By Amy Tsao
When Delta Air Lines (DAL ) announced a major overhaul of its fare structure on Jan. 5, many industry analysts predicted the decision would set off an old-fashioned, all-out price war. In the hours after Delta's plan to lower prices by simplifying its fare structure, rival carriers initially balked at following suit.
Then, American Airlines, which is operated by AMR (AMR ), cracked and announced on Jan. 6 that it would match Delta's fares in certain markets. Continental Airlines (CAL ), United Airlines, which is operated by UAL Corp. (UALAQ ), US Airways Group (UAIRQ ), and Northwest Airlines (NWAC ) also lowered prices to match Delta in select markets, according to travel industry site Bestfares.com. In addition, Southwest's (LUV ) recent decision to move into Pittsburgh puts added pricing pressure on troubled US Airways in that key market.
CHANGE YOUR HABITS.
It's unclear at this point just how hard Delta's move will hit the carrier's bottom line -- and the rest of the industry's (see BW Online, 1/6/05, "Inside Delta's Low-Fare Strategy"). "It's bold and aggressive, but the jury is out on whether it's smart," Michael Miller, partner at airline consulting concern Velocity Group, says of Delta's strategy.
What's clear is that consumers will have to do their homework to be sure they're getting the best deal. "The travel habits you had in the past won't apply," says Miller. Adds Mark Gerchick, aviation consultant at Gerchick, Murphy & Associates, based in Washington, D.C.: "Things are turbulent at the moment, and they will be for the next six months to a year."
In theory, Delta's new pricing holds considerable promise for travelers, especially those flying for business. The simpler structure is similar to the systems used by JetBlue (JBLU ) and Southwest. Delta also set limits on last-minute fares and removed certain restrictions like requiring a Saturday-night stay.
But leisure travel prices aren't likely to plummet from current levels since they've already been driven way down by stiff competition from nimble low-cost airlines. And skirmishes with labor unions over wages and underfunded pensions, along with the specter of rising fuel prices squeezing earnings, will undoubtedly cause service disruptions. "While there's a great battle for the hearts and minds of consumers, contentious management-employee relations could impact travelers negatively," says Kevin Mitchell, chairman of the Business Travel Coalition.
So here are five factors travelers now have to consider as they book travel under the industry's emerging new rules:
Business travel costs will increase -- while prices drop.
Companies, knowing that Delta will charge only $499 for a last-minute, one-way fare, will almost certainly be more inclined to let employees to travel more. "Now they can afford that extra third or fourth [business] trip a month," Mitchell says. And lower fees for itinerary changes (Delta will charge $50 instead of $100) will also help make business flying more attractive. "Many things that were set in stone are now being thrown out the window," says Velocity Group's Miller.
If limits on prices for business tickets take hold broadly, airlines may offer fewer corporate discount programs. Another consequence: If the simpler price structure does indeed spark more business travel, fewer upgrades will likely be available to first class. No matter what, price competition on routes popular with the exec set is sure to be even fiercer than it has been.
More travelers will fly on the fly.
Leisure travelers have been accustomed to buying airline tickets well in advance of a trip. The prevailing wisdom is that the earlier the purchase, the better the chance of getting good value. More transparent pricing options could change that. "As this [new reality] settles in, people won't have to book tickets four months in advance for a good deal," says Mitchell. "You'll be able to have confidence in the price even two to four weeks in advance."
Some of the best deals for vacationers could be for air-and-lodging packages as hotels and resorts will be able to market bundled deals with airlines more readily. "The predictability will now be there," says Mitchell.
Simpler doesn't mean easier.
Just because Delta and others are trying to abandon their old, convoluted ways of setting fares doesn't mean consumers can expect price disparities to disappear. True, the wild variations should diminish over time, but that will take a long time. "Anyone looking for rock-bottom fares will still have to check all the flights anyway," says Alan Sbarra, vice-president of Unisys R2A Management Consultants.
That means travelers will still want to troll sites like Expedia (EXPE ) and Travelocity. And thrifty flyers who automatically choose low-cost carriers like Southwest or AirTran Airways (AAI ) will want to consider the possibility of even lower fares elsewhere. "This puts Delta in that conversation," says Sbarra.
The low end may go up.
Over the last several years, airfares have declined across the board, analysts say, as low-cost carriers' rock-bottom prices have forced traditional network airlines to follow suit somewhat. So, the lowest prices probably won't go much lower -- and they may even rise. "Passengers will be disappointed to think they're going to get half off," says Velocity Group's Miller. In a system where pricing is transparent, there's less potential that the guy sitting next to you paid $300 for his business-class seat while you paid $750.
The turbulence isn't over.
A simpler way of setting ticket prices is long overdue. And now is probably as good a time as any for the industry to make the transition. But don't forget, many airlines, including Delta, aren't far from bankruptcy. US Airways, which is already in Chapter 11, is perhaps worst off, but increased fare pressure could push others over the edge.
Savvy travelers will need to be aware of the financial situation of the airlines they book -- US Airways' service disruptions in Philadelphia over the holidays could be a sign of things to come as management-labor relations further deteriorate (see BW Online, 9/14/04, "How to Rise Above a Belly-Up Airline").
One way consumers can protect themselves from potential service disruptions is by always purchasing tickets with a credit card, says Gerchick. Credit-card companies will in most cases refund tickets should an airline file for bankruptcy and reduce service -- as long as the ticket was bought directly from the carrier. In addition, the federal government recently renewed a consumer-protection provision that allows ticket holders for canceled flights to fly with another carrier for a $25 charge.
Business consumers, by and large, will benefit from the changes under way. But the coming fare war will likely be tough for an industry already in dire straits.
Tsao is a reporter for BusinessWeek Online in New York
Edited by Thane Peterson