On January 4, Delta introduced SimpliFares, a new price list for domestic tickets that reduces the number of fare types, eliminates the Saturday-night stay requirement for leisure fares, and caps one-way walk-up fares at $499 for coach and $599 for first class. In other words, Delta has redesigned its fares to be simpler, less restrictive, and (at the top end) more reasonable.
If Delta’s SimpliFares become the new industry standard among mainline carriers—which seems likely since they’ve been widely matched—there are implications, both positive and negative, for the traveling public. But before we take a look at the three areas where the changes are most likely to play out, we should look at the industry events that led up to Delta’s announcement.
A little history
Change has been a long time coming. Consumers of every stripe have been squawking about irrational and confusing airline fares for years. Business travelers seethed at paying enormous premiums for the “privilege” of being allowed to make last-minute ticket purchases and change their itineraries as circumstances dictated. And leisure travelers were perplexed by the dense thicket of advance-purchase stipulations and stymied by the Saturday-night stayover requirement.
But, with the exception of Southwest, there were no widely available alternatives. So ticket buyers suffered in silence.
With the recent proliferation of low-cost carriers like JetBlue, AirTran, ATA, and Independence Air, it became painfully obvious that there was no compelling reason why simple, cheap fares could only be offered by cattle-car operators like Southwest. Consumers began openly questioning the mainline carriers’ pricing. Worse yet, they voted in favor of simpler fares with their pocketbooks, redirecting substantial business volume to low-fare airlines and shifting the balance of marketplace power from the legacy carriers to their newer, smarter rivals.
For a time, the majors remained in denial, assuming that if they stuck doggedly to the old ways, consumers would eventually re-embrace the previous regime, profitability would be regained, and the good times of the late 1990s would be restored. It was not to be.
In desperation, United and Delta deployed low-fare subsidiaries Ted and Song to compete directly with the discounters while simultaneously maintaining their traditional full-service operations and convoluted pricing.
Among the larger airlines, only Alaska and America West made serious efforts to make meaningful reforms to their ticket prices. But they were too small to force larger carriers to match their pricing.
And so the status quo was maintained until Delta delivered on its promise to reexamine its business model from top to bottom, including its fares. Not only will its new SimpliFares change how consumers look at Delta, they will affect the industry as a whole, especially with regard to the cost of tickets, the value of elite status, and the survival of the legacy airlines.
With full-fare coach and first-class fares capped at $499 and $599 each way respectively, the traditional business model of business travelers subsidizing cheap leisure travel will be undermined, if not overthrown altogether. That’s great news for business travelers, who routinely find themselves sitting alongside leisure flyers—occupying identical seats, receiving comparable service, and eating the same meals—who had paid 10 and sometimes 20 times less for their tickets. But without the disproportionate subsidy of unrestricted business fares, the average price of cheaper tickets will almost certainly rise.
Precisely how the average will be ratcheted up remains to be seen. The majors will have to offer at least a few token deeply discounted seats to keep the most price-sensitive shoppers from abandoning them in droves. Therefore, the mid-priced coach fares are left as the most likely candidates to be raised.
While no one prefers paying more to paying less, buyers of lower-priced tickets should find some consolation in the knowledge that slightly higher fares are both fair and rational.
The lower first-class fares will also make first class a viable option for more travelers. And as more consumers purchase newly affordable first-class tickets, fewer first-class seats will be available for frequent flyer program participants, either as mileage upgrades or as complimentary upgrades for elite program members.
It’s difficult to predict just how acute this problem will become. But it could seriously undermine the most important aspect of the airlines’ most effective marketing programs: the loyalty effect of mileage programs on the airlines’ most profitable customers.
In a worst-case scenario, if the airlines are unable to find ways of adding back value to elite membership, the lure of attaining elite status would be seriously diluted, leaving the airlines’ very best customers to choose a carrier on a trip-by-trip basis rather than on the basis of long-term loyalty currently engendered by the promise of elite perks.
Lastly, fare reform will affect the airline industry as a whole.
In the short term, analysts expect the new pricing to result in a net decrease in revenue and profits for the largest airlines. That’s bad news for US Airways, United, and other carriers with questionable survival prospects. In fact, it has been suggested—plausibly, I think—that part of Delta’s agenda is to push one or more carriers into insolvency, thereby reducing capacity and allowing the surviving airlines to raise prices.
In the long run, if the legacy carriers are successful at reducing their operating costs and can match the low-fare carriers’ prices and still turn a profit, then they will not only insure their own survival, but they will slow the growth of the discounters.
My own hope is that the industry can regain its equilibrium on the pricing front and turn its attention to competing for travelers’ business on the basis of service and comfort. Delta’s move, which I applaud, is a step in that direction.
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