Simplifying Fares is a Problem for Traditional Carriers

3rd Jun 2003

A recurring theme of the recent ABTECH conference was the trend for airlines to simplify their fares - but there are significant problems for traditional airlines in applying the no-frills model to pricing.

Airlines are worried about the risk of dilution and so for years have had a belt and braces approach to pricing. They have adopted complicated fare rules and use revenue management to control access to capacity. The low cost airlines have demonstrated that you don`t need both. They have unrestricted one way fares and use revenue management to control access.
Traditional airlines are starting to move in the same direction.

In his keynote speech at last week`s ABTECH conference, Jerry Foran of British Airways described the ways in which the low cost carrier model, together with the impact of the internet, is causing established carriers to reassess their fare structures.

To an individual airline, the multiplicity of fares seemed to make sense as a way of segmenting their customer base. For travel companies, having to deal with fares from many airlines, it has always been problematic.

The drive towards simplification came from the low cost carriers offering fares direct on the net. BA saw that complex fares simply didn`t work online. They presented their fares (both online and offline) as one-way costs. Consumers can combine any of these one-ways together in an out-and-back journey (though they cannot book a single one way). This, combined with other improvements to the online sales process saw sales through increase dramatically, to the extent that they have now overtaken BA call centre sales.


So does this means that the established carriers like BA have belatedly accepted that they over-complicated life and will adopt the low cost carrier model wholesale?

Well, yes and no.

Yes, they do accept the over-complex criticism. Jerry himself offered some insights into the degree of over complication. On longhaul flights for example, 80% of revenue was accounted for by 1% of fare types (and 97% by 10% of fare types). It is difficult to resist the conclusion that many of the invented fare types were simply unneccessary.


But no, because BA cannot simply apply the low cost model willy nilly.

First, the established carriers are generally full network airlines. They operate shorthaul flights as feeders into their longhaul networks. And the knock-on effects of pricing changes reverberate across the network. This may sound like an argument put forward by a residue of yield managers intent on keeping their arcane science (and their jobs) intact. But clearly the businesses are different, and some clear thinking is needed before the baby gets thrown out with the bath water.


Second, there are significant problems in applying this form of simplification to B2B fares. B2B fare distribution carries with it a whole raft of infrastructure - BSP, audits, debit memos for incorrect fares and so on. These all represent costs that could in theory be saved. But it isnt easy to simplify the whole chain at a stroke.


So while consumers profit from the new simplified approach to fares, it looks as if travel intermediaries will have a wait before these infrastructure issues can be addressed.

In the meantime, the airlines, intent now on reflecting cost of sale by channel in the end price, are providing fewer attractive fares to intermediaries. And the value added of those intermediaries comes under more and more scrutiny.

In a buyers` market, as at present, competition will limit the speed with which airlines can apply their new `knowledge` to B2B prices without losing market share. But over time it`s a real problem for the trade.

Claude Demeestere of Amadeus quoted a view from analysts at JP Morgan, that the distribution savings airlines are achieving from direct sell via the internet may well be less than the revenue they lose through price reductions forced by online transparency. As this becomes apparent, airlines may wish for online prices to rise again, but competition from the low cost carriers may restrict the extent to which this is possible
The hope for the trade is that the value of the intermediary will become widely appreciated by the cash-rich time-poor generation, so that despite the online accessibility of attractive fares consumers and businesses will continue to find a place for agents in the booking process.

If airlines and their partners do not make the time to re-engineer inefficient B2B booking processes, this may be a false hope.




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