Northwest Spoiling Bids to Hike Air Fares

Each day thousands of travelers nationwide book airline tickets not realizing that they’ve saved a few bucks thanks to a handful of executives in the Minneapolis area.

They’re senior executives of Northwest Airlines, and they’re making sure that the Eagan, Minn.-based carrier keeps spoiling attempts by other airlines to raise leisure fares. Two weeks ago, for the fourth time since April, several major airlines increased leisure-ticket fares by $20 per round trip, then promptly rolled them back after Northwest refused to match the increase.

“Northwest is becoming the policeman for higher leisure fares,” said Tom Parsons, who runs Bestfares.com, a travel Web site. “The one calling the shots in the future, at least for a fare hike, will be Northwest.”

It’s a stalemate that’s good news for consumers, because Northwest is helping to keep downward pressure on leisure fares overall. In May, for instance, the average domestic airline fare for a 1,000-mile trip, excluding taxes, was $122.05, the lowest fare for that month in more than a decade, according to the Air Transport Assn., the industry’s trade group. (The tally excludes low-fare giant Southwest Airlines.)

While consumers benefit, most airlines are losing millions of dollars a day and screaming they need more revenue. So why doesn’t Northwest go along with a modest price increase? Because the nation’s fourth-largest airline believes even a small price increase will discourage people from flying Northwest--or any airline--and actually cost the carrier money.

The other large airlines, such as AMR Corp.’s American, UAL Corp.’s United, Delta Air Lines and Continental Airlines, in turn aren’t willing to have leisure fares higher than Northwest’s, for fear of losing even a single vacation traveler to the holdout. So they’re quick to rescind fare increases if Northwest doesn’t go along. “We want to be competitive,” Delta spokesman Anthony Black said.

The low fares partly reflect slumping air travel in the face of the lackluster economy and post-Sept. 11 skittishness about flying. But the airlines’ inability to lift leisure fares also is a key reason the industry, which will report its second-quarter financial results this week, is expected to show a combined loss of $1.4 billion to $1.7 billion for the three months ended June 30. That’s on top of the staggering $7 billion the airlines lost last year.

Northwest is expected Thursday to post a second-quarter loss of about $103 million, according to Wall Street analysts. The company’s stock, at $9.63 on Nasdaq on Friday, is down 38% this year, worse than the 33% decline of an index of 10 major airline shares.

Beyond the losses, the Northwest skirmish adds another twist to the confusion and controversy over fares in general, and points up the industry’s struggle to significantly change how they price seats in a way that will both boost their incomes and not alienate consumers.

Reluctance to Cut

Business Fares

In terms of business travel, all carriers are being criticized for the opposite problem--maintaining fares that are too high. Yet the carriers have been reluctant to slash business fares even though they acknowledge that they’re suffering a drop in business traffic, which is key to their survival. Two of them, United and US Airways, are seeking federal bailouts in the form of U.S.-backed loan guarantees.

“Everybody knows” that the airline fare structure “is badly broken,” Donald Carty, American’s chief executive, said at a recent industry conference.

Many contend that, for airline prospects to improve, business fares must come down and leisure fares must go up. A few airlines, including Northwest, have tweaked their fare policies to assuage business travelers and, they hope, increase the carriers’ revenues. But making wholesale changes to fares is proving a formidable task, with the airlines hesitant to provoke their customers, shareholders or other constituents, or to risk having their rivals launch a fare sale as means of retribution.

Northwest believes that if it raises the basic or “list” prices of leisure fares by even $20, it will promptly spark one or more rivals to launch a sale that undercuts them, rendering the new “higher” fares worthless.

Instead, Northwest contends that the simplified fare structure it imposed in November, which reduces the need for constant fare sales, ultimately will generate more revenue overall.

Northwest won’t discuss this publicly; airlines are skittish about discussing fare policy for fear they’ll be slapped by federal regulators on antitrust grounds. Still, comments by Northwest officials in the company’s internal newsletter show that the airline believes that, in this market, any fare increase for leisure travel will turn away passengers.

Northwest’s matching of the others’ increases “might have actually led to more fare discounting, producing even lower revenue,” Tim Griffin, Northwest’s executive vice president for marketing and distribution, said recently in the airline’s employee newsletter.

“The vast majority of our customers don’t ask for the regular price--they want and buy the lowest fare available, so matching this recent fare increase would not have improved our revenues,” Griffin added.

Long Part of

Northwest’s Strategy

Blocking others’ fare increases is also part of Northwest’s strategy. “For years they’ve done it,” said Jon Ash, managing director of Global Aviation Associates, an industry consulting firm in Washington. “Obviously they think they have a better pricing formula than everybody else in the world.”

Ash said there’s another reason Northwest has balked at joining the push for higher fares: Northwest has long suffered a reputation for poorer service than many of its rivals, even though Northwest executives, including Chairman Richard Anderson, get good marks for improving the carrier’s service in the last two years.

“They feel the need to keep their fares low, because they can’t command a premium price in competitive markets,” that is, on routes where Northwest vies with American, United or other network carriers, Ash said. “American Airlines can because they’re perceived to have a materially better product.”

Northwest, which carried more than 54 million passengers last year, traces its roots to 1926 and was once known as Northwest Orient. With 1,700 daily flights and domestic hubs in Minneapolis/St. Paul, Detroit and Memphis, it’s also a leading U.S. carrier to Asia and has been a pioneer in creating alliances with other airlines, such as KLM Royal Dutch, that extend its route system worldwide.

Improving Service,

the Balance Sheet

In the late 1990s, Northwest incurred huge operational, labor and public-relations setbacks that damaged its image and prompted critics to call the carrier “Northworst.” The problems were capped by a highly publicized debacle in early 1999 when more than 7,000 of the airline’s passengers were stranded for hours on the runway in Detroit during a blizzard.

Northwest’s service has improved considerably since then and, though it’s still losing money, the carrier has emerged from the aftermath of Sept. 11 with one of the strongest balance sheets in the airline industry and more than $2 billion in cash at its disposal. Some observers say Northwest’s stubbornness about the leisure fares also illustrates how its executives have become industry mavericks who are almost cocky in their belief that the carrier has the right formula and is sticking to it.

In any case, none of the other big airlines “is willing to allow a competitive mismatch with Northwest” by raising their leisure fares without Northwest going along, said Gary Chase, an analyst with Lehman Bros.

But Chase also said “it’s unclear whether or not Northwest’s strategy is paying off for Northwest” in terms of higher yields, or average fares, that could help improve its bottom line. Chase said those numbers will rise mainly on better supply and demand--if passenger traffic goes up and the number of airline seats holds steady or goes down--and not on modest fare increases of $20 a ticket.

Northwest says its strategy is working. In its latest monthly report on passenger traffic, for June, Griffin said Northwest’s domestic yields are improving faster than the industry’s. It is also closer to regaining profitability than most big airlines. “Consumers are responding favorably to our fares and our product,” Northwest spokesman Kurt Ebenhoch said.

Northwest also adjusted its business fare structure, adding “BizFlex” fares that offer fewer restrictions and deeper discounts to travelers who book ahead. But other carriers are finding it difficult to change business fares and please both frequent travelers and investors.

Consider: American Trans Air, the nation’s 10th-largest airline, a unit of ATA Holdings Corp., recently unveiled a simplified set of business fares, noting that “it has become evident that air travelers are looking for low, unrestricted fares.” Indeed, ATA said its new plan would slash its fares by 25% to 40%. But Wall Street appeared to interpret that as meaning ATA’s revenue also would drop, and investors sold off the carrier’s stock for three straight days.

Bill McKnight, ATA’s executive vice president for marketing, said the airline’s new setup eliminated high business fares that weren’t selling. He also predicted that the new prices would appeal to business travelers, who increasingly are shopping for lower fares. But Indianapolis-based ATA doesn’t have the market clout that would make its changes a template for the industry. Northwest, however, does have the size to head off other fare increases if Northwest doesn’t feel like going along. And it usually doesn’t.

Northwest is helping limit higher leisure fares, but it’s also doing its part to keep those fares from dropping much further, said Parsons of Bestfares.com. One goal behind Northwest’s recent changes to its fare structure was to reduce the need for constant sales to attract passengers, and to dissuade travelers from always expecting a fare sale around the corner.

That appears to be happening, he said. Although Northwest and other carriers still have short-term sales on certain routes--as the declining average fare in May illustrates--the major airlines together haven’t had a full-blown nationwide fare sale for three months, and that’s “unheard of,” Parsons said.