=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2002/11/22/f= inancial1023EST0047.DTL ---------------------------------------------------------------------- Friday, November 22, 2002 (AP) Airlines try business-fare cuts, find no revenue loss SCOTT MCCARTNEY, The Wall Street Journal (11-22) 07:23 PST (AP) -- Airlines are finally starting to cut back sky-high business-travel fares. They are conducting a series of tests to see if lower fares will bring back business travelers who are staying home, buying in advance or running to discount airlines. Early results are encouraging some carriers to believe that they can cut business fares and actually maintain or increase revenue. Delta Air Lines has cut business fares in the last two months by about 21 percent in more than 400 small markets with no announcement, yielding a double-digit increase in revenue. Continental Airlines, which has been one of the staunchest defenders of the current fare structure, has been very quietly conducting tests of lower business airfares since June in select markets. Results have been mixed but not discouraging, Continental officials say. Northwest Airlines and America West Holdings Corp. also have experimented with cheaper fares aimed at business travelers. AMR Corp.'s American on Monday said it cut business fares by 40 percent in 23 markets and raised leisure fares at the same time; it is expected to push the new structure out nationwide. The new unrestricted prices at full-service airlines -- $1,200 in many markets for a last-minute booking instead of $2,000 -- are still higher than discount carriers, but the gap has been narrowed, and the new fares are popping up in an increasing number of markets. "It's starting already to have a domino effect," says Bob Harrell of fare analyst Harrell Associates in New York, a consulting firm. Amid a devastating drop in demand that will result in roughly $4 billion in losses this year, major airlines have been searching for ways to generate more revenue by luring back high-ticket business travelers. Walk-up fares hadn't been cut much since the Sept. 11 terrorist attacks. American CEO Don Carty has conceded customers feel "gouged." Corporate travel managers and Wall Street analysts have suggested for more than a year that airlines need to slash business-travel fares simply because corporate travelers were refusing to buy. But carriers have resisted -- until now. Some feared a repeat of a 1992 debacle when American imposed a new, simplified "Value Pricing" scheme, and suffered huge losses when competitors retaliated and undercut its prices. Others said cutting prices made no sense when carriers need every penny they can get. Carriers have been slow to change, says one airline executive, because "we can't afford to be carrying more people for less money." Airlines have long believed that road warriors would travel no matter wh= at the airfare. That held true when the economy was booming and planes were full on popular routes, but it's a harder argument today, with budgets tight and many empty seats offering travelers more choices. "Five years from now, instead of a pricing structure with business fares five or six times, on average, higher than discounted fares, I would expect it to be about 3-to-1," said one airline executive, shy about being named because the Justice Department bans public discussion of future fare actions. "It will tighten." Continental now has some positive-looking results -- but not a definitive answer to the problem. Instead of relying on a full-coach, round-trip unrestricted fare of about $2,000 between Cleveland and Los Angeles, for example, Continental since June has offered a $716 unrestricted fare in that market, about $118 higher than Southwest Airlines. Through October, the test resulted in about the same revenue that Continental thinks it would have collected with its higher fare. But Continental did gain market share, taking passengers from Southwest, most likely, and from connecting service on carriers such as UAL Corp.'s United Airlines. Continental made similar changes on routes from Cleveland to Houston, and from Houston to cities in Florida. It found the new fare structure yielded less revenue but more market share. The same test in Houston-Oakland produced higher revenue and didn't dilute traffic from Continental's service to San Francisco. "We haven't found the silver bullet to say it's a huge success," says Jim Compton, Continental's senior vice president of pricing and revenue management. The tests remain in place, Continental says. Delta's unannounced testing offers clearer evidence of the impact of low= er business-travel pricing. Delta lowered unrestricted walk-up fares by about 21 percent in small markets over a seven-week test period this fall, and yielded double-digit revenue gains, compared with the previous year, according to a report put out Tuesday by J.P. Morgan airline analyst Jamie Baker. "Unless one assumes that Spokane business travelers are uniquely frugal with respect to air fares, we'd assume the results of Delta's experimental fares are repeatable elsewhere," Mr. Baker says. A Delta spokesman declined to comment on the fare test but did say the Atlanta-based carrier doesn't dispute anything in the J.P. Morgan report. So far, other carriers have matched most of American's changes, as well = as other carriers' experiments. Analysts believe American is moving toward a nationwide overhaul -- but = in small steps. In the markets American is testing, including some of its biggest markets such as Dallas-Los Angeles, the new fare structure will undoubtedly produce less revenue in the short term, analysts say, but it still could be considered a success. If American can gain market share back from discount carriers, reduce complaints from customers and stimulate more business travel, the new fare structure would likely pay off in the long run. "It's going to produce less revenue in the short term, and it's going to be rolled out nationwide," says Sam Buttrick of UBS Warburg. "To change people's behavior, and get travelers away from thinking, `These guys are trying to s___- me,' takes a long time." =20 ---------------------------------------------------------------------- Copyright 2002 AP