US airline Delta Air Lines Inc`s landmark simplification of its domestic price structure, announced this week, will stimulate major changes inside and outside the US in the aviation industry…
US airline Delta Air Lines Inc`s landmark simplification of its domestic price structure, announced this week, will stimulate major changes inside and outside the US in the aviation industry this year, the Centre for Asia Pacific Aviation (CAPA) said in its upcoming Outlook 2005, Asia Pacific Aviation and Tourism.
The report by the Sydney-based aviation consulting firm noted Delta`s simplifare initiative follows a similar move in Europe, where Air France/KLM announced a new pricing structure which involved changes of a similar magnitude for short haul European routes.
Like Delta`s move, KLM`s will almost inevitably provoke similar responses by its immediate neighbours, the report said. Delta`s new economy and first class fares are pitched well below previous levels – as low as 50 pct in many cases – but they also involve greatly simplified conditions.
Introducing the new structure, Delta said it considered its principal competitors to be the three leading low cost carriers in its markets, JetBlue, Southwest and AirTran. CAPA said the timing of Delta`s move is important because it could trigger a shakeout in the US airline industry.
If so, 2005 promises to be painful and probably even deadly for higher cost network airlines in that country, as yields tumble, it said, adding that because the major US airlines have extensive international networks, their pain will be shared beyond their home borders.
American Airlines responded on Thursday to Delta`s move, rolling out a new fare structure for domestic routes.
CAPA said while Delta`s and KLM`s pricing initiatives are directed specifically at local, short haul low cost operations, large domestic/international operators in the US and Europe cannot isolate the financial impact within domestic borders. It said in the short term, the resulting financial stress on any US airline caused by tumbling domestic yields will quickly be exported to its Pacific routes, as the distressed airline discounts to generate cash.
Normally, this should not be a prolonged problem, which most financially healthy Asia Pacific airlines can withstand. But the nature of the US bankruptcy laws, notably so-called Chapter 11, can allow this process to be drawn out over a lengthy period, the CAPA report said.
It now looks highly likely that 2005 will be the year when the US industry finally starts to rationalize. That is to say, some large airlines will go broke and, eventually, go out of business. CAPA said the short term effects will be to destabilize air fares and airline yields on Pacific routes but in medium term a more stable environment is likely.
The report will be released at CAPA`s Asia Pacific and Middle East Aviation and Tourism 2005 outlook conference in Singapore on Jan 24-25.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
