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 The Brancatelli File

joe VALUE PRICING:
GOOD IDEA THEN, BETTER IDEA NOW


BY JOE BRANCATELLI

May 15, 1998 -- I know you were expecting my usual rant, but I thought it prudent, just this once, to bring in a Guest Ranter.

So here's Bob from Dallas.

"Higher and higher full fares and an ever-growing array of discount fares surrounded by an ever-changing plethora of restrictions simply do not work. Business travelers, who have watched unrestricted fares skyrocket, have had enough.

"They are rebelling against a system they perceive to be unfair, which imposes unacceptable constraints on their ability to obtain a reasonable fare--like forcing them to stay away from home on a Saturday night--and which pushes them to do things they regard as ethically unattractive but economically compelling, like purchasing two deep-discount tickets and throwing away the unused segments. And they're not shy about telling [airlines] how much they dislike the restrictions and complexity--and how stupid they think [airlines] are for having created something so unacceptable.

"Customer surveys reflect rising anger about a system which denies travelers the flexibility they want and need--flexibility to go when they want to go, come back when they want to return, change plans in between--and not pay more for the privilege than it's worth.

"The system, quite simply, is broke!"

So who is this mysterious ranter who knows so much and burns with such outrage? Allow me to introduce you to Bob Crandall, the chief executive of American Airlines, who retires on May 20.

In the days leading up to Crandall's final bows at American's annual meeting, you will surely read much about him. You will hear from people who hate him, people who love him and people who believe he is the seminal figure in post-deregulation commercial aviation. He will be blamed for everything that is wrong in travel. He will be credited for everything that is right in travel. There will be a torrent of words about his management style, his relationship with unions and even the sailboat he'll skipper after he leaves the stage.

For me, none of it matters. For me, a business traveler and business journalist, the defining moment of Crandall's career was April 9, 1992, the day he uttered that rant.

As a business journalist, I couldn't help but admire the honesty, especially since Crandall was ridiculing a system that he basically created. After all, American pioneered deep-discount, heavily restricted fares and created yield management. I had to admire his guts for condemning his own fare structure, which, he pointed out, permitted a $1,166 roundtrip difference between American's $1,504 full-coach transcon fare and American's lowest fare of $338.

"Does that make sense?" Crandall asked that day. "Of course it doesn't--and it's turning off lots of business travelers"

I couldn't help but admire his solution, an ingenious program that American dubbed Value Pricing. There were just four fares per route (first, coach and 7- and 21-day advance purchase). There was balance (the cheapest seat was usually 49 percent less than the full-coach fare, which had been reduced by about 38 percent), fairness (all the specialty, holiday and gimmick fares were gone), equity (first-class fares were reduced 20-50 percent) and rationality (leisure travelers paid less, but business travelers weren't gouged).

Of course, Value Pricing was dead within weeks. In one rash move, Crandall chose to match a Northwest Airlines gimmick promotion and the whole Value Pricing structure came tumbling down. In his drive to indulge his competitive fire and in his zeal to preserve the purity of Value Pricing, Crandall turned the Northwest promotion into a suicidal price war. Fares fell to $99 nationwide, airline earnings crashed and Value Pricing disappeared in the resulting pool of red ink.

As a business traveler, I have never forgiven Crandall. After constructing Value Pricing, a brilliant strategy to "regain the goodwill of customers," his tactical blunder plunged us back into chaos. The fact that Crandall's 1992 rant is as appropriate today as it was then is proof of our despair.

And how about some fare comparisons as a measure of our despair.

Let's start with Crandall's New York-Los Angeles example. The then-absurd disparity of $1,166 between the full coach ($1,504) and lowest fare ($338) is worse today. Full coach is $1,836 now, the lowest fare is $247 now, meaning the difference between us and them is $1,589. American doesn't have four fares in the market, it has 35.

New York-Chicago? It was $854 roundtrip in full coach then. Value Pricing cut it to $500, but today it's $992. American doesn't have four fares in the market, but 56.

Dallas-Seattle was $1,284 roundtrip in full coach then. Value Pricing cut it to $760. Today it's $1,782. American's lowest fare in the market today? Only $198. Fare disparity: $1,584.

Value Pricing was a good idea then. It's a better idea now.

Memo to Bob: Why not get up in front of the annual meeting on May 20 and deliver the same rant you delivered on April 9, 1992? You can reintroduce Value Pricing and then go sailing off into the sunset knowing you did the right thing.

This column originally appeared at biztravel.com.

Copyright 1993-2004 by Joe Brancatelli. All rights reserved.