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Delta's fanfare for the businessman

If you can't gouge business travelers, who can you gouge? Delta Air Line's announcement that it will simplify its fare structure and generally reduce fares seems to indicate that the answer may be no one, and that could spell further trouble for all airlines.
/ Source: Forbes

If you can't gouge business travelers, who can you gouge? Delta Air Line's announcement that it will simplify its fare structure and generally reduce fares seems to indicate that the answer may be no one, and that could spell further trouble for all airlines.

Delta, the third largest U.S. carrier, said today it would cut its airfares by as much as 50 percent for travel in the continental United States. Most of the cutting is expected to come in the one area that has not been significantly cut already: on seats sold to business travelers who do not stay where they were going on a Saturday night.

The airline, which is trying to restructure without filing for bankruptcy protection, as several of its competitors have, said that no one-way economy fare would be higher than $499 and no one-way first-class fare would be higher than $599. It is also eliminating Saturday-night stay requirements for certain fares. "We're expanding SimpliFares based on feedback from our customers, who are calling for simpler, more affordable everyday fares," said Delta's CEO Gerald Grinstein in a statement. Of course, simplicity has its limits as Delta also noted additional taxes, fees, and restrictions apply, and fares are available only for purchase on delta.com or from a travel agent.

Inevitably, other major carriers will have to match Delta, just as Delta is effectively matching the so-called low-cost carriers. This may mean still another overall revenue drop for an industry that has seen its gross incomes drop in historic ways since 2001 and the Sept. 11, 2001, terror attacks. It may also imperil Delta's own, low-cost carrier, Song (see: "Is Delta Singing The End Of Song?").

Lat year, for the first time since 2000, Delta was able to stop its revenue decline. It has also cut overall costs by about $1.5 billion since 2001. But it still had a loss of $790 million, which is on par for the industry.

Airline revenues overall are still well below their 2000 levels, and Delta is no exception. Even as carriers have merged and others have gone out of business, the price competition shows no sign of abating. Northwest Airlines, the No. 4 carrier, warned yesterday that Delta's new scheme, if adopted by others, would immediately, adversely and significantly affect industry revenue.

The brutal economics of airlines can be seen in many ways, but perhaps none as starkly as in the "breakeven passenger load factor," the percentage of seats that must be occupied by revenue passengers for us to break even on a net income basis. In 1999 and 2000, Delta said it needed to sell 65 percent of its seats to break even. In 2003, it needed to sell 78 percent, even as it, like other airlines, had cut flights. In 2000, Delta earned 10.8 cents per passenger seat mile (which works out to $162 for a 1,500 mile flight). In 2003, it earned 9.9 cents (or $149 for the same flight). That revenue-per-seat-mile was up slightly from the two previous years, but it was not enough to break even, despite the fact that Delta was selling a greater percentage of its seats (73 percent) than anytime since 1999.

If airlines lose the ability to sell seats purchased at the last minute at a premium, airline economics have taken another nosedive.