Friday, January 07, 2005

Delta launches airline price war -- and the shakeout finally arrives?

Update: The WSJ reports...
This isn't a fare war. It's a revolution. The repricing of airfares by Delta Air Lines is nothing short of a historic change in U.S. travel...

In a filing in its bankruptcy reorganization, US Airways ... reported some rather startling numbers. In the first quarter of 1998, 39.7% of its domestic passengers purchased "premium" tickets -- first-class, business-class or unrestricted coach. Yet in the first quarter of 2004, only 4.6% of domestic passengers bought "premium" tickets.
Well, that could explain why this is happening now rather than six years ago.

Delta Airlines, on the verge of Chapter 11, is making a big competitive move by slashing prices on its most expense business class tickets and restrictions on its cheaper ones -- reversing the standard practice of the "legacy" airlines.

The legacy airlines, which carried forth from the days of high government-regulated fares, have expensive cost structures and restrictive union work rules that have left then unable to match the low operating costs of post-deregulation start-ups like Southwest and JetBlue.

In response they've become perhaps the world's most expert practitioners* of price discrimination, mastering the art of charging the business traveler $1,000 more than the tourist in the next seat in exchange for a short-notice booking with few restrictions.

But even that has not been enough, and one after another -- Pan Am, TWA, Braniff, Eastern, Continental, US Air, Northwest, United -- has flown into bankruptcy or history. Delta, the least unionized and among the best managed, has lasted the longest -- but now it clearly sees that its time too has come.

With the low-cost airlines improving the quality of their service towards matching that of the legacy airlines' top-price service, the fare differential the latter have depended upon has become unsustainable -- and Delta has now decided to bite the bullet by dropping its prices from the top.

The Financial Times reports... is quite possible the price war may doom the chances of recovery for United and US Airways, respectively the country's second and seventh largest airlines, which are currently in Chapter 11.

Delta has said it will reduce domestic fares by up to 50 per cent and scrap requirements for overnight stays on Saturdays, a tactic to prevent business travellers from using discount tickets.

In the short term this will lose it revenue it can ill afford to forego. But Delta appears to be gambling that if it moves first, it may be one of the survivors in what looks like a final dogfight among the so-called legacy airlines...

No one should want to see an airline go under, with all the attendant human costs. But it is hard to see what else can restore a measure of health to the rest of the US industry.

For some time, necessary restructuring was delayed by federal government cash and loan guarantees given to airlines claiming to be suffering from the impact on air travel of the September 2001 terrorist attacks. This aid has rightly ended. It is now time for market forces to determine the industry's shape.
Competitors' responses are reported at USA Today.

[* after college and university "tuition assistance" offices, of course.]