Short-haul pricing models are changing fast in Europe and beyond as mainline carriers fight back against their low-cost rivals, writes Chris Tarry.
There have been bouts of near hysteria in Europe over the rise of the so-called low-cost airlines and some appear to believe that only the discount carriers will be the winners in the future. In reality, the mainline carriers have always had restricted discount fares, but the issue has been over their ready availability compared with the easily bookable online fares of the low-cost sector.
The mainline carriers are now fighting back. But as they do so it is worth taking a look at the potential impact on segmentation, not least the possibility that the restricted low fares being made available to attract leisure passengers will also be used by business travellers who would once have paid much more for a fully flexible ticket.
Despite some attention-grabbing discounts being posted by the mainline carriers, it is clear that they cannot compete long-term at the very lowest end of the budget market, which has been cultivated by the likes of Ryanair. However, a battleground appears to be emerging in the slightly higher price segments where leisure passengers may be persuaded to discriminate on grounds of service quality - provided that the ticket is still seen as offering "value for money".
While the flow back of such customers may represent good incremental traffic for the mainline carriers, the risk is the extent of substitution that occurs where business travellers are able to take a low price restricted fare, but to retain flexibility through an additional purchase of a flexible, refundable one-way ticket for the return.
Many corporate travel policies already demand that their employees book economy for short-haul travel. But in reality the savings to be made between full economy and business class fares are often negligible. The real savings for corporates are to require their travellers to take some restriction on the ticket. This is not to suggest that all corporate travellers can plan sufficiently far ahead to be able to book a restricted ticket but rather there is clearly an opportunity for those who are able to do so given the massive expansion in the number of low fare tickets that are now freely available.
The following analysis looks at a handful of near European and domestic destinations out of London on British Airways (see table right for examples). The focus is not a comparison with the fare that a low-cost competitor might offer, rather the opportunity for a corporate where the travel policy has a mainline airline as the preferred airline.
Three departure dates were selected, 12, 19 and 26 days from the date of booking on 8 November. While this related to a particular date, it is reasonable to conclude that a similar pattern would be evident for other dates. These are freely available web fares, taking the first flight out in the morning and a peak flight back. The results show that apart from Paris, where pricing may reflect the competition from the train, significant savings compared to the fully flexible, full fare economy ticket were possible.
Savings are still possible even if some flexibility is induced by the additional purchase of a refundable full fare one-way ticket for the return journey. If the full fare return is not needed then the only additional cost is an administration charge. The gains here are less clear cut for bookings closer to departure, but can clearly still be significant on most of the selected routes for longer lead time bookings.
Clearly, for both sides there are new strategies and tactics to be considered. The issue for the airlines is the timing and rate of step up in the yield management system to the full fare against the background of all other requirements that have been set for them. For the corporates clearly there will be a significant group that are not able to make bookings close to the date of departure and will have to fly on a full (or fuller) price ticket. Even for those who have made a restricted booking there will be a cost if their outward travel plans subsequently change, since the restricted ticket is likely to have no refund value. However, in a world where the need is usually to be better than average, there is an opportunity for savings. Recent survey data from Europe's corporate travel arrangers suggests that 57% of corporates are already using restricted tickets. It appears that the rules of engagement are already changing and only time will tell whether this is a short-term phenomenon or a fundamental behavioural shift. For certain, corporates are looking to save money.
Source: Airline Business
