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Why business travelers are disgruntled
by Vaughn Cordle
Washington, D.C., October 12, 2003 – Based on market share data, financial performance, and a
recent survey by the Business Travel Coalition http://btcweb.biz, major airlines ARE GETTING THEIR
CLOCKS CLEANED. THEY have a SIGNIFICANT AND CONTINUING cost and fare disadvantage
with the lower-cost airline segment. Wide fare differentials impact the perception of value and this
has resulted in a market share shift between the two business segments. Airline yield
management policies that maximized revenue by raising prices on the business traveler – beyond a
certain perceived level of value - have alienated the industry’s most valuable customer. It is
becoming increasingly evident that high and inconsistent business fares may have raised revenue
in the short run but have destroyed goodwill and airline business in the long run. Business travelers
do not like uncertainty in fare levels and that’s what they get when there are wide variances in fare
pricing and wide fare differentials between low-cost and high-cost airlines. Bottom line: If business
travelers do not get simpler and more consistent pricing, they will continue to take their business
elsewhere.
Reducing uncertainty in air travel pricing and reducing fare-variance will reduce uncertainty for the
business traveler, his travel manager, and the corporate executive who must budget for travel
expenditures. The airline benefits when customers perceive they are treated fairly and when fare
levels are low enough to reduce the use of travel substitutes. If fares are too high, passengers, and
potential passengers, simply take the train, bus, or communicate via technological means. The
loss of business travel is not recognized directly by the airline because there is no record of the
potential traveler booking another airline or setting up a web-conferencing meeting. However, it
does show up eventually in the airlines top and bottom line.
Improved and lower cost travel substitutes combined with greater availability of lower-cost air travel
alternatives has shifted power to the corporate customer. This has resulted in a buyers market for
air travel and it has resulted in lost revenue for the major airlines. Fare differentials must be
narrowed and the current fare structure reformed if the major airlines are to slow the market share
loss. This will require a narrowing in the cost differentials with the low cost airlines.
Robert Crandall, who introduced the Value Pricing concept in 1992 as CEO of American Airlines,
suggests the following: “The problem with doing it now is that the major's have not yet gotten their
costs low enough, have weak balance sheets and are terrified that revenues will go down and not
up. If they were even reasonably competitive cost wise, they could implement value pricing without
concern. With appropriate costs, their ubiquity and convenience would enable them to price
"business fares" at a premium of 20 to 25 percent and thus recapture the incremental costs (hubs
and frequency) of the ubiquity and convenience they have to sell. At the same time, they could offer
leisure fares at prices set by Southwest, Airtran, Frontier, et al. Then, if they really got smart, they
would stop giving away their premium cabins and charge an appropriate amount per square foot to
occupy the space. I think one of them should give it a shot, since not doing it is simply going to allow
the low fare guys to further erode the system advantage the majors now have. However, I see no
indication that any one of the majors is up to the task.”
America West’s new simplified fare structure has resulted in above-market unit revenue gains. The
big network airlines should take a close look at this simplified plan because it appears to be a
smarter way to price the product. It reduces uncertainty (i.e., risk) for the corporate travelers in terms
of budgeting for air travel and it highlights the unfairness of the current fare policies of the majors.
Earlier this year, United Airlines introduced a new business fare structure (called "BIZ Fares") in
most domestic markets. The new structure consists of an unrestricted business fare that is
approximately 30 to 40% lower than the old "walk-up" fare and a 7-day advance purchase one-way
fare that is approximately 70% lower. It would appear that the industry is finally moving toward
pricing policies that will be more attractive to their most valuable customers.
Business travelers have three key critical issues with the major airlines:
Issue # 1: Business travelers demand pricing consistency
Travel managers have a major problem with the way airlines price and market their product.
Problem: Large variations in fare pricing create uncertainty and increase the perceived risk of
booking future flights. This encourages travel managers to seek alternative means of
travel/communication and it destroys airline brand loyalty. Perception: Yield management has
become yield MIS-management and business travelers believe they are being taken advantaged of
and price-gouged.
Solution: Airlines should dampen out wide fare-variances and provide business customers
consistent pricing on specific routes and for specific block periods of time.
Benefit: Airlines help corporate customers reduce the uncertainty of air travel expenditures and
future travel plans. Customer loyalty improves because consistent pricing is perceived to be fair
pricing.
Issue # 2: Business travelers feel discriminated against
Business travelers feel mistreated because they are excluded from certain price promotions and
sales channels. Problem: This angers the business traveler because they know that they pay the
highest fares. This type of discrimination encourages them to increase the use of travel substitutes
and rebook on lower-cost airlines. Perception: Big airlines don’t care about their best customers.
Solution: Consistent pricing would lock-in the corporate customer at the higher rate when discounts
are offered, and alternatively, lock them in when fares increase.
Benefit: Business traveler loyalty increases along with bookings. Uncertainty is reduced for
customer and airline.
Issue # 3: High fares reduce business travel
Value is relative. Business travelers can use communication technology in the place of air travel
and they have low cost travel alternatives. Problem: High fares reduce traffic and future business for
the major airlines and it results in market share loss. Perception: Improved, low cost travel
substitutes and fast growing lower-cost airlines provide better relative value for the business
traveler.
Solution: Value-type pricing that is consistent and easy to understand. Fare differentials must be
reduced between the high cost and low cost airlines.
Benefit: Business travelers perceive they are treated fairly because they are in reality. Perceived
and actual value is improved because uncertainty is reduced along with fare differentials and fare
variance.
by Vaughn Cordle
Washington, D.C., October 12, 2003 – Based on market share data, financial performance, and a
recent survey by the Business Travel Coalition http://btcweb.biz, major airlines ARE GETTING THEIR
CLOCKS CLEANED. THEY have a SIGNIFICANT AND CONTINUING cost and fare disadvantage
with the lower-cost airline segment. Wide fare differentials impact the perception of value and this
has resulted in a market share shift between the two business segments. Airline yield
management policies that maximized revenue by raising prices on the business traveler – beyond a
certain perceived level of value - have alienated the industry’s most valuable customer. It is
becoming increasingly evident that high and inconsistent business fares may have raised revenue
in the short run but have destroyed goodwill and airline business in the long run. Business travelers
do not like uncertainty in fare levels and that’s what they get when there are wide variances in fare
pricing and wide fare differentials between low-cost and high-cost airlines. Bottom line: If business
travelers do not get simpler and more consistent pricing, they will continue to take their business
elsewhere.
Reducing uncertainty in air travel pricing and reducing fare-variance will reduce uncertainty for the
business traveler, his travel manager, and the corporate executive who must budget for travel
expenditures. The airline benefits when customers perceive they are treated fairly and when fare
levels are low enough to reduce the use of travel substitutes. If fares are too high, passengers, and
potential passengers, simply take the train, bus, or communicate via technological means. The
loss of business travel is not recognized directly by the airline because there is no record of the
potential traveler booking another airline or setting up a web-conferencing meeting. However, it
does show up eventually in the airlines top and bottom line.
Improved and lower cost travel substitutes combined with greater availability of lower-cost air travel
alternatives has shifted power to the corporate customer. This has resulted in a buyers market for
air travel and it has resulted in lost revenue for the major airlines. Fare differentials must be
narrowed and the current fare structure reformed if the major airlines are to slow the market share
loss. This will require a narrowing in the cost differentials with the low cost airlines.
Robert Crandall, who introduced the Value Pricing concept in 1992 as CEO of American Airlines,
suggests the following: “The problem with doing it now is that the major's have not yet gotten their
costs low enough, have weak balance sheets and are terrified that revenues will go down and not
up. If they were even reasonably competitive cost wise, they could implement value pricing without
concern. With appropriate costs, their ubiquity and convenience would enable them to price
"business fares" at a premium of 20 to 25 percent and thus recapture the incremental costs (hubs
and frequency) of the ubiquity and convenience they have to sell. At the same time, they could offer
leisure fares at prices set by Southwest, Airtran, Frontier, et al. Then, if they really got smart, they
would stop giving away their premium cabins and charge an appropriate amount per square foot to
occupy the space. I think one of them should give it a shot, since not doing it is simply going to allow
the low fare guys to further erode the system advantage the majors now have. However, I see no
indication that any one of the majors is up to the task.”
America West’s new simplified fare structure has resulted in above-market unit revenue gains. The
big network airlines should take a close look at this simplified plan because it appears to be a
smarter way to price the product. It reduces uncertainty (i.e., risk) for the corporate travelers in terms
of budgeting for air travel and it highlights the unfairness of the current fare policies of the majors.
Earlier this year, United Airlines introduced a new business fare structure (called "BIZ Fares") in
most domestic markets. The new structure consists of an unrestricted business fare that is
approximately 30 to 40% lower than the old "walk-up" fare and a 7-day advance purchase one-way
fare that is approximately 70% lower. It would appear that the industry is finally moving toward
pricing policies that will be more attractive to their most valuable customers.
Business travelers have three key critical issues with the major airlines:
Issue # 1: Business travelers demand pricing consistency
Travel managers have a major problem with the way airlines price and market their product.
Problem: Large variations in fare pricing create uncertainty and increase the perceived risk of
booking future flights. This encourages travel managers to seek alternative means of
travel/communication and it destroys airline brand loyalty. Perception: Yield management has
become yield MIS-management and business travelers believe they are being taken advantaged of
and price-gouged.
Solution: Airlines should dampen out wide fare-variances and provide business customers
consistent pricing on specific routes and for specific block periods of time.
Benefit: Airlines help corporate customers reduce the uncertainty of air travel expenditures and
future travel plans. Customer loyalty improves because consistent pricing is perceived to be fair
pricing.
Issue # 2: Business travelers feel discriminated against
Business travelers feel mistreated because they are excluded from certain price promotions and
sales channels. Problem: This angers the business traveler because they know that they pay the
highest fares. This type of discrimination encourages them to increase the use of travel substitutes
and rebook on lower-cost airlines. Perception: Big airlines don’t care about their best customers.
Solution: Consistent pricing would lock-in the corporate customer at the higher rate when discounts
are offered, and alternatively, lock them in when fares increase.
Benefit: Business traveler loyalty increases along with bookings. Uncertainty is reduced for
customer and airline.
Issue # 3: High fares reduce business travel
Value is relative. Business travelers can use communication technology in the place of air travel
and they have low cost travel alternatives. Problem: High fares reduce traffic and future business for
the major airlines and it results in market share loss. Perception: Improved, low cost travel
substitutes and fast growing lower-cost airlines provide better relative value for the business
traveler.
Solution: Value-type pricing that is consistent and easy to understand. Fare differentials must be
reduced between the high cost and low cost airlines.
Benefit: Business travelers perceive they are treated fairly because they are in reality. Perceived
and actual value is improved because uncertainty is reduced along with fare differentials and fare
variance.
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