British Airways, bmi British Midland and SAS have become the first mainline carriers to modify their fare structures in response to the threat from the no-frills competition.
BA, followed swiftly by bmi, scrapped restrictions and reduced fares on UK routes from London, while SAS has made its pricing structure simpler while also cutting prices as part of its Scandinavian Direct concept for flights within Scandinavia. Their efforts will be watched closely by other mainline European carriers, who for now are content to rely on special price promotions to sell their unwanted extra capacity.
Commenting on BA's first competitive response to these carriers, Tiffany Hall, head of UK &Ireland sales and marketing at the airline, says: "We want to compete profitably and intelligently alongside the no-frills carriers by adopting what they do well - online bookings and pricing simplicity." One of the most reviled restrictions - the Saturday night stay - has been axed, as have limits on advance purchases. The structure will be less complicated, says BA, with simple trade-up steps based on choice of flight, flexibility and availability.
By taking "a leaf out of the low-fare carriers' book", BA will be able to sell seats that would otherwise go empty, says Chris Avery, analyst at London-based JP Morgan. As the first major airline to face a serious threat from low-cost carriers, BA's strategy will be scrutinised by its mainline rivals, but their differing national circumstances mean they will not necessarily follow its model, he adds. However, the strategy will probably be rolled out to BA's European short-haul network in time, he believes.
"We think Scandinavia will definitely be a target area for other carriers to come into - it is a high-volume market with a lot of business travel," says Jens Willumsen, SAS senior vice-president marketing & product management. By applying a more "customer-oriented fare structure" SAS is already "positioning itself strongly" to counter the low-fares threat, he says.
The introduction of Scandinavian Direct in June is also a reaction to a steep drop off in business traffic in the past 12 months. SAS is going to a one-class service in Scandinavia, with a selection of four daily pricing options geared towards business travellers wanting a full working day at their destination. A day return ticket bought seven days in advance will cost 30% less in the new concept compared to the previous structure.
"We definitely risk some revenue loss," says Willumsen, from passengers that would have paid a full business-class fare but now benefit from the lower fares. "But we strongly believe the daily fares will stimulate more travel," he adds, winning back passengers who had moved to train or road travel.
As it strives to bring the passenger side of its business back into profit, SAS is looking at its entire European short-haul product, with a new concept there being launched in the autumn, says Willumsen. It will draw on some of the lessons learnt in Scandinavia.
Until low-cost carriers make serious inroads into other large domestic markets in Europe, the need to follow the lead of BA and SAS is less pronounced. However, on the Frankfurt to Berlin route, where it has competition from low-fares carrier Germania, Lufthansa has taken action, lowering fares and relaxing restrictions such as the minimum stay requirement for the cheapest prices. After matching Germania's prices, in February the German competition authority ordered Lufthansa should raise its fares, ruling that it introduced unfair low prices to squeeze its rival.
Elsewhere, carriers are working on other initiatives, notably cutting travel agent commissions. KLM, for example, is moving from a system where agents obtained a 7% fee per booking to a fixed €34 ($30) fee.
Source: Airline Business
