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Analyses - November 11, 2004

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November 2004

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Print Transportation,

Simplified pricing in the airline industry

In an article in USA Today, Joe Brancatelli urges the «Big Six» in the US (American, Continental, Delta, Northwest, United and US Airways) to simplify their fare structure as a way to resolve their financial woes. Railing against their stubborn refusal to change their archaic pricing structure, he cites the example of Ireland’s Aer Lingus and its successful move to simplified pricing. All of this leads us to wonder how Air Canada’s new fare strategy will turn out.

Business-travel expert Joe Brancatelli has worked for various industry magazines (Frequent Flyer, Travel Holiday, Travel+Leisure) and now publishes his own website and writes columns and articles for a number of major US publications. In the USA Today article mentioned above, Brancatelli emphasizes that airlines like Southwest, JetBlue and America West have understood the benefits of simplified fare structures. As he explains, the model adopted by Aer Lingus is an example of the new practices taking root in the airline industry.

Keep it simple! 

Aer Lingus has adopted a strategy to simplify pricing and reduce fares on its trans-Atlantic flights. The airline now only sells one-way tickets, thus freeing customers from the need to buy a round-trip ticket they do not need, simply to qualify for a better fare. Minimum-stay restrictions are also a thing of the past.

 

The economy-class fare is capped at US$503 for the five destinations the airline serves in the US. Consumer response to this initiative has been very positive and traffic has increased by double digits on the Los Angeles route. With no other carrier trying to match the airline’s fares to Ireland or Europe via its Dublin hub, the difference in ticket price is sometimes quite dramatic: one Aer Lingus fare is between $300 and $400, while the same route with the closest competitor is priced at more than $1000.

 

The company is seeing the same positive reaction to its business-class fares, which have been cut by up to 60%. Whereas the section used to often be only half full, there are now waiting lists for certain flights. Some firms have even changed their travel policy to allow employees to fly business class.

 

Under the old pricing structure, a one-way fare could range from $100 to over $800, a spread that customers resented. Now that the price is capped
at $500, consumers find the difference between the lowest and highest fare more acceptable. Jack Foley, executive vice president of Aer Lingus, explains that the old way of doing things set up a price war among the airlines, with each company looking to match the competition. Under the new system, Aer Lingus responds directly to the market, not to other airlines. So far, consumer reaction to the fares indicates that simplification is a good strategy.

 

Although it might be hard to believe, the move has also reduced operating costs. To explain this, Jack Foley raises the following points:

  • Do you know how many return seats go out empty because we used to force people to buy roundtrips to get the lower fares?

  • Do you know how much money we spent doing corporate contracts with the old, complicated pricing?

  • Furthermore, it is costly to migrate complicated systems to more advanced platforms or to support archaic systems just to maintain complicated pricing.

 

What about Air Canada?

As part of its recovery plan, Air Canada has announced a simplified fare structure. In light of new market realities, officials explain that complicated pricing is too expensive to maintain and hinders the company’s competitiveness. Like Aer Lingus, the airline no longer requires a round-trip purchase or a Saturday-night stay. In the interests of transparency, the airline hopes displaying all fares (an example is illustrated below) will inspire trust among consumers and enable travellers to make a more informed choice.

MLa_simplification_tarifaire

 

However, when the Executive Class fare ($1495) is more than eight times the Tango fare ($179), one starts to wonder how much «added value» Business Class can offer.
It remains to be seen whether the strategy will be successful for Air Canada.

 

Sources:

– Brancatelli, Joe. “If they fix it, we will fly,” USA Today, October 31, 2004

– Woodyard, Chris. “Low fares go trans-Atlantic with Aer Lingus flight plans,” USA Today, September 27,

2004.

 

 

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