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Low-Fare And Hoping

Delta's Pricing Move Simplifies Rates But Leads Carriers in a Risky Direction

By Bill Brubaker
Washington Post Staff Writer
Sunday, January 9, 2005; Page F01

Stop me -- no, stop Jerry Grinstein -- if you've heard this one: "Yes, we lose money on every sale, but we make it up in volume."

Grinstein is chief executive of Delta Air Lines, and "make it up in volume" is exactly what he outlined last week when he announced new, lower fares for many of Delta's domestic flights, all part of a simpler fare structure. "Introducing SimpliFares," is how Delta's Web site greeted visitors early Wednesday morning, when the changes went into effect. "One airline is changing everything."

A Delta employee helps passengers check in at Denver International Airport. Delta's new fare structure could send ripples across the industry. (Matthew Staver -- Bloomberg News)

_____Recent Headlines_____
American Answers Delta in Fare War (The Washington Post, Jan 7, 2005)
Delta to Cut Fares on Most U.S. Flights (The Washington Post, Jan 5, 2005)
Southwest Plans Service to Pittsburgh (The Washington Post, Jan 5, 2005)

One thing it didn't change was the airlines' reputation as a me-too industry. American Airlines quickly responded with similar fare cuts, and Continental, United, US Airways and Northwest matched fares on routes where they compete with Delta.

Cutting prices, and therefore revenue, usually isn't the best course for a company that posted a $646 million loss for a single quarter, as Delta did in the third quarter last year. But the new fare structure may offer a blueprint for how the nation's largest carriers will price their products in the near future.

It also is why the big traditional airlines -- of which two have filed for Chapter 11 bankruptcy protection -- have been beseeching their unionized employees for concessions on pay and benefits. To charge fares that approach those of the low-cost competitors -- Southwest Airlines, JetBlue and others, upstarts without obligations to pay benefits to generations of retirees -- the national carriers have argued that they can't afford the legacy of $200,000 pilots and highly paid mechanics and baggage handlers.

But as vacationers, and especially business travelers, stare with delight at fares that are in some cases half what they were less than a week ago, they are also wondering how long this can last.

Lost Trust

It was only last month that Delta's Grinstein stood before a group of airline professionals in New York and predicted imminent change in the financially troubled industry.

The reason the major airlines have been losing market share to low-cost competitors such as Southwest, he told his audience at the elite, private-membership Wings Club, is because travelers no longer think they're getting a good deal from the big carriers.

"I recently came across the mission statement for Costco, the membership warehouse company," Grinstein said, according to a transcript of his prepared remarks. "Their goal is to 'continually provide our members quality goods and services at the lowest possible prices.' "

The failure of major airlines to meet that standard "caused us to lose the trust of our customers," Grinstein continued. "Passengers no longer believed they were receiving the highest quality at the lowest possible price. And they were right.

"As a result, customers shifted their trust and affiliation to carriers like Southwest and JetBlue. Southwest succeeded so well that today customers flock to the airline's Web site, even when Southwest's prices are higher than other carriers'. They simply trust Southwest to be the best value around."

Then, last week, Delta acted, sending ripples of uncertainty through the airline industry.

With fuel costs higher than airlines had ever expected, low-cost carriers capturing about 30 percent of the industry's market share and the possibility of a bankruptcy filing looming, the Atlanta-based airline decided it had no other choice.

"It's the low-fare carriers that brought this on," said Anthony F. Cristello, an analyst for BB&T Capital Markets. "It's a change that was inevitable. And it's the customer who's going to benefit."

Under Delta's new structure, prices for last-minute walk-up fares have been cut by as much as 50 percent, the long-unpopular Saturday night stayover requirement for lower-priced fares has been eliminated, the fee for changing nonrefundable tickets has been dropped from $100 to $50, and the airline's menu of fares has been simplified: Now there are eight prices for each flight; before, there were dozens.

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