stable company where you can always earn your frequent flier miles,” said Jim M. Roberts, president of Uniglobe Regency Travel in Rancho Cucamonga.
TWA has the most to lose under the new plan, say industry analysts. Last year, the airline slashed unrestricted coach and first-class fares in a successful strategy to attract last-minute business travelers. But those passengers now stand to save less money when compared to the new American Airlines-initiated fare plan, which lowers the average coach fare by 38% and up to 50% for first class.
For example, the $700 TWA round trip coach fare between Los Angeles and New York was about 46% less than the $1,504 American Airlines price under the old schedule. Today, after American lowered its unrestricted coach fare to $920, the TWA fare is 23% cheaper.
“When American Airlines introduced this change in the fare structure, they dramatically affected the (business traveler) niche that TWA had been very effective in tapping,” said Donald S. Garvett, a pricing specialist with Simet, Helliesen & Eichner, a New York-based airline consulting firm.
TWA, which has reduced fares on other routes to keep 30% to 40% below the competition, says its share of passenger traffic on the Los Angeles-New York route has not shrunk as a result of the smaller price gap.
“The gap is less, but prices are still lower,” said a TWA spokeswoman. “We still think it will count for something. If a consumer is looking for the best price out there, we are still lower by a few hundred dollars.”
In contrast to TWA, the new fare plan puts less pressure on Continental and America West, said Garvett. That is because both airlines are less dependent on full-fare coach travel--where the deepest price cuts were made--than TWA and rely heavily on leisure passengers traveling on discount fares, which fell a modest 5% to 10%.
Even though they may not save as much as they used to by flying on Continental or America West, leisure travelers are still more willing to take advantage of price breaks that most business passengers would pass up. “There are some leisure travelers who will jump through substantial hoops to save $20,” said Garvett.
Leisure travelers will miss the promotional or sale fares that have been eliminated for the most part under the new price schedule. Those sale fares are often cheaper than the new plan’s discount fares that must be purchased seven or 21 days in advance.
For example, American lowered the cost of its 21-day, advance-purchase roundtrip ticket between Los Angeles and New York from $549 to $460 under the new fare plan. However, TWA already had a special $308 fare for the same trip.
In addition, a passenger flying round-trip between Chicago and Los Angeles can buy a seven-day, advance-purchase nighttime fare on America West for $278 and save more than $100 over the 21-day, advance-purchase fare on American.
But many industry leaders have criticized such promotional fares as unreasonable and insufficient to cover the billions that must be spent to maintain a modern, safe and efficient fleet of jets.
However, that argument often is lost on bargain travelers. At Uniglobe Travel, Roberts says many of his customers responded to the lower fares “by waiting to see if the fares are going to fall further.”
