Will Losses Force Carriers to Restructure Air Fares?

The U.S. airline industry, we keep hearing, must reinvent itself. And certainly, as airlines have announced layoffs, cut back schedules and persuaded Washington to part with billions in bailout money, executives have said a great deal about strengthening and rethinking security measures. The big question now seems to be fares.

Some prices will drop in the short term, all sides seem to agree. But after that? That’s where the debate begins.

In one corner, let me introduce Rolfe Shellenberger, 72, of Palm Desert, an executive with American Airlines from 1951 to 1982. Twenty years ago he was project manager on the experiment that created the first frequent-flier program. Now he’s a consultant on travel issues for Runzheimer International, a company based in Rochester, Wis., that advises businesses on travel expenses.

Shellenberger thinks this summer’s events--not just those of Sept. 11 and their aftermath, but also the months of slump before that--have made it vital for airlines to rethink their fare structures. The time has come, he says, to treat business customers better and stop overpricing business travel while underpricing leisure travel.

Now to the other corner. Here stands Randy Petersen, 46, of Colorado Springs, Colo., who left the retail business in 1986 to start Inside Flyer magazine. He has become one of the leading authorities on frequent-flier miles. For all the horrors of September, prices have little to do with the problem or the solution, Petersen says. Except for a fall discounting season that’s longer and deeper than usual, Petersen expects fare structures to remain largely unchanged.

At center stage is the two-tiered pricing structure practiced by the major U.S. airlines (although Southwest is more restrained than others): Through the use of advance-purchase requirements and mandatory Saturday stay-overs, the carriers have separated leisure travelers from business travelers, charging business travelers higher rates while giving leisure travelers vastly lower fares. On Sept. 21, the Dow Jones Travel Index, a fare survey tool devised by the Wall Street Journal to measure fluctuations in fares across the country, showed economy-class leisure fares well under $400 and economy-class business fares well over $1,000, all for the same 20 U.S. flights.

I was reminded of this recently when I booked a trip to Charlotte, N.C. I needed a ticket on less than 14 days’ notice, with no Saturday stay-over. The airlines, I knew, were suffering through the lowest demand in years. The best price I could get from a major airline: $1,668.

I eventually booked using https://www.hotwire.com, a Web site that lets customers know prices but withholds itinerary particulars and airline names until they have committed. I agreed to a $529 fare, then found I would have a three-hour layover in Chicago on the way out and a four-hour layover on the way back.

This doesn’t seem like a good way to win back business.

And now nobody, including Shellenberger and Petersen, is sure when, or whether, business travel will return to its pre-Sept. 11 levels. At the airlines, besieged executives aren’t talking publicly about fare structures.

Says Shellenberger: “Anybody who buys [airline tickets] within two weeks of departure right now is overpaying a large amount, which destroys the impulse buy, which is what the airlines really need right now.”

The airlines “have to realize that they’re giving too much away on the leisure side [and] missing opportunities in their zeal to gouge business travelers,” he says. “The airlines are going to have to simplify the pricing model. They’ve already enraged the [corporate] controllers and the business travelers themselves.... I’m speculating, but I predict that airline prices will go up for leisure and go down for business travel.”

Shellenberger says there are hints that some airlines are already thinking that way. He notes that earlier this summer, United and Delta airlines staged small experiments with relaxed advance-purchase and Saturday stay-over restrictions in a handful of markets outside California. Now, he suggests, the airlines are likely to go further with such ideas. One of the most crucial markets to watch, he adds, is California, where United competes heavily with Southwest.

Shellenberger doesn’t stop with fares, by the way. He thinks that if airlines want to win back scared and disaffected customers, they need to give service higher priority. “They just quit doing anything for the customer 20 years ago,” he says, when they realized the power of frequent-flier miles to command brand loyalty.

Now to Randy Petersen.

Yes, the fares may look imbalanced and business travelers may feel aggrieved, Petersen says, but when it comes to fares, “I sincerely doubt that the airline industry will learn anything from this [year].”

Petersen notes that during the 1990s, American Airlines Chief Executive Bob Crandall, now retired, tried to restructure pricing. His competitors resisted, and the effort failed.

So what exactly will the airlines do to win us back?

Petersen expects the season’s usual fall fare-cutting to last longer this year; instead of prices jumping back up in time for Thanksgiving, he thinks the airlines may keep sale rates in place for travel through the end of 2001.

But consumers need to remember, Petersen says, that because of escalating fuel costs as planes get heavier, “a plane full of people flying for cheap is far less profitable to airlines than a plane flying half-full of people who are paying regular air fares.... They don’t really want cheap passengers in empty seats. Fuel costs make that unprofitable for them. Don’t think that everywhere you’re going to fly is going to be $100.”

Petersen also suggests that airlines may experiment with some frequent-flier program changes. For instance, instead of merely boosting mileage benefits or lowering award thresholds, Petersen says, carriers might try to goose the market with fly-three-times-get-one-ticket-free offers.

That way, he says, travelers are more likely to collect their benefit soon, and instead of accruing debt to be paid off later, the airlines will be filling seats when demand is low.

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Christopher Reynolds welcomes suggestions, but he cannot respond to letters and telephone calls. Address comments to Travel Insider, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012; e-mail chris.reynolds@latimes.com.