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Delta cuts fares by as much as half

January 5, 2005

Start Tribune
Liz Fedor

Delta Air Lines slashed many of its fares by as much as 50 percent Tuesday as
part of a restructuring that may unleash an industrywide fare war at a time when
U.S. airlines continue to lose billions of dollars.

"Delta has made massive changes to their fares in all U.S. markets," Terry
Trippler, a Minneapolis-based fare watcher, said late Tuesday shortly after Delta
filed the fare cuts.

It remains to be seen how many carriers will match Delta's plans, which included
dropping Saturday-night stays and capping prices on advance and last-minute
ticket purchases.

In a rare public comment on competitor pricing, Eagan-based Northwest Airlines
warned Tuesday afternoon that Delta's price cuts would be "revenue negative,"
which prompted speculation that Northwest might not match the cuts.

Vaughn Cordle, an analyst for Airline Forecasts, said Northwest is "absolutely
correct" that fare cuts could produce a passenger revenue drop in the short
term. But airlines might find they have no choice but to go along, he said.

"Average fares will go down," Cordle said. But airlines that can withstand a brief
decline in their passenger revenue associated with fare cuts will boost their
passenger traffic in the long run, he said.

Delta's fare changes are based on an experiment it conducted in Cincinnati,
where it capped one-way fares in economy class at $499 and one-way fares in
first class at $599. It also eliminated Saturday-night-stay requirements and
streamlined its complicated pricing system by offering eight fare types.

In a written statement, Northwest emphasized Tuesday that any analysis hinges
on the details of the fare cuts and simplification employed by Delta.

However, the carrier said, "Northwest expects that such an initiative, if it becomes
general, would immediately adversely and significantly affect industry revenue."

Northwest and other U.S. airlines have lost about $30 billion during the past four
years. Average fares already are lower than they were in 2000, largely because
of more price-conscious business travelers and the growing clout of low-fare
airlines. Continued high fuel prices also are squeezing Northwest and the rest of
the airline industry.

But the Business Travel Coalition, which has long fought for fare reforms,
immediately criticized Northwest's statement.

Kevin Mitchell, chairman of the business coalition, said Northwest improperly was
telegraphing its pricing intentions. In his own news release, Mitchell concluded:
"Northwest does not plan or contemplate changes to its fares in response to a
fare simplification initiative by Delta."

Northwest's public statement "surprised everybody," Trippler said. He, too,
interpreted Northwest's comments to mean that the carrier "would not go along
with any fare restructuring that was revenue-negative."

Robert Mann, an airline consultant from New York, agreed with Cordle that
average fares in the domestic market will drop if Delta stimulates industrywide
reform.

In many cities, travel would become "more affordable and less stifling to those
individuals who find at the last minute that they simply must travel for business or
personal emergency business," Mann said.

Many customers who have been paying expensive walk-up fares believe they
are being gouged, he said.

So some of those passengers have shifted part of their business to low-fare
airlines, and they are buying less-expensive restricted fares on big airlines such
as Northwest and Delta.

Some industry insiders compared the Delta fare cuts to major fare reforms
attempted by American Airlines in 1992, when it introduced "value pricing."

American's plan disintegrated in a few months, but not before it triggered a major
price war when many carriers were struggling with weak passenger demand and
high fuel prices in the wake of the 1991 Gulf War.

In June 1992, Northwest sued American, charging that the larger carrier was
trying to eliminate competitors through "predatory pricing." It lost the suit. During
that tumultuous period in the industry, Continental also sued American, and
America West shareholders accused American of predatory pricing.

Delta's overarching goal -- simplified and fair pricing -- appears to be almost
identical to American's in 1992, Cordle said, with one big difference: Low-cost
carriers had a tiny portion of the domestic market in 1992, and now they are
serving about 30 percent of domestic passengers.

How big airlines react to a Delta fare restructuring will be based in large part on
what types of low-fare competition they face in given markets, Mann said.

Liz Fedor is at

lfedor@startribune.com.