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Growing Heft Puts Budget Airlines in the Pilot's Seat Low-Cost Carriers Thwart Fare Hikes by Big Rivals Coping
With High Costs |
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By SUSAN CAREY Discount airlines are holding sway over the' pricing
of air fares as never before, blocking major carriers desperate to raise
ticket prices so they can recover sky-high fuel costs. With fuel at a 13-year high, airlines have made at
least 12 attempts to boost airfares in the past 2 ¥.I months alone. But most
of the efforts have failed to stick, and increasingly the spoiler has been
one or more budget-price airlines, which see a chance in the current squeeze
to extend their market shares. For travelers, this change in pricing power could
affect everything from ticket prices to the financial viability of the big airlines
they use to whether they must continue to endure unpopular restrictions,
such as Saturday-night-stayover requirements, to
get low fares. In late February, Continental Airlines raised ail its
fares for travel in the |
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$5 one-way. It blamed
historically high fuel prices-and noted that its passengers last year had
paid the lowest fares since 1994. "This fare increase is a step toward
matching fares with the cost of
providing air travel in this environment," Jeff Misner,
the chief financial officer, said at the time. AMR Corp. 's
American Airlines, UAL Corp.'s United Airlines and Delta Air Lines
immediately boosted fares in kind. But Northwest Airlines joined only in some lower-fare
markets. And a number of budget carriers, including Southwest Airlines, AirTran Airways, Frontier Airlines and America West
Airlines, didn't follow suit, and 'the effort fizzled, Once merely dabbling on the fringes and stealing some
of the major airlines' leisure travelers, budget carriers have gained a
critical mass in the market and, as a result, much broader pricing clout.
Low-cost airlines together now control fully a quarter of domestic air capacity
and fly in the highest-demand. markets, from JP Morgan, in a survey of new jet |
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orders, estimates the
discount group will boost its collective domestic fleet by 250 planes to more
than 1,000 by 2006. The 2,500 planes in the domestic fleet of older,
so-called hub-and-spoke airlines, by contrast, is
hardly expected to budge. And as the budget airlines grow, they increasingly
compete with each other, exerting more downward pressure on fares. The big airlines have been reeling since 20m,
together posting billions of dollars of losses due in part to constricted
demand and their higher cost of operations. Despite energetic cost-cutting,
the major carriers remain plagued by complexities that go along with having
70 or more years of history. They have senior work forces compensated at the
top of union scale. They have multiple kinds of planes, adding expense to
training, maintenance and spare parts. They operate big hubs, which are
costly in terms of real estate, staffing and flight delays. "There used to be a parallel universe: the
high-fare set and the low-fare set," said Stan Hula, vice president of
planning at low-fare ATA Airlines. "The majors always matched low
fares, but they tried their best not to sell them" in large numbers by
tying them up with Saturday night stays or ruthlessly limiting the inventory
available at the lower fares. |
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Of course, the smaller carriers have to pay the
higher fuel costs, too, and have led fare increases of their own. AirTran raised its prices two times in as many months and
it was matched by everyone but fellow discounter Southwest. Spirit Airlines
led an increase in late January that succeeded in some markets, and ATA was
the leader of a March 3 effort to nudge up cheaper ticket prices. Early last
week, ATA struck again On Friday,
Continental expanded that $5 increase to nearly all of its fares in the Antitrust laws prohibit' airlines from talking to
each other about pricing intentions. So they playa cat-and-mouse game by
posting new fares on their Web sites and through computer-reservation systems
used by travel agents and Internet travel firms. Typically, one airline will
raise its prices late in the week and see if its competitors match. If there
are any holdouts by Monday, all the carriers will roll back the boost to stay
competitive. After the 2001 terrorist attacks, the major airlines
cut capacity. As a result, they have been flying fuller airplanes. But demand
generally hasn't returned to the go-go ievels it
reached during the late 1990s, and many ffiers who
have returned to the skies are buying much cheaper fares. Northwest, for one,
says its revenue last year matched that achieved in 1996. One bright spot
for the big airlines is growth in international traffic. In the late 1990s, the network airlines pushed
through many increases, raising their highest unrestricted fares to 52,000 or
more for a roundtrip coast-to-coast flight. "according
to American Express Co., the average one-way domestic fare paid by its
customers peaked in 2000 at
$311 after increasing annually for six years. That figure has declined each
year since then, falling to $276 in 2003 |
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. Behind that price erosion is a weak economy; the
movement of business travelers to cheaper, restricted tickets; and the
growth of Southwest and its imitators. When America West started nonstop
flights between Strapped with much higher costs than those of discounters,
US Airways says that 70% of its domestic flying last year was unprofitable.
Its average one-way domestic fare last year, $125, was 11% below 2000.
"If we could charge more money, we would," David Siegel, the chief
executive, said last week in a speech to employees. "But passengers
want low fares." Delta's chief executive, Gerald Grinstein, also
recently complained that traditional carriers have little pricing power,
compared with the newer airlines. "One [price increase] stuck, but it
wasn't started by a network carrier," Mr. Grinstein lamented. "It
was started by AirTran," Delta's rival in "The low-fare carriers 'are, as a group, now
playing a role that Southwest pioneered: the price policeman," said
Keith Taylor, Southwest's vice president of revenue management and pricing.
And in the main, he says, the group's pricing power "is downward." Fare watchers predict the major airlines won't be
able to make broad fare increases stick like they used to. Experts also
think the Saturday-night-stay requirement on discounted tickets will
disappear. Most budget airlines don't have it and two hub-and-spoke carriers,
America West and Alaska Airlines, have dumped it. Terry Trippler,
a fare watcher for Cheapseats. com,
said that west of Experts believe this could be the year in which the
big airlines finally jettison their complex pricing structures, which can
offer as many as 50 individual fares in a given market. Alaska Airlines recently
revamped its complicated system, reduced the number of fare types it offers
and narrowed the difference between its highest and lowest fares. Hurting the industry's ability to raise fares is the
fact that the big airlines are putting more seats back into the skies to
battle the rapid expansion of the budget airlines. According to Deutsche Bank
Securities, the nation's nine largest airlines offered nearly 8% more
capacity in February than a year earlier. Capacity is expected to grow by
nearly 6% for all of
2004. |
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