Newjetjockey
Well-known member
- Joined
- Jun 12, 2003
- Posts
- 173
The Wall Street Journal
October 1, 2003
THE MIDDLE SEAT
By SCOTT MCCARTNEY
Logic Behind Air Fares Often Defies Economics
There's a story that makes the rounds in the airline industry of a Southwest Airlines pricing employee who once went to work at Northwest Airlines.
Northwest, like its rival old-line airlines, has a pricing department built on incredibly sophisticated computer models and an army of financial analysts, all of which produces, as might be expected, incredibly complicated pricing. Airlines change prices as many as seven times a day on thousands of fares, and analysts try to decipher competitors' strategies, shifts and signals, fare-by-fare, day-by-day, minute-by-minute.
When the ex-Southwest worker showed up, his new employer quickly asked a question that had long troubled Northwest. Southwest only responded to pricing changes on Tuesdays. What did that mean? What signal was Southwest trying to send to the rest of the industry?
"We only met on Tuesdays," the new employee shrugged.
I tell that story to suggest that sometimes airline pricing has less to do with economics than with individual airlines themselves. Air carriers, at least the old-line variety, are at times strange organizations that do things for reasons incomprehensible to customers or other rational beings.
How else can you explain American Airlines pricing between New York and Dallas?
Dallas-New York is a bread-and-butter trip for AMR Corp.'s American and a crucial moneymaker. American has 60% of the heavily traveled market, according to the Department of Transportation. In the third quarter last year, New York-Dallas had the highest fares of markets of similar length and by far the highest passenger count, at 3,099 a day, on average. And American's average fare is 38% higher than Delta Air Lines, which has only 14% of the market.
High fares, high traffic and no nonstop low-cost competition. Dallas-New York is perhaps one of the last strong markets American has, and American milks it for all it's worth.
Frustrated Travelers
So why then is American undercutting its own prices?
For business travelers who want nonstop flights between Dallas-Fort Worth and the New York area, American's fare is about $2,100 round-trip from either La Guardia Airport or Newark Liberty Airport in New Jersey. If you can book 14 days in advance, there's a $1,656 nonrefundable fare that requires no Saturday night stay, so it can be used by some business travelers. Delta and Continental Airlines offer much the same prices on their nonstops.
But to New York's Kennedy Airport, nonstop, American will sell you a ticket for $298 without a Saturday-night stay if you can book two weeks in advance.
Sure, Kennedy may be farther from Manhattan and less desirable. But how much less desirable?
This is exactly the kind of disparity in airline pricing that frustrates business travelers. Neither the $2,100 price nor the $298 price has much relation to the cost of actually providing the service. So why would American do this?
American says the Kennedy-specific fare has been available for more than a year and is meant to match prices offered by competitors with connecting service. "We match to be competitive," a spokeswoman says.
Yet American rarely cuts its nonstop premium prices to match connecting prices because business travelers much prefer direct service. AirTran, ATA Airlines and a host of others offer cheap tickets on connecting service to La Guardia and Newark from Dallas, but American, Delta and Continental don't match those prices on their nonstops. That's one of the airline pricing rules chiseled in the tarmac -- customers will pay handsomely for nonstop convenience. If you want a cheaper seat on American to La Guardia, you have to change planes in St. Louis.
Why then, when American has the only nonstops between DFW and JFK, does American sell $298 tickets?
"It seems odd, particularly for hub flying, where they are usually a little more attentive," said the head of pricing at one airline, shy about being identified when talking about competitors.
A Subtle Signal
American's service to JFK -- only two daily flights in each direction -- pales in comparison to its 12 flights in each direction between Dallas and La Guardia and seven flights each way between DFW and Newark. The JFK flights primarily are designed to connect to international trips. So it's not like there is huge capacity in the market and a boatload of empty seats to sell. How, then, can you explain different pricing for airports served by the same yellow taxis?
My "grassy knoll" theory: To send a signal to JetBlue Airways to stay out of Dallas.
JetBlue is based at JFK, and it has created eight shades of havoc for American on several routes from New York to California. While preserving its unrestricted, walk-up fares from New York to Los Angeles International Airport at $1,852, American has now adopted a JetBlue-like pricing of $598 for its highest-priced, round-trip coach ticket to Long Beach, Orange County and San Jose.
In past conversations with JetBlue executives, I've been told that Dallas is on JetBlue's list of future cities. The combination of high traffic and high fares would seem tailor-made for new competition. But Dallas may not currently be high on the upstart airline's list because it knows that attacking American's home would probably trigger the airline equivalent of nuclear war. If JetBlue needed a reminder, it could just look at American's pricing in the New York market.
American's spokeswoman, Andrea Rader, says the carrier isn't sending signals to anyone. "The notion that we are sending a message to anyone isn't true," she said. JetBlue declined to comment.
But other fare watchers are suspicious. Bob Harrell, an air-travel consultant in New York who tracks airline pricing closely, says American's JFK fare seems aimed at staking out territory -- otherwise, it makes little sense. The fare is even cheaper than most of the prices American has in the market that require a Saturday night stay.
"I don't think they want to have another repeat of what happened to Delta in Atlanta-Los Angeles," he said. Atlanta-Los Angeles once had high fares and high traffic for Delta -- until JetBlue and AirTran both jumped in and fares came crashing down, dropping from around $2,000 a round-trip to $300 a round-trip.
Mr. Harrell notes that American probably minimizes the loss of high-fare business travelers by making the JFK fare a 14-day advance purchase, too far in advance for many business trips. His own tracking cuts off "alternative business fares" at 10 days.
"You're not going to get an airline guy to say, 'We're doing this to keep JetBlue out of the market,' " Mr. Harrell says. "But they don't want JetBlue down in Texas. The hypothesis is a strong one."
Out of all the extensive computer code and the army of financial analysts, there probably is some logic somewhere in the cheap American JFK fare. At the least, it represents opportunity for business travelers -- and resentment, too. Sometimes you get lucky; sometimes you get gouged.
Sometimes you can take advantage of the games airlines play.
Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved.
October 1, 2003
THE MIDDLE SEAT
By SCOTT MCCARTNEY
Logic Behind Air Fares Often Defies Economics
There's a story that makes the rounds in the airline industry of a Southwest Airlines pricing employee who once went to work at Northwest Airlines.
Northwest, like its rival old-line airlines, has a pricing department built on incredibly sophisticated computer models and an army of financial analysts, all of which produces, as might be expected, incredibly complicated pricing. Airlines change prices as many as seven times a day on thousands of fares, and analysts try to decipher competitors' strategies, shifts and signals, fare-by-fare, day-by-day, minute-by-minute.
When the ex-Southwest worker showed up, his new employer quickly asked a question that had long troubled Northwest. Southwest only responded to pricing changes on Tuesdays. What did that mean? What signal was Southwest trying to send to the rest of the industry?
"We only met on Tuesdays," the new employee shrugged.
I tell that story to suggest that sometimes airline pricing has less to do with economics than with individual airlines themselves. Air carriers, at least the old-line variety, are at times strange organizations that do things for reasons incomprehensible to customers or other rational beings.
How else can you explain American Airlines pricing between New York and Dallas?
Dallas-New York is a bread-and-butter trip for AMR Corp.'s American and a crucial moneymaker. American has 60% of the heavily traveled market, according to the Department of Transportation. In the third quarter last year, New York-Dallas had the highest fares of markets of similar length and by far the highest passenger count, at 3,099 a day, on average. And American's average fare is 38% higher than Delta Air Lines, which has only 14% of the market.
High fares, high traffic and no nonstop low-cost competition. Dallas-New York is perhaps one of the last strong markets American has, and American milks it for all it's worth.
Frustrated Travelers
So why then is American undercutting its own prices?
For business travelers who want nonstop flights between Dallas-Fort Worth and the New York area, American's fare is about $2,100 round-trip from either La Guardia Airport or Newark Liberty Airport in New Jersey. If you can book 14 days in advance, there's a $1,656 nonrefundable fare that requires no Saturday night stay, so it can be used by some business travelers. Delta and Continental Airlines offer much the same prices on their nonstops.
But to New York's Kennedy Airport, nonstop, American will sell you a ticket for $298 without a Saturday-night stay if you can book two weeks in advance.
Sure, Kennedy may be farther from Manhattan and less desirable. But how much less desirable?
This is exactly the kind of disparity in airline pricing that frustrates business travelers. Neither the $2,100 price nor the $298 price has much relation to the cost of actually providing the service. So why would American do this?
American says the Kennedy-specific fare has been available for more than a year and is meant to match prices offered by competitors with connecting service. "We match to be competitive," a spokeswoman says.
Yet American rarely cuts its nonstop premium prices to match connecting prices because business travelers much prefer direct service. AirTran, ATA Airlines and a host of others offer cheap tickets on connecting service to La Guardia and Newark from Dallas, but American, Delta and Continental don't match those prices on their nonstops. That's one of the airline pricing rules chiseled in the tarmac -- customers will pay handsomely for nonstop convenience. If you want a cheaper seat on American to La Guardia, you have to change planes in St. Louis.
Why then, when American has the only nonstops between DFW and JFK, does American sell $298 tickets?
"It seems odd, particularly for hub flying, where they are usually a little more attentive," said the head of pricing at one airline, shy about being identified when talking about competitors.
A Subtle Signal
American's service to JFK -- only two daily flights in each direction -- pales in comparison to its 12 flights in each direction between Dallas and La Guardia and seven flights each way between DFW and Newark. The JFK flights primarily are designed to connect to international trips. So it's not like there is huge capacity in the market and a boatload of empty seats to sell. How, then, can you explain different pricing for airports served by the same yellow taxis?
My "grassy knoll" theory: To send a signal to JetBlue Airways to stay out of Dallas.
JetBlue is based at JFK, and it has created eight shades of havoc for American on several routes from New York to California. While preserving its unrestricted, walk-up fares from New York to Los Angeles International Airport at $1,852, American has now adopted a JetBlue-like pricing of $598 for its highest-priced, round-trip coach ticket to Long Beach, Orange County and San Jose.
In past conversations with JetBlue executives, I've been told that Dallas is on JetBlue's list of future cities. The combination of high traffic and high fares would seem tailor-made for new competition. But Dallas may not currently be high on the upstart airline's list because it knows that attacking American's home would probably trigger the airline equivalent of nuclear war. If JetBlue needed a reminder, it could just look at American's pricing in the New York market.
American's spokeswoman, Andrea Rader, says the carrier isn't sending signals to anyone. "The notion that we are sending a message to anyone isn't true," she said. JetBlue declined to comment.
But other fare watchers are suspicious. Bob Harrell, an air-travel consultant in New York who tracks airline pricing closely, says American's JFK fare seems aimed at staking out territory -- otherwise, it makes little sense. The fare is even cheaper than most of the prices American has in the market that require a Saturday night stay.
"I don't think they want to have another repeat of what happened to Delta in Atlanta-Los Angeles," he said. Atlanta-Los Angeles once had high fares and high traffic for Delta -- until JetBlue and AirTran both jumped in and fares came crashing down, dropping from around $2,000 a round-trip to $300 a round-trip.
Mr. Harrell notes that American probably minimizes the loss of high-fare business travelers by making the JFK fare a 14-day advance purchase, too far in advance for many business trips. His own tracking cuts off "alternative business fares" at 10 days.
"You're not going to get an airline guy to say, 'We're doing this to keep JetBlue out of the market,' " Mr. Harrell says. "But they don't want JetBlue down in Texas. The hypothesis is a strong one."
Out of all the extensive computer code and the army of financial analysts, there probably is some logic somewhere in the cheap American JFK fare. At the least, it represents opportunity for business travelers -- and resentment, too. Sometimes you get lucky; sometimes you get gouged.
Sometimes you can take advantage of the games airlines play.
Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved.
