Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, Apr 15 1992 Date: Wed, 15 Apr 92 05:42:41 EDT Message-ID: 04-15 0000 BONUS: American's gambit raises stakes USA TODAY Update April 15, 1992 Source: USA TODAY:Gannett National Information Network American Airlines Chairman Robert Crandall was not happy. The USA's biggest airline had just lost $195 million in a mere three months, and Crandall's top marketing executive was about to deliver more bad news one day last spring. The Persian Gulf war and the recession weren't the only factors keeping people off American's planes, Senior Vice President Michael Gunn glumly told Crandall. Customers were fed up with high fares and complicated rules. "What we have isn't working," Gunn told his boss. And Gunn had stacks of angry letters to prove it. WHAT DID CRANDALL DO TO REMEDY THE SITUATION? Their talk led to a year of top-secret research that by last week produced the most radical change in airline fares in more than a decade. Overnight, American slashed its highest domestic fares, erased dozens of discount fares on thousands of routes and replaced them with just four new fares - first-class, coach and two types of discounts. The move promises to save money for many fliers while restoring simplicity and fairness to a system that confused even travel agents. WHAT ELSE HAS BEEN THE RESULT OF THE CHANGES? It also has set off a high-stakes corporate game of chicken that could drive fares even lower and sink an already-unprofitable industry deeper in the red. USAir has temporarily cut some fares 20% below American's. And Trans World Airlines, which is in Chapter 11 bankruptcy reorganization, has undercut American's fares by as much as 40%. "They hope to get the competition out, but it's not going to happen to TWA," says Chairman Carl Icahn. "We're here to stay." HOW DO AMERICAN'S COMPETITORS FEEL ABOUT THE CUTS? Publicly, anyway, the USA's biggest airlines - United, Delta, Northwest and Continental - seem to have embraced American's fare structure. But in an industry where prices have a short shelf life, no one knows how long that will last. Whatever the outcome, the move toward simpler, cheaper fares shows how the airline industry is re-inventing itself for the 1990s. WHAT MADE THE AIRLINES COME TO GRIPS WITH REALITY? After watching the U.S. industry lose $6 billion in two years, seeing consumers grow angrier and Congress consider reregulation, most airline executives are ready to try something different. The big airlines have an extra worry. They can't ignore the possibility that America West, Continental and TWA - the three airlines in bankruptcy reorganization - might fly out of Chapter 11 as tougher low-fare competitors. WAS MAKING THE CHANGE EASY FOR AMERICAN? Making the change was not a simple decision. The key question that had to be answered was whether lower prices would increase revenue by encouraging more people to fly - or decrease revenue by giving a price break to those who would be flying American anyway. To find out, American's pricing analysts researched 10 years of price changes on the airline's biggest routes, consulted economics experts at three business schools and ran computer scenarios based on industry traffic and fares for six of the months between June and February. THEN WHAT HAPPENED? Once Crandall and American's board gave the go-ahead, American's well-oiled marketing machine took over. Everything was planned, down to the tiniest detail - even when to go public with the plan. By waiting until Thursday, American saved money because fliers who had bought tickets for Easter travel couldn't exchange them for the new 21-day- and seven-day-advance-purchase fares. And American executives - who planned a $20 million, 10-day advertising blitz - hoped a Thursday announcement would give them at least a four-day jump on the competition. They were wrong. United's ads hit television Friday night and print Sunday. ARE FINANCIAL WOES THE ONLY REASON AIRLINES ARE TRYING FRESH IDEAS? The full reason has to do with the future. Though many forecasters give a rosy outlook for travel once the recession ends, some aren't prepared to take that for granted. One reason: Travel exploded in the 1980s because the price of air travel declined and became affordable for most people. Cost-saving innovations such as two-tier wage scales - paying new employees lower rates - and the hub-and-spoke route system helped make that possible. One of the biggest threats to travel growth, says Air Transport Association economist David Swierenga, is the airlines' continued ability to keep inflation-adjusted prices low in the face of rising costs. WHAT ARE SOME OTHER REASONS? No one really knows what impact new technology - such as videoconferencing and computer networks - will have on future business travel. Airlines can't afford to see business travelers stay home because they typically pay higher fares than do leisure fliers. However, since 1978, business travel's share of total travel has declined from 52% to 48%. Another concern is how much discretionary income people will spend for travel in the 1990s. Put another way, how much of the money people used for travel in the 1980s will be soaked up by rising medical costs, housing costs, retirement costs and the costs of taking care of aging parents? IS AMERICAN PESSIMISTIC ABOUT THE NATION'S ECONOMY? At the very least, there's growing pessimism about how much improvement can be expected in living standards in the USA. "Until the government makes some major changes, our economy won't rebound as fast or as far as any of us would like," says Crandall. WHAT DOES AMERICAN HOPE TO GAIN IN THE LONG RUN? By making fares simpler and cheaper, American hopes to reverse travelers' increasing frustration and fill more seats on its planes. In the long run, American says the new fares will generate $300 million to $350 million more in annual revenue. At the same time, American will save $25 million a year because it will have only 70,000 fares in its database to manage instead of 500,000. HOW LOW CAN THEY GO? TWA says it can afford to undercut American because TWA's costs for labor and aircraft are lower. Some wonder if American also is trying to squeeze out the competition by erasing - or at least narrowing - the price advantage of competitors such as TWA. That's not hard to believe for those who know American's brass-knuckles style. In a report last week about a lawsuit between American and United, Business Travel News said a Crandall memo surfaced concerning schedule changes by defunct Pan Am. In the margin was this notation from Crandall: "Crush these guys." IS AMERICAN INVINCIBLE? No. It's having its own problems competing against no-frills discounter Southwest Airlines, a company one-tenth American's size but with much lower costs. Once confined inside Texas' borders, Southwest is now a major player on short routes along the West Coast and in the Midwest. And that's giving the big airlines fits. American has been rumored to be exploring a no-frills service that would help it compete with Southwest. "We do know we have a serious problem," Crandall says. "We must learn to compete with those who have different products at different prices." Bonus Editor: Michele Coleman. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM