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Everyone loves Southwest
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- Nov 26, 2001
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By Eric Gillin
Staff Reporter
02/20/2003 07:04 AM EST
In an industry that has lost more than $18 billion over the last two years and has two billion-dollar titans in bankruptcy, you would think that airlines would jump at the chance to raise ticket prices from 15-year lows.
Of course, you'd be wrong -- this is the airline industry, after all.
Early this week, Northwest Airlines thwarted a Continental Airlines led effort to raise ticket prices by $10 each way to compensate for the rising price of fuel. Though Northwest went along with ticket hikes on select lower-price fares, the airline balked at matching rivals hike for hike, as has been the case each time the airlines have tried to raise prices since Sept. 11, 2001.
The drama began on Friday evening, before a blizzard shut down airports across the Eastern Seaboard, when Continental announced that it would raise fares $20 on all round-trip flights on all its routes. The next day, AMR unit American Airlines, Delta Air Lines, UAL unit United Airlines, US Airways and three other smaller carriers all matched Continental's move.
Northwest played the spoilsport on Saturday, telling rivals it was unwilling to hike fares across the board. While some complain that Northwest is blocking a much-needed fare increase, the company says it participated in the hike, just not 100%, and that rivals made the decision to drop the issue of a fare increase.
"We only matched on the lowest fare types," explained Kurt Ebenhoch, Northwest's spokesperson. "Then on Sunday, Continental and our competitors rescinded the increase proposed across the board on every fare type, and we followed suit after. We only matched where we thought a fare increase could be sustained."
This kind of behavior is nothing new for Northwest, which blocked a handful of attempts to raise prices last year. Northwest said it could not comment on its pricing strategies, but experts say the company's strategy when it comes to pricing is to focus on raising the cheapest fares, while leaving the overpriced business-class fares alone.
"Northwest is generally the stickler on these things," said Michael Boult, COO of eCLIPSE Advisors, which advises corporations on their travel needs. "I've spoken with them about this, and their philosophy seems to be that they'd like to see the coach-wide fares drop before going along with price increases at higher price points. Otherwise, they're gonna squash the increases."
Ultimately, the airlines got some measure of relief this week -- but not from Continental's ticket increase. On Tuesday, after the fare increase had completely faltered, American Trans Air, the low-cost unit of ATA Holdings (ATAH:Nasdaq - news - commentary - research - analysis), announced that it would charge $3 each way to cover rising fuel costs. Most carriers, including Northwest, followed suit.
The $6-per-round-trip charge will certainly help the industry, but a lingering question remains: Is Northwest cutting off the industry's nose, taking away the ability to raise prices, to spite its own face?
Maybe not. While higher ticket prices could help the top line, there's no guarantee that higher ticket prices will automatically boost revenue. In fact, with travel demand so slack at the moment, carriers are just as reliant on volume as they are on price. A price hike could backfire, further reducing demand, to the point where airlines could have made more money with cheaper fares.
"There are actually a few different components to this," said David Swierenga, economist at the Air Transport Association, which tracks the airline industry. "If the business traveler and their corporation aren't not doing well, they will have constrained their travel budget. So if prices go up, they're not spending more, they're just traveling less."
And it's not just business class; Swierenga says that leisure travelers are even more sensitive to price shifts. "If a family wants to take a vacation and prices are high, instead of going to Hawaii, they'll go to Florida. They'll still take a vacation, but they'll spend less. It may seem counterintuitive about raising prices, but it can actually reduce revenue."
Whereas carriers once competed on service, the downturn has caused them all to add in new fees, skimp on small stuff and even charge for food. Airline tickets have become a commodity, and consumers know they're going to get the same experience no matter how much they pay. As a result, most shop on price, which has been made incredibly easy through search engines offered by Orbitz, Expedia and Travelocity.
Raising ticket prices won't solve the problem, especially because the carriers that demand ticket increases simultaneously dump cheap seats onto Internet vendors such as Hotwire.com, which sell fares well below the published prices without revealing who the carrier is until the ticket is bought. Nearly every carrier does this, but they take great strides to protect their own identities so as not to tip off consumers and rivals.
The real issue has nothing to do with ticket prices and everything to do with proper management. If the companies were meeting lowered demand levels, they wouldn't need to undercut their own higher prices by selling seats over the Internet on the cheap. In many ways, the act of dumping seats, not a failed ticket hike, is hindering carriers.
"It's all about yield management," said Boult. "You don't have to come out and say, 'Woe is me. Not having this fare hike is killing me.' All you have to do is make it harder to find those cheap fares."
As long as airlines feel they need to make industrywide pricing decisions in lockstep, then they're all bound and gagged in the same sinking boat. As Boult says, "In no other industry do you have it so prices are always the same. Take Krispy Kreme and Dunkin' Donuts. Do they sit there and match each other all the time?"
Staff Reporter
02/20/2003 07:04 AM EST
In an industry that has lost more than $18 billion over the last two years and has two billion-dollar titans in bankruptcy, you would think that airlines would jump at the chance to raise ticket prices from 15-year lows.
Of course, you'd be wrong -- this is the airline industry, after all.
Early this week, Northwest Airlines thwarted a Continental Airlines led effort to raise ticket prices by $10 each way to compensate for the rising price of fuel. Though Northwest went along with ticket hikes on select lower-price fares, the airline balked at matching rivals hike for hike, as has been the case each time the airlines have tried to raise prices since Sept. 11, 2001.
The drama began on Friday evening, before a blizzard shut down airports across the Eastern Seaboard, when Continental announced that it would raise fares $20 on all round-trip flights on all its routes. The next day, AMR unit American Airlines, Delta Air Lines, UAL unit United Airlines, US Airways and three other smaller carriers all matched Continental's move.
Northwest played the spoilsport on Saturday, telling rivals it was unwilling to hike fares across the board. While some complain that Northwest is blocking a much-needed fare increase, the company says it participated in the hike, just not 100%, and that rivals made the decision to drop the issue of a fare increase.
"We only matched on the lowest fare types," explained Kurt Ebenhoch, Northwest's spokesperson. "Then on Sunday, Continental and our competitors rescinded the increase proposed across the board on every fare type, and we followed suit after. We only matched where we thought a fare increase could be sustained."
This kind of behavior is nothing new for Northwest, which blocked a handful of attempts to raise prices last year. Northwest said it could not comment on its pricing strategies, but experts say the company's strategy when it comes to pricing is to focus on raising the cheapest fares, while leaving the overpriced business-class fares alone.
"Northwest is generally the stickler on these things," said Michael Boult, COO of eCLIPSE Advisors, which advises corporations on their travel needs. "I've spoken with them about this, and their philosophy seems to be that they'd like to see the coach-wide fares drop before going along with price increases at higher price points. Otherwise, they're gonna squash the increases."
Ultimately, the airlines got some measure of relief this week -- but not from Continental's ticket increase. On Tuesday, after the fare increase had completely faltered, American Trans Air, the low-cost unit of ATA Holdings (ATAH:Nasdaq - news - commentary - research - analysis), announced that it would charge $3 each way to cover rising fuel costs. Most carriers, including Northwest, followed suit.
The $6-per-round-trip charge will certainly help the industry, but a lingering question remains: Is Northwest cutting off the industry's nose, taking away the ability to raise prices, to spite its own face?
Maybe not. While higher ticket prices could help the top line, there's no guarantee that higher ticket prices will automatically boost revenue. In fact, with travel demand so slack at the moment, carriers are just as reliant on volume as they are on price. A price hike could backfire, further reducing demand, to the point where airlines could have made more money with cheaper fares.
"There are actually a few different components to this," said David Swierenga, economist at the Air Transport Association, which tracks the airline industry. "If the business traveler and their corporation aren't not doing well, they will have constrained their travel budget. So if prices go up, they're not spending more, they're just traveling less."
And it's not just business class; Swierenga says that leisure travelers are even more sensitive to price shifts. "If a family wants to take a vacation and prices are high, instead of going to Hawaii, they'll go to Florida. They'll still take a vacation, but they'll spend less. It may seem counterintuitive about raising prices, but it can actually reduce revenue."
Whereas carriers once competed on service, the downturn has caused them all to add in new fees, skimp on small stuff and even charge for food. Airline tickets have become a commodity, and consumers know they're going to get the same experience no matter how much they pay. As a result, most shop on price, which has been made incredibly easy through search engines offered by Orbitz, Expedia and Travelocity.
Raising ticket prices won't solve the problem, especially because the carriers that demand ticket increases simultaneously dump cheap seats onto Internet vendors such as Hotwire.com, which sell fares well below the published prices without revealing who the carrier is until the ticket is bought. Nearly every carrier does this, but they take great strides to protect their own identities so as not to tip off consumers and rivals.
The real issue has nothing to do with ticket prices and everything to do with proper management. If the companies were meeting lowered demand levels, they wouldn't need to undercut their own higher prices by selling seats over the Internet on the cheap. In many ways, the act of dumping seats, not a failed ticket hike, is hindering carriers.
"It's all about yield management," said Boult. "You don't have to come out and say, 'Woe is me. Not having this fare hike is killing me.' All you have to do is make it harder to find those cheap fares."
As long as airlines feel they need to make industrywide pricing decisions in lockstep, then they're all bound and gagged in the same sinking boat. As Boult says, "In no other industry do you have it so prices are always the same. Take Krispy Kreme and Dunkin' Donuts. Do they sit there and match each other all the time?"
