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Troubled Airlines Face Reality: Those Cheap Fares Have a Price
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Nonetheless, Ms. Ackerly prefers to fly out of San Jose on American,
whose fares are competitive with those of Southwest. On American, she
earns frequent-flier miles that can lead to a free ticket overseas or a
first-class upgrade.
Low-fare airlines have begun cutting into the big airlines' business on
longer routes, as well. The two-year-old JetBlue flies from Kennedy
International in New York to Oakland and, in Southern California, to
Ontario and Long Beach. Its fares are as low as $99 each way
cross-country. On Sept. 15, Southwest will start flying from Baltimore
to Los Angeles, opening its first coast-to-coast route.
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=09
"With the huge numbers of people residing in the California cities, you
get the right price in there and you can fill up the airplane," said
Richard Sweet, executive director of sales and marketing for Southwest.
Fare Shopping
Even Corporations
Want Bargains Now
These days, many airports look a lot like those in California, which was
long considered an island of airline competition in a sea of
oligopolies, where one or two big carriers dominated. Southwest flies to
58 cities, JetBlue flies to 19, and both have invaded the once-expensive
airports of New England and New York State. Spirit Airlines has made
such inroads in Detroit that Northwest will match its $154 round trip to
La Guardia Airport starting Sept. 3. Northwest's current fare, with no
advance purchase requirement, is $318.
The growth of discount carriers is the primary reason that the average
price to fly a mile fell 25 percent, adjusting for inflation, from 1991
to last year.
Unable to raise the prices they charged leisure travelers for fares
booked well in advance, the biggest carriers have instead stretched the
gap between restricted fares and the last-minute tickets purchased by
businesspeople. Many companies simply paid the bill, and their employees
got on the plane.
"In the roaring 90's, when business was good, it cost you $1,200 to fly
out to the West Coast =97 $2,400 round trip =97 and you didn't think =
twice
about it," said Dave Barger, the president of JetBlue.=20
But while business fares were rising, the Internet was beginning to give
companies technological power to match what the airlines had been using
against them since the 1980's. Yield-management systems had helped the
carriers figure out the maximum they could charge each flier.
Priceline.com
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t
om.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=3DPCLN> ,
Expedia, Travelocity and other Web sites helped companies determine the
minimum they could spend on a ticket =97 by leaving a little later, for
example, or using an alternate airport served by a discount carrier.
"Overnight, the airlines lost control of their product," said Cameron
Burr, a partner at the Burr Group, a private equity firm in New Canaan,
Conn., that invests in aviation, and a son of a founder of People
Express. "People can game the system."
Mr. Bethune, Continental's chief executive, said, "They can do things
they weren't even aware of a few years ago."
When the economy slowed in 2000, airline executives decided they had no
choice but to raise business fares again, trying to wring more revenue
from passengers who have no choice but to take a specific flight. In
recent months, a typical corporate ticket has been almost six times as
expensive as a discount ticket, up from a multiple of about three in
1997, according to American
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om.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=3DAXP>
Express Corporate Travel.
That strategy boomeranged, however, causing a revolt that led to last
week's turmoil, analysts said. Companies have canceled trips or taken to
buying discount tickets in advance and paying the penalty if employees'
plans change. Some employees, meanwhile, are shopping on the Internet
themselves, bypassing corporate travel offices whose negotiated fares
are often no bargain anymore.
For example, DaimlerChrysler
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employees often eschew the bulk discount they receive from Northwest
Airlines =97 and the convenience of assigned seating =97 to fly =
Southwest
between their headquarters near Detroit and two large plants in St.
Louis.
"With companies like Southwest, their fares are affordable as is," said
David Weiner, Daimler's corporate travel manager. "It's not like you
would require any additional discount."
Booz Allen Hamilton, a management consulting firm that sends employees
around the world, has reduced its travel spending by more than 20
percent this year, said Douglas Weeks, the firm's travel manager.
Satisfying their bosses' directives to save money, consultants are more
often using videoconferencing or flying out of airports that have
low-fare competition, like Baltimore- Washington
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International.
"The airlines need to figure out a way to close the gap" between leisure
and business fares, Mr. Weeks said. "It's really backfired."
The troubles caused by the recession and the tepid economic recovery are
not a surprise to executives at United, American and other major
carriers. During much of the 90's boom, they insisted that they were
working hard to avoid the sort of busts that had plagued the industry.
Though they added capacity, they did so less feverishly than in the
1980's. As they slowly bought new planes, they retired older jets that
were more costly to operate.
"Our testosterone levels are pretty low," Gregory D. Brenneman, then the
president of Continental, said in 1998. "We just want to make money." If
there was a blind spot, it had to do with labor costs. Led by the
employee-owned United, the major airlines negotiated one
"industry-leading" contract after another with unions, ratcheting up pay
after years in which it had often stagnated.
But just as the bubble obscured truths about the broad economy, it
convinced airline executives that low-fare competition would not require
them to change the fundamentals of their business model. Last week,
three of the top six airlines, almost in unison, acknowledged that they
had changed their minds.
=C0 La Carte
A Quick Connection
Will Cost Extra
Airlines may be among the world's most complex companies, but one of the
linchpins of their operations is easy to see in the sky above almost any
major airport.
Planes form a diagonal line three or four jets long on a clear day. For
a while, the airport seems to be home to nothing but landings. Then the
parade ends, and a new one begins in the opposite direction, as plane
after plane takes off.
In between landings and takeoffs, passengers rush to switch planes. To
minimize connection times, the first planes to arrive wait for
passengers from the last to have landed.
American, which invented this system and has been the world's largest
carrier since it bought Trans World Airlines last year, plans to curtail
the ritual and scramble its jets. Now, American said last week, it will
get them back in the air more quickly, allowing the airline to save
money by flying each plane more often.
At American's hubs in Chicago, Dallas and St. Louis, that means
travelers ultimately will do the waiting, as long as 15 minutes extra to
make a connection. Eventually, analysts say, American may charge extra
for a fast connection.
Such choices are likely to play an ever larger role in air travel.
Struggling to turn a profit against the head-on competition of
discounters, carriers will reduce capacity and trim service over all,
analysts say.
"Think about flying Southwest," said Sam Peltzman, an economist at the
University of Chicago who studies the industry. Increasingly, "that's
what it's going to be like."
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