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30000 Feet

VIEWS: 1 PAGES: 12

									  “THE PLANE TRUTH”
                                                       The View                                             from
                                                                  30,000 Feet
            HOW THE AIRLINE INDUSTRY REALLY WORKS
              TWENTY YEARS AFTER DEREGULATION
It’s 1979. You just booked a flight home. What did                the same as it did 20 years ago. Adjust for inflation and it’s
you buy?                                                          actually a third less.
Simple: A ticket. A seat on a plane. A trip home.                 The customer next to you booked last week for a moderate
                                                                  discount. She paid double your fare. The 15 people closest
You chose among six airlines offering a total of seven daily
                                                                  to you paid eight different fares. The one who huffed up to
flights on the route. But first, a stop in Dallas/Ft. Worth.
                                                                  the gate in a panic at the very last minute is one of only six
Transfer to another airline two terminals over.
                                                                  customers on the plane flying at full fare – quadruple yours.
Your fare was similar to the fare the fellow sitting next to      His great relief at getting on board lessened the sting; so did
you paid. About the same as everyone around you. About            his triple-dip frequent-flyer miles. He’s a million-miler, so
the same as the folks on any other airlines’ flights you          he puts the ticket on his credit card and picks up a special
could’ve picked, in fact. Why shop for the best price?            summer-travel bonus. The bonus points add up to almost
They’re all the best price.                                       half a free round-trip ticket from this flight alone.
Also the worst.                                                   From your seat the flight seems about the same as 20 years
                                                                  ago. The crew, the safety announcements, the magazines,
                                                                  the view from 30,000 feet.
Fast-forward to 2001. You’ve booked a flight home on
Delta. You chose among six airlines again – three of them         Yes, it feels familiar up here. But the economic machinery
are new – offering 28 daily flights at 208 different fares        keeping the airline aloft is fundamentally different.
with various freedoms and restrictions.
                                                                  These pages are meant to help explain why and how that
There’s still a transfer in Dallas/Ft.Worth, this time on Delta   difference affects you every time you travel.
two gates down. You booked three weeks ago for a deep
discount, you’ll stay the weekend, and your ticket cost about

                                                      THE PLANE TRUTH    13
                                                                          1
                                                    Changing Tickets
                                                                                       learned to survive. Success is due to one
True or False?                        T
                                            wenty years ago the U.S. air travel
                                            industry was deregulated, and for the
                                            first time market forces – instead of
                                                                                       primary reason too: sound business prac-
                                                                                       tices. Airlines are obliged to faithfully obey
Airfares are more expensive           government policy – emerged as the               free market rules just as certainly as they
today than they were before           primary architect of airline economies. The      once obeyed regulations. And because the
deregulation in 1978.                 free market began to reshape airlines into       best carriers respect that fact, air travel today
FALSE. Domestic airfares              more dynamic businesses that compete             is cheaper, better and faster.
have dropped an average of            through supply and demand.
39 percent, after adjusting for
                                                                                       Despite this reality, some consumers are
inflation, since 1978. When
                                      Today the industry is transformed. To attract    convinced that pricing, competitive prac-
weighted dollar-to-dollar
                                      customers, carriers have added flights and       tices and routing choices are categorically
against the Consumer Price
                                      destinations. There are vast differences in      less consumer-friendly than they were
Index increase of 155 percent
                                      fares, depending on the tradeoffs between        20 years ago.
over the same period, fares
                                      convenience and price the customer wants.
                                      And overall, the average fare has dropped        Why? One explanation suggests that people
increased only 56 percent.                                                             tend to take change personally. Rather than
Either analysis indicates a
                                      39 cents on the dollar from 1978, after
                                      adjusting for inflation.                         viewing a familiar route or fare change as
fare drop in real terms.                                                               a business response to market forces, a
                                                                                       long-time customer might find it entirely
                                                                                       reasonable to take the change as a personal
                                                                                       affront – an act of corporate indifference
                                                                                       to customer loyalty.
                                                                                       That reaction is understandable but misdi-
                                                                                       rected. Why?
                                                                                       First, market forces inevitably drive airlines to
                                                                                       give consumers what they want: the pricing,
                                                                                       schedules, destinations and service their
                                      With regulatory barriers to entry swept          collective buying patterns reveal. Moreover,
True or False?                        away, the industry has grown fiercely
                                      competitive. Today more U.S. and interna-
                                                                                       the airline industry is one of the most fiercely
                                                                                       competitive in the world. Like all companies,
The airline industry is hugely        tional airlines than ever compete for busi-      if the airlines are to succeed, they must offer
profitable.                           ness, wooing customers with superior             customers what they want, employees a
                                      service and investors with the prospect          rewarding career and shareholders an attrac-
FALSE. The industry is notori-                                                         tive return on their investment.
ously cyclical and although it        of solid profits. Airlines have grown the
now shows healthy signs, it           market, and in turn grown with it ... or         A BRIEF HISTORY
hasn’t always been this way. In       withered in its intense competitive heat.        OF AIRLINE DEREGULATION.
the 1990s, the total net profit for
                                      Two decades after the fact, deregulation         In the early days of domestic air travel,
the domestic airline industry         clearly has been a deep and reckoning
was $7.7 million – that’s less                                                         ticket prices were dictated by the Civil
                                      force. In its presence established carriers      Aeronautics Board (CAB). All seats were
than a penny for each dollar of       who failed to adjust are simply gone,
revenue. Since 1978, average                                                           the same and comparable flights cost the
                                      including one of the nation’s first airlines,    same no matter which airline you flew.
real yields are down 39 percent       Pan Am. And Eastern, once its largest.
and are still dropping. The                                                            1940s and ’50s. Federal policy still kept all
industry actually lost more           Those who have succeeded have adapted            airlines’ prices the same. So in those days,
money in four years during the        by fundamentally retooling for the free          airlines weren’t real “competitors” in
early 1990s than it had made in       market. Scheduling and pricing – each            today’s sense of the word – they couldn’t
all the years combined since          quite visible to the customer – were deeply      adjust the product offered in response to
the Wright Brothers took flight       affected. They changed for one reason: the       the laws of supply and demand to inno-
at Kitty Hawk.                        imperative of profitability – and the best       vate and differentiate. The only way to
                                      assurance of that is to provide better service   “compete” for customers was through
                                      for the customer.                                extravagant service. The CAB even dictated
                                      Reversing decades of industry trends toward      where carriers could fly.
                                      financial loss, the very best airlines have

                                                           THE PLANE TRUTH        2
                                                 Changing Tickets

1960s. Early in the decade, regulators
approved new fares based on time of                                                     Now & Then:
departure, length of stay and bundled
tour features. By its end, regulators had
allowed discount fares on midweek and                There is far more competition now.
weekend flights, although limited to
certain routes or seasonal cycles, in order          There were 94 commercial airlines
to stimulate demand for less-traveled flights
and seasonal cycles. But the supply-and-             in 1999, compared with 39 in 1978.
demand genie was out of the bottle. The
public wanted more.
                                                                                         Surprised?
1970s. They got it. In the early ’70s, carri-
ers sprang up in California and Texas and
flew only within their state borders, where
they were exempt from federal regulation.                              “NO EMPTY SEATS? HOORAY!”
They competed on price, and soon their
                                                Airline customers react emotionally to ticket prices. That’s understandable – but from
planes were full. Their customers began
                                                the airline’s point of view, the science of pricing a ticket isn’t emotional at all. In fact, it’s
warming to the idea that Washington was         as close to pure science as possible – and because of computers it grows more exact
costing them money on airline travel.           every day.
Under public pressure, the CAB allowed              The heart of its science is one simple (and widely misunderstood) fact:
more discount travel in 1976, letting char-         Airlines don’t prosper from expensive seats. Airlines prosper because of full airplanes
ter flights charge $99 for one-way fares        with each seat sold at the right price.
between New York and Florida.                       Therefore filling planes is the airline’s essential task. Not surprisingly, the science to
                                                accomplish it has developed into a finely wrought intricacy. And squarely in the center
1978. Eventually, pressure from carriers,       of the process are the two complex disciplines of pricing and revenue management.
                                                    Pricing is the science of setting prices. Simple? Hardly.
some cities, and customers prompted the             Three key forces affecting prices – market performance, supply and demand, and
government to quit regulating domestic          competitive factors – are in constant turmoil. Now add various immediate, seasonal and
prices entirely in 1978.                        unpredictable elements that can suddenly change the picture.
                                                    That’s why at any given time, an airline may offer a dozen or more prices on the same
Customers welcomed choice. And carriers         flight ... in response not only to its own needs, but also to competitors and to even larger
welcomed competition. For years they’d          outside forces that converge to express themselves through what the customer buys.
been flying routes as required, with some           Then the science of revenue management steps in to optimize the “mix” of all these
flights barely half full. Now they needed       various prices for one essential purpose: Filling airplanes.
                                                    Revenue management assesses the history of customer behavior – deep data
some way to fill them without angering          indeed, with millions of past customer purchases to analyze; weighs it against the price
and losing the full-fare customers they         options currently offered; postulates various contingencies against grids of history and
already had.                                    projections; and finally arrives at an optimum mix: The precise number of seats to offer
                                                at each of the various fares and restrictions, in the combination most likely to fill the
And thus began the science of                   most seats. Not surprisingly, revenue management uses extremely sophisticated
modern-day air travel, which quickly            computer modeling to reach these conclusions.
sprang into action and developed into               When pricing and revenue management are choreographed perfectly, they blend
the industry we know today. It was              principles of actuarial science (predicting future behaviors based on the past) and
                                                calculus (tracking a moving target) – in a chess game that doesn’t end until the moment
propelled with the help of two powerful
                                                the plane lifts off the runway.
new tools.                                          And how can you be sure they’re choreographed perfectly?
                                                    When a flight’s completely full.
First was the hugely efficient system of            So believe it or not, a full plane means everyone wins.
hub-and-spoke plane routing, which                  The airline wins (and by extension its shareholders win too) because the flight oper-
changed the face of air travel forever.         ates at maximum efficiency. After all, an empty seat is a sale perished forever.
                                                    Customers win too, because optimum calculations have reserved precisely the
And second was the use of computers             correct number of seats to deliver exactly what everyone on board needed on that day.
to study, learn and predict how customers           The airline confidently took the calculated risk of holding open a few unsold full-fare
really want to travel, and how much they’re     seats until the last possible moment – a great relief to the business customer who
                                                rushed to the airport with a crucial unexpected trip.
willing to pay for the many gradient
                                                    At the other extreme, the airline was able to offer the lowest fares in airline history
options between cost and convenience.           to those leisure customers on board who planned far in advance.
                                                    So next time you lift off and look around and see the number of empty seats is
The economic model for today’s airline          precisely zero ... think of it as the face of pricing and revenue management success, and
industry was born.                              consider that one way or another it’s paying off for you, too.


                                                THE PLANE TRUTH               3
          The Hub-and-Spoke System Remodels the Airways

                            Y
                                 ou’re driving to Grandma’s. Is there an             The industry has found that the hub-and-spoke
 Deregulation                    Interstate from your driveway directly              system that Delta pioneered before deregula-
   Made Us                       to hers? Not unless you have unusual                tion has enormous advantages.
                            connections.
     Do It                  Instead, you travel an Interstate to a hub city,
                            take a state highway, and proceed to her town
Two tools in particular     on smaller roads built to handle local traffic.
                            Express and local train service use this same
have helped airlines
                            idea. It’s called “hub-and-spoke.”
re-gear their operations    Aircraft move around the country in much the                      THEN                           NOW
                            same way. But it wasn’t always so.                              Hub-and-spoke deploys fleets efficiently.
for a free market.
                            Under the old regulatory model, carriers                 “Hub-and-spoke” is hugely efficient –
The first is hub-and-       were forced to fly directly to remote or small           the best method known for reaching a maxi-
                            markets, even with regular flights that were             mum number of destinations using a limited
spoke routing – using key
                            routinely nearly empty. These were, in effect,           number of aircraft – and its efficiency
cities as “hubs” where      “unusual connections” directly from                      becomes obvious when compared to the
                            Grandma’s driveway to yours. That was                    old “direct-line” system.
flights converge like       convenient for an isolated few, but grossly
                                                                                  Using the old system, 10 planes can deliver
“spokes” from smaller       inefficient for millions of others.
                                                                                  customers to 10 destinations. But a hub-
airports. This routing      Airlines obviously lost money on                                     and-spoke system, with the
                            these routes because the cost of             Now & Then:             same 10 planes, can offer
system – similar to         any given flight is about the same,                                  exponentially more routes (the
                            whether it’s empty or full. Every                                    exact number depends on the
Interstate highways –                                                Twenty-five percent of
                            vacant seat at takeoff is literally                                  particular hub/spoke configu-
allows customers to         lost money.                              Americans flew in 1978      ration used).
                            Basic economics says that every          (250 million customers)          For instance:Through Atlanta
reach the widest-possible
                            empty seat raises the “break-               compared to some              alone, Delta and its subsidiary
choice of destinations      even” price – where the airline                                           Atlantic Southeast Airlines
                                                                        50 percent in 1999
                            stops losing money on each                                                (ASA) today offer more than
with only one transfer.                                                 (650 million). That
                            seat sold, and begins to show                                             900 daily flights, giving
                            profit instead.                           number is expected to           customers a choice of thousands
The second tool is the
                                                                            climb to 1 billion        of routes each day – using fewer
                            Spreading those numbers across                                            than 400 aircraft.
science of revenue                                                       customers each year
                            an airline’s complete fleet makes
management, which is        it clear that half-empty flights                    by 2009.                The result? More service
                            to Grandma’s front door drove                                               and options to customers
based on the growing        costs sky-high, systemwide. In a                                            systemwide – not only from
                            deregulated market, such routes                    Surprised?               hubs but at hundreds of
understanding of what the
                            simply have to be dropped if                                                spoke cities as well.
traveling public wants,     there’s not enough traffic to render them
                                                                                       Consider the flight options in Charleston, S.C.,
                            at least marginally profitable.
based on millions of                                                                   if the Atlanta airport weren’t a hub. The daily
                            This reality is compounded by the fact that                demand for pure “Charleston to Atlanta”
records of its behavior.    airline fleets are finite – Delta’s, for example,          service – simply to Atlanta, no further – is
Compiled and analyzed by    consists of more than 600 aircraft. When one of            roughly 125 customers each way. That
                            these multimillion-dollar planes flies half-empty,         demand between the two cities might allow
computer, this record of    an airline’s primary business asset – the craft and        Delta to offer one flight each day.
                            crew – is diverted from serving routes where
customers’ past choices                                                                But by routing through an Atlanta hub,
                            paying customers are standing in line for seats.
                                                                                       Charleston customers are just a transfer away
can help predict their
                            Airlines are businesses. Business obeys                    from 151 destinations worldwide. And Delta
future choices.             supply and demand. And market forces insist                is able to offer nine flights – not one – to
                            airlines supply seats where customers demand               2,000 customers every day.
                            them most often.



                                                   THE PLANE TRUTH             4
                               T h e H u b - a n d - S p o ke S y s t e m R e m o d e l s t h e A i r way s

Naturally, fierce inter-hub competition among
carriers creates even more choices. For
instance, a customer flying from Los Angeles            SO YOU WANT TO BE A HUB CITY?
to Hartford can choose to route through
Atlanta – or 15 other hub cities: Baltimore,            An airport hub can be a potent economic engine.
Charlotte, Cincinnati, Cleveland, Dallas/                   One case in point: Atlanta. In December 1998, an independent economic
Fort Worth, Denver, Detroit, Houston,                   impact study was performed for the city of Atlanta, analyzing the effect that the
Minneapolis/St. Paul, Newark, Philadelphia,             presence of Delta Air Lines alone at Atlanta’s airport has on the city, state and
Pittsburgh, St. Louis, San Francisco or                 region. Atlanta is Delta’s largest hub and epitomizes the qualities of a hub-and-
Washington, D.C.                                        spoke system.
                                                            This 1998 study quantified Delta’s impact on the 20-county area surround-
Hub-and-spoke routes reduce transfers. The              ing the city (the Metropolitan Statistical Area, or MSA).
percentage of flights where customers change                It found:
planes only once is about the same today –                  The total economic impact of Delta’s operations on the city of Atlanta is
roughly one-third – as in 1979. But today,              enormous. Depending on estimate methods, it ranged from $9.5 billion to
two-transfer flights are all but eliminated.            $11.5 billion in 1998 – 5 percent of Georgia’s entire estimated Gross State
Meanwhile, no-transfer flights have increased;          Product. That’s $3,000 for every man, woman and child in the 20-county
and 99 of 100 transfers are to the same airline.        Atlanta metropolitan area.
In 1978, 14 percent of customers had to                     Delta’s presence in Atlanta generates enough state and
change carriers entirely.                               local taxes to build a new Georgia Dome every year. Delta paid $57 million in
Hubs are powerful economic engines.                     state and local taxes in 1998. Delta employees and Delta-supported business
Transportation hubs have always sparked                 paid $170 million in household taxes.
growth. For example, Chicago’s population                   Delta is the state’s largest private employer. The airline employs more
in 1850 was 30,000. In 1848, Chicago                     than 30,000 in Atlanta’s 20-county MSA alone. Delta’s indirect and direct
began railroad service, and by 1856 the city            employment activity in the Atlanta MSA generated about 115,000 jobs in 1998.
was a hub serving a dozen railroad compa-                   Delta customers spend considerable money when they visit Atlanta.
nies. By 1860, the population tripled, to               The Atlanta Aviation Department calculates that they spent a total of almost
more than 100,000.                                      $9 billion in 1999.
In the same way,
today’s air service
makes a commu-
nity more attractive
to businesses,
investors and
tourists alike, and
plays a key role in
economic decision-
making. (See side-
bar on this page.)
Hub-and-spoke also
drives the economic engines for smaller               hub airports may be higher, customers at hub
communities, since they can be linked to              cities have the benefits of far more service options.
national and international destinations with          They enjoy the convenience and flexibility of high
just one transfer or fewer.                           frequency and nonstop service; both are impor-
                                                      tant factors to the business traveler. Airlines have to
The hub-and-spoke system does not increase            cover the cost of providing this service and the
fares. Average ticket prices at hubs are approxi-     large operation to support this schedule.
mately 5 percent higher than similar tickets at
spokes. This so-called hub premium reflects           In sum, the hub-and-spoke system uses
the often-ignored fact that the average ticket        common sense to serve as many communities
price reflects the higher percentage of business      as possible, as efficiently as possible.
customers who travel from hubs. Of course,            And it has been applied for efficiencies from
most hub cities are commercial centers and            everything to air transport to overnight package
enjoy a robust business base. Fares used by the       and mail delivery, by diverse industries, all for a
business traveler generally are higher because        very good reason:
they are booked later and have fewer if any
restrictions. Although average ticket prices at       It works.

                                                         THE PLANE TRUTH           5
                                      A t Ta ke o f f – F l i g h t 8 8 5 : A P r i m e r i n P r i c i n g


PREDICTING DEMAND                    WHAT DO MODERN PRICING METHODS
                                     PRODUCE?
Massive computers built to
understand customer behavior         Convenience. Delta Flight 885 offers nonstop service between New
have cut waste in the airline        York’s Kennedy Airport and Miami, departing at 7:10 p.m. and arriving
industry as surely as fuel-          in Miami at 10:26 p.m.
efficient trucks cut waste for       Partnership. Business fares generally account for 40 percent of
freight companies, refrigera-        bookings, which won’t sustain multiple flights, so Delta offers
tion cuts waste for grocery          advance-purchase leisure fares to make the route feasible to serve.
chains, and zero-defect quality      In essence the business traveler and leisure traveler coexist in a
programs cut waste for               partnership that gives them both more choices.
automakers.                          Choice. Flight 885 is allotted a variety of fares each day, based on
These computers are remark-          the collective behavior of past customers. Some coach passengers
                                     pay as little as $98 and book up to 332 days in advance. Some might
ably sophisticated. They
                                     pay as much as $470 by walking up to the counter just before depar-
distinguish among time-
                                     ture. There is no “average” customer, but 60-day advance bookings
sensitive, route-sensitive and       for vacation are common, and 7-day advance bookings for business
price-sensitive customers;           are too. Still other customers take advantage of low fares that are
weigh their options; calculate       available for travel on weekends and sold at the last minute via the
all possible consequences            Delta Web site, delta.com.
down through the branches of
                                     This kind of variety and flexibility simply wasn’t available to customers
the fare tree; tightly track and
                                     20 years ago. As federal deregulation intended, competition has indeed
precisely predict how, when          met demand with supply – and a healthy vengeance.
and at what price specific
airline seats sell; and minimize     WHO PAID WHAT?
– even eliminate – empty             (ALL FARES ARE ONE WAY)
seats at takeoff. They’re
more than 70 percent success-
                                     First Class (24 Seats)
ful today – up from 54 percent
                                     I (1) Full first class                         $ 623
loads filled by far cruder
                                     I (4) Discount first class                     $ 470
methods in 1979.
                                     I (2) Paid upgrades                            $ 153
                                                                                                                   332 Days Out
Delta has an industry-leading        I (7) Free upgrades                            $ 0                            The flight is loaded into the
                                                                                                                   reservations system for ticket sales.
revenue management system.           I (3) SkyMiles frequent flyer award            $ 0                            The airline must determine how
What this technology means to        I (7) Empty seats                                                             many seats to sell at each fare,
                                                                                                                   making sure that some are still
the customer is that Delta is                                                                                      available for the business traveler
able to more accurately protect      Coach (159 Seats)                                                             making last-minute plans.
last-minute seats for the busi-      I (5) Full coach                               $ 470
ness traveler, while offering        I (12) Delta Meeting Network                   $ 210
greater availability of discount     I (27) 7-day advance purchase fare             $ 129
seats for the leisure traveler. It   I (3) Travel agent discount fare               $ 117
also minimizes overbooking and       I (5) Government/Military discount fare        $ 101
customer inconvenience by            I (49) 21-day advance purchase fare            $ 98
more accurately forecasting          I (18) Air/Sea fare for cruise customers       $ 87
those who “no-show” for flights.     I (15) Convention/Meeting fare                 $ 85
                                     I (12) Special weekend Web Fare                $ 79
                                     I (10) SkyMiles frequent flyer award           $ 0
                                     I (3) Empty seats



                                     AT TA K E O F F
                                       FLIGHT 885:            THE PLANE TRUTH            6


                 * This flight and the fares in the chart above are for demonstration purposes; actual fares and schedules will vary.
                                     A t Ta ke o f f – F l i g h t 8 8 5 : A P r i m e r i n P r i c i n g




60 Days Out                          30 Days Out                              Morning of the Flight                     Takeoff
50 seats are booked.                  132 seats are booked.                   178 seats are booked.                     At departure, 173 customers of the
                                                                                                                        178 booked actually board the plane.
21 at the 21-day advance purchase      60 at the 21-day advance                55 at the 21-day advance purchase
   fare.                                  purchase fare.                          fare.                                  49   at 21-day advance purchase fare.
15 at the convention/meeting fare.     20 at the convention/meeting fare.      30 at the 7-day advance purchase          27   at 7-day advance purchase fare.
 8 SkyMiles frequent flyer first       18 at the air/sea fare.                    fare.                                  18   at the air/sea fare.
   class awards.                       10 SkyMiles frequent flyer coach        18 at the air/sea fare.                   15   at the convention/meeting fare.
 6 at the 7-day advance purchase          awards.                              15 at the convention/meeting fare.        12   Delta Meeting Network seats.
   fare.                                7 at the 7-day advance purchase        10 SkyMiles frequent flyer coach          10   SkyMiles frequent flyer coach
                                          fare.                                   awards.                                     awards.
                                        5 at the full coach fare.              12 at the full coach fare.                 7   on first class free upgrades.
                                        4 at travel agent discount fare.        7 on first class free upgrades.           5   at government/military fares.
                                        4 at the discount first class fare.     5 at government/military fares.           5   at the full coach fare.
                                        3 SkyMiles frequent flyer first         4 at the discount first class fare.       4   at the discount first class fare.
                                          class awards.                        12 at Web Fares.                          12   at Web Fares.
                                        1 at the full first class fare.         3 SkyMiles frequent flyer first class     3   SkyMiles frequent flyer first
                                                                                  awards.                                     class awards.
                                                                                2 at travel agent discount fare.          3   at travel agent discount fare.
                                                                                3 at the full first class fare.           2   on first class paid upgrades.
                                                                                2 on first class paid upgrades.           1   at the full first class fare.
                                                                                                                        Flight 885 takes off with 95 percent of
                                                                                                                        its seats filled.




 A PRIMER IN PRICING                                          THE PLANE TRUTH             7
                                            Yo u r Ti c ke t : C r a c k i n g t h e C o d e s



Why Does                                         What’s this?                                    Answer: A ticket is a complex
                                                                                                 contract, whereby you and Delta
                                                  A ticket?                                      trade convenience for money,

Your Seat                                         A seat?
                                                                                                 and money for convenience. It’s
                                                                                                 the basic agreement you make
                                                  A destination?                                 with an airline in a deregulated

Cost Less                                         A service?
                                                                                                 world. Here’s a closer look at
                                                                                                 the terms of your contract.


Than Mine?
Customer paid deep                 At the heart of the contract is
discount fare, so any              your fare class (Y,B,M,H,Q,K,
changes will cost $100.            etc.). There are trade-offs among
                                   time, money and convenience.




                                                                                                            Members of SkyMiles frequent
                                                                                                            flyer program earn miles toward
                                                                       The ticket itself has grown          free trips with each flight.
                                                                       electronically sophisticated.
These fees and taxes go to the                                         This one is coded with
airport, and to local, state and                                       magnetic information about
federal governments.                                                   the customer’s trip.




                                                                                           Most customers don’t receive paper tickets at
                                                                                           all. They prefer the convenience of electronic
                                                                                           ticketing, and for their records they use a
                                                                                           receipt/itinerary card like this, that documents
                                                                                           all flight information. Customers using elec-
                                                                                           tronic tickets don’t need to worry about incon-
                                                                                           veniences associated with paper tickets, such
                                                                                           as theft and loss, and aren’t concerned about
                                                                                           having paper tickets delivered in time to travel.




                                                        THE PLANE TRUTH          8
                                Pricing: Fairer Fares

       Airline customers are sensitive                                                                                          True or
                                                                                                                        False?
                                                                                                                   Customers have to fly
              consumers in basic ways.                                                                            a lot more connecting
                                                                                                               flights since the “hub-
                                                                                                              and-spoke” system went

                 They’re price-sensitive,                                                                    into effect.
                                                                                                             FALSE. According to the
                                                                                                             Official Airline Guide, North
                                                                                                             American Edition, the
  time-sensitive, or a blend of both.                                                                        percentage of direct flights
                                                                                                             flown by domestic travelers
                                                                                                             has remained precisely the
                                                                                                             same since deregulation in
                                                                                                             1978.



                                                                                                             True or False?
                                                                                                             Airlines squeeze every
                                                                                                             possible dollar out of
                                                                                                             business travelers.
                                                                                                             TRUE AND FALSE.
                                                                                                             The blunt answer is yes and
                                                                                                             no. Airlines are in the busi-
                                                                                                             ness of balancing supply
                                                                                                             and demand, and have a
          Since deregulation, domestic airlines have provided bigger fare discounts to more customers.
                                                                                                             duty to find a balance that
                                           Source: Air Transport Association
                                                                                                             pleases customers, betters
“Pure” leisure customers are mostly sensitive                21 days, 14 days, seven days and finally in     competitors, and generates
to price. They’re willing to trade a departure               some cases three days out. The steepest fares   an adequate return for
date or time for a price they want.                          are for last-minute seats, because holding      investors. So certainly it’s in
                                                             them open means the airline risks departing     a carrier’s best interest to
“Pure” business customers are mostly sensi-                                                                  determine what a seat is
                                                             with them empty. To airlines, an empty seat
tive to time. They’re willing to trade extra                                                                 worth, and set its price
                                                             is lost revenue – lost forever.
money for the departure time they want.                                                                      accordingly.
And between these two extremes lies a                        If consumers wanted choice, and airlines        Airlines therefore reserve a
vast gray mix of preferences where most                      wanted the chance to fine-tune the art of       sufficient number of seats
of us fit in.                                                supply and demand, deregulation certainly       for customers with last-
                                                             granted their wishes. Today, a fare from        minute, urgent requests.
Deregulated airlines were faced with devel-                  Orlando to Washington, D.C., is offered by      The price for assuming this
oping new fares for all potential customers.                 eight different airlines, with a total of 157   risk of an empty seat at
As you can imagine, this proposition got                     different prices ranging from $157 to           departure is based on the
very complicated, very fast.                                 $637. That smorgasbord of fares is meant        airline’s millions of departure
Today there are specialty fares for corporate                to produce an optimum mix of leisure and        experiences.
customers, senior citizens, government and                   business travelers that, taken as a whole,
military employees, conventions and meet-                    fills planes as efficiently and profitably as
                                                             possible.                                       (continued on next page)
ings. Other fares are pegged to how far in
advance a flight is booked, and the prices                   (continued on next page)
increase as departure day approaches – at

                                                                 THE PLANE TRUTH        9
                                                            P r i c i n g : F a i re r F a re s


(continued from previous page)      (continued from previous page)

One rarely noted fact: Most         Airline computers
customers do not pay full           spend their days and
fare. One published full fare       nights calculating how
(prominently described as a         the customer in 11A is
“milestone” in high fares by        different from the one
the Wall Street Journal, at         in 11B. What’s his
$1,002 for a Boston-to-             price sensitivity?
Los Angeles one-way leg),           What’s her time sensi-
after investigation wasn’t at all   tivity? What are their
representative of the average       travel histories?
customer, who paid $240.
                                    These computers apply
Anecdotes are entertaining,         mathematical tools to
but can be misleading too.
                                    forecast demand, esti-
At Delta’s Atlanta hub, for
                                    mate no-shows and
instance, 90 percent of
                                    optimize the fare-mix
customers travel on a
                                    – all aimed at filling
discount fare of some sort.
                                    the most seats.
                                    Precisely which fares
                                    are available at a given
                                    moment depends on
                                    what the actual
                                    demand has been and
                                    is expected to be – a
                                    dynamic process that’s
                                    in constant flux from
                                    the moment the flight is opened for sales                     tremendous flexibility – if they choose to
                                    until it leaves the gate.                                     exercise it.

                                    To clearly understand that dynamic flux,                      Recently an industry analyst observed that
                                    however, requires this distinction:                           before deregulation, air travel was for the
                                                                                                  business traveler and the rich.
                                    As seats are sold, both prices and seat
                                    availability fluctuate.                                       Now the skies are open to everyone.
                                                                                                  The cost of consumer goods has gone up
                                    In other words, a flight opens for sale with a                155 percent while airfares have gone up just
                                    pre-determined number of seats at the                         56 percent since 1978. In other words, in
     Annually, more than
                                    prices effective for the dates of travel, and                 real dollars adjusted for inflation, plane
     56 percent of Delta’s
     domestic coach                 those fares may or may not be available                       travel has actually gotten substantially
     customers travel on            when you want to book, depending on how                       cheaper.
     deep discount fares.           well the flight has sold up to that point.
                                                                                                  The same analyst wrote, “Now, with
     At Delta, “discount”           For humans, these fluctuations can be                         so many different prices offered on each
     fares mean those that          baffling. Fares are complex. Customers can                    flight, there’s a fare for just about every-
     average 60 percent less        call for prices three days in a row and get                   one. Maybe what’s really frustrating
     than full, unrestricted        three different fare quotes. Pricing seems                    is choice.”
     coach fares. “Deep             mystifying and beyond their control.
     discount” fares aver-                                                                        Perhaps not such a problem after all.
     age 30 percent lower           Yet ironically, the exact opposite is true.
     than discount fares.           Competition has granted customers


                                                               THE PLANE TRUTH            10
                                        T h e L a s t Wo rd o n D e re g u l at i o n ?

                                Verdict: It Works!
Twenty years ago Washington utterly              facilities and revenues that would be the
retooled the engine that drives the airline      pride of any community their size. Their            New
industry by converting it to run on the fuel     host cities enjoy economic booms like
of competition instead of regulation.            those that converging railroads sparked a      Airlines Are
                                                 century ago.
Rarely has a governing body, in one swift                                                       Flying High.
move, so effectively freed an industry from      And happily, the record shows that this        Service on low-fare airlines
artificial governance and harnessed it to        strong growth has come about with              has never been more widely
consumer choice. In the two decades since        uncompromised customer safety.                 available. The nation’s low-
the Airline Deregulation Act of 1978, most                                                      fare airlines carry more
of its stated goals have been met.               The current state of airline travel in this
                                                                                                customers today than ever
                                                 country is a result of a long-regulated        before. After a decline in
Chief among these goals has been, and            industry mastering supply and demand           the late 1980s, the last decade
remains, competition. Today airlines offer       over the span of two decades. The result is    has seen a resurgence of
more flights, more often, to and from            the most efficient and effective model         low-fare airlines, with a
more places, and at lower prices.                known to transportation science,               299 percent increase from
                                                                                                25 million annual customers
                                         Now & Then:                                            in 1990 to almost 84 million
                                                                                                in 1998. This 84 million
                                                                                                customers represented
   Consumers have far more choice now. Today, 86 percent                                        21 percent of all domestic
                                                                                                origin and destination traffic –
     of the public can choose between two airlines – and in                                     equaling the highest percent-
                                                                                                age since airline deregulation
     many cases among more – when making travel plans.                                          in 1978.

     At deregulation, only 26 percent had any choice at all,                                    Competition exists on most
                                                                                                routes, and the arrival of
      and very few had more than a simple choice between                                        a new entrant stimulates
                                                                                                competition, which in turn
                                     two carriers.                                              increases demand for low-
                                                                                                fare seats. Many travelers
                                           Surprised?                                           from start-up cities already
                                                                                                purchase discount fares
                                                                                                on the larger carrier. And
In two remarkable decades, a record              armed with the twin tools of hub-and-
                                                                                                in many cases, they’re
number of carriers entered the market            spoke routing and sophisticated revenue
                                                                                                connecting beyond the hub
and a record number failed. But carriers         management systems.
                                                                                                to destinations not served by
who learned to respect and respond to
                                                 It’s a very different picture from 1979.       the “start-up” carrier.
the market have thrived.
                                                 Delta manages the airline business better      A representative scenario
In essence, the architect of the domestic                                                       might be one of the country’s
airline industry today is the customer. As       than anyone. More than 100 million flyers
                                                 must believe so too – that’s how many          busiest airports, Atlanta,
a result, Americans today are accustomed to                                                     where customers can choose
a menu of air travel choices with impressive     customers chose to fly Delta in 2000, more
                                                 than any other airline has ever flown in one   among not just major carriers
fare, itinerary and service options.                                                            but also AirTran, Frontier,
                                                 year. Such success is why we have become
The impact reaches beyond travel itself.         the trusted carrier we are today, charging     Midway and Vanguard air
Local economies across the country feel the      fair prices and rewarding those who place      service. While some start-
potency of dollars spent by commuters            their travel plans, their investments, and     ups have failed, often it is due
passing through airports. Large airport          indeed their lives, in our hands.              to undercapitalization or poor
hubs, where regional spokes of service                                                          management.
converge, are like cities themselves, with


                                                    THE PLANE TRUTH       11
                                                 Now & Then

                                                       What’s New?
                                                 Almost all customers fly at
                                              significant discounts. Many take                 What’s New?
             What’s New?                        advantage of the last-minute            Carrier choices are broader
        Travel choices are broader.            discounts now offered via the               too. Today, there are
            The hub-and-spoke                  airlines’ Web sites. Delta offers          94 domestic airlines –
                                                deeply discounted fares every                up from 39 in 1978.
               system gives                    week on its Web site, delta.com
         travelers an exponential
             increase in one-                                                                            What’s New?
         connection destinations.                                                                        Air travel is
                                                                                                        the safest it’s
                                                                                                          ever been.


                                             CUSTOMERS ARE ASKING
   What’s New?                                 WHAT’S THE SAME?
  The Consumer                                                                                              What’s New?
 Price Index has                       Small and medium-sized carriers are thriving                      Discounted tickets
  grown at more                        alongside the leaders. In fact, market-share                     have doubled. More
 than double the                        numbers among large carriers have barely                       than nine of 10 tickets
 rate of airfares.                             budged in the past 20 years.                            sold by major carriers
The CPI has risen                      Nonstop flights are more common than ever.                      today are discounted,
155 percent since                     Even with the boom in ticket sales and destina-                   compared to roughly
  1978. Airfares                         tion options, the percentage of customers                      half of all tickets sold
    have risen                        changing planes has not grown. The hub-and-                           at the time of
    56 percent                         spoke system usually limits itineraries to one                       deregulation.
   on average.                          transfer at most, and almost never requires
                                                     flying two airlines.




        What’s New?                                                                                    What’s New?
 Discount depth has nearly                                                                        The industry is far
  doubled. In 1978, the                                                                          more efficient now.
                                                                                                   Thanks to better
   average discount was
                                                                                                operations driven by
   42 percent. Today it’s                              What’s New?                              competition, airlines’
        70 percent.                             Large airlines are vulnerable to                 financial health has
                                               failure. In fact, big airlines have                 begun to recover
                                                                                                  after years of loss.
                                            proven about as likely to go bankrupt
                                                                                                 Debt-to-equity ratio
                                             in the face of competition as small,                has improved from
                                                      low-fare start-ups.                         1.9 : 1 to 0.9 : 1 in
                                                                                                  the past six years.



                                                  Surprised?
                                                  THE PLANE TRUTH         12

								
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