As airlines in the USA and beyond look to get traffic moving through the system again, there are some fundamental questions emerging. At the core is whether it is now time to reinvent the old fare structures and business models
The last time the industry reached this point was a decade ago, back in the dark days after the Gulf War. Then American Airlines led the charge to get the US market moving again with its value pricing initiative. Seats may indeed have been filled, but what ensued looked like little more than a self-destructive fares war. It took years to remove the blood from the carpet. And while half the US industry languished in bankruptcy protection, European counterparts were standing in line for government handouts. This time around neither of those solutions is a real option.
As the industry has more or less acknowledged with talk of "new business models", and as the corporate customer has signalled by staying away in droves, now is not the time for band-aid solutions.
For the US majors, a fundamental change in pricing may indeed come about this year, if only by necessity. The consensus is that the current business model, if it was ever right, has now broken down terminally and that the traditional fixes will not work. Among business travellers, the consensus has been building for some time that pricing is past breakdown and must be fixed.
Sam Buttrick, analyst with UBS Warburg, is convincing when he argues that as the US economy recovers, pent-up demand will remain "at price points well below the airlines' current costs." That, he says, is a problem for the airlines, not for the customers.
In Europe too, the yield/cost equation is high on the agenda, propelled there in part by the spectacle of some fast-growing low-fares contenders which now command many times the valuation of the flag-carrying majors.
A round of consolidation is the classic economist's answer to such cost issues. Yet that is hardly a plausible solution for the present fix. Airlines have a shaky record of making mergers work - costs have rarely gone down and recently the resulting companies have more often gone bust than thrived. In any case, such activity is still too tightly bound by regulation to allow the deals that would make a difference.
Instead, the US carriers face the need for massive reductions in structured business fares. A restored value proposition could break down corporate travel barriers enough to produce more revenue than what Buttrick calls the "current price-and-gouge structures". What is being suggested here is not simply some quick marketing ploy, nor even a new pricing initiative, but a deep structural rethink. In Europe too, the same questions loom. Witness the soul-searching taking place at British Airways and soon, no doubt, to start elsewhere. Already, more than one full-service airline has confessed that the business fare multiples of many times the economy price has allowed others to enter the market.
What is needed is indeed value pricing, and that starts with carriers deciding what value they want to offer. The low-cost carriers have already carved out their bottom-end segment and corporate jet services have done the same at the top. Now it is time for the majors to start reshaping the vast flat plains that make up the undifferentiated middle ground.
Few carriers have stood out from the crowd and stamped their identity on the marketplace. There are too many carriers offering the same product at the same prices and the corporate customers apparently no longer like either.
If differentiation has existed in the past, then it has perhaps centred on geography rather than service. For all the liberalisation, that is still largely true of Europe's national carriers. BA, Air France and Lufthansa still largely represent all things to all travellers in their respective national markets.
Even in the US market, geography has tended to matter more than segment. As a former Northwest Airlines president said of the region from which his airline gets its name: "It's cold and its damp, but its ours." Yet even with its fortress Midwest hubs, Northwest is finding that it too has to do a little more by way of personality and is busy injecting a little more high-tech into the mix.
What customers want in general, and corporate travellers want in particular, appears to be a simpler, more transparent set of different market choices from cheap and cheerful to expensive and exclusive. That segmentation, rather than geographical accidents of birth, must eventually come to determine how carriers do business and with whom.
Kevin Mitchell, chairman of the US Business Travel Coalition, warns that business travellers already have choices of which the mainline airlines might like to take note. When they start travelling again, it will not be solely on the big aircraft of the scheduled airlines - corporate jets, charters and even the car are all real alternatives. Costs here are a good deal easier to understand than the traditional maze of fares. Web-based communications too have finally become a meaningful proxy for travel.
Business travellers want a structure that they and their corporate managers can understand and embrace, says Mitchell. Perhaps while studying radical alternatives, the majors might consider giving these customers what they want. That indeed would qualify as value pricing.
Source: Airline Business
