Plagued by high fuel costs, US Airways decided to stop offering one-way fares below certain levels ($69 for flights less than 500 miles and undisclosed minimums on longer flights). In the hypercompetitive domestic U.S. airline industry, will such a fare barrier work? If history is guide, unilateral moves by major U.S. carriers to establish pricing floors, ceilings or redesigns don't generally last long.
Here are some examples:
• Just a few years ago, US Airways was talking up its GoFares initiative. Rolled out in an increasing number of markets, GoFares had no Saturday-night stay requirements and never cost more than $499 each way. Now, as US Airways sets fare floors, talk of fare ceilings cannot be heard too often. The phrase GoFares cannot be found on the US Airways Web site. The page on which the airline listed all GoFares--www.usairways.com/gofares--is no longer available.
• In 1992, American Airlines infamously introduced value pricing. "The plan was designed to make fares simple, sensible and fair," according to AA's official history, as shown on its Web site. "It offered customers substantially greater travel flexibility, and was a major revision to American's fare structure. Intense price competition made the Value Plan unfeasible, however, and American was forced to abandon it."
• Delta Air Lines as part of its SimpliFares initiative in 2005 set caps of $499 and $599 on one-way domestic airfares for economy and first class, respectively. By July of that year, Delta raised the caps by $100 in the face of rising jet fuel costs. At the time, the airline said it still never applied Saturday-night stay requirements. However, within a matter of a few more months, Delta abandoned the caps altogether and eventually jettisoned the last vestiges of SimpliFares by reintroducing Saturday night stays.
AirTran, JetBlue, Frontier and Southwest also at times instituted fare caps, often matched by major network competitors. For example, Delta's Song in 2003 capped at $299 one-way fares between Northeast cities and Florida, matching JetBlue. Where is Song now?
American Airlines during 2003 capped one-way economy fares for certain transcon flights at $299, matching JetBlue. "It wasn’t that long ago that we had an average transcon fare of $299," said JetBlue CEO Dave Barger during a recent conference call with analysts. "And now we're into the $500s." A quick look at AA's Web site found coach tickets on transcon flights above $299.
Granted, most of these examples are fare caps and not fare minimums, but the airline industry does not lend itself to any sort of pricing barriers. Moreover, US Airways runs hubs in Charlotte, Las Vegas, Philadelphia and Phoenix--three of which also are strongholds for Southwest Airlines. Though it too is keen on raising fares in the challenging operating environment, Southwest is unlikely to bar itself from selling cheap fares in those cities.
While welcoming the US Airways move, JPMorgan Securities analyst Jamie Baker pointed out the reality of the current situation: "With jet kero at $3.50/gallon, we would suggest that no one-way fare below $99 ever be allowed to exist--including sales--though we realize this would eliminate a significant portion of Southwest's overall fare spectrum. And therein lies the problem."
US Airways, however, gave itself wiggle room by saying that only "non-sale fares" would have the new minimums. Perhaps that caveat will allow the airline to maintain its stated policy, especially as carriers seemingly attempt fare hikes on a weekly basis to offset crippling fuel costs. But given competition from the likes of Southwest, and the cyclical nature of the airline business, are publicly stated fare floors really sustainable?