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Airline Stocks Drop on Delta Fare Change

Posted on: Thursday, 6 January 2005, 00:00 CST

ATLANTA - Delta Air Lines' plan to cut its most expensive fares and ax a Saturday-night stay-over rule for cheaper tickets could be a boon to business travelers. But some rivals balked at the idea and analysts warned the move could reduce the already struggling industry's revenues as much as $3 billion a year if every carrier followed suit.

Shares of airline stocks slumped after the announcement.

Several other airlines were reviewing Delta's plan. None immediately matched it nationwide. And two discount carriers, Southwest and AirTran, said they already offer lower fares than Delta's new model.

One thing is for sure from Delta's decision, analysts said: The days of paying top dollar for domestic flights are numbered as major airlines try to win back business travelers from discount carriers and fight off mounting losses.

"They need briefcases on airlines to make a profit," said Terry Trippler, an industry expert in Minneapolis who runs an airline information Web site.

On Wednesday, Delta Air Lines Inc., the nation's third-biggest carrier, announced that it is cutting its most expensive fares by as much as 50 percent nationwide and is eliminating other restrictions in an effort to woo business travelers and other last-minute ticket buyers.

Delta said no fare would be higher than $499 one-way in coach class or $599 one-way in first class under its new program, which it advertised in newspaper ads in several of its key markets.

Analysts and airline officials stressed that not every ticket buyer will see a fare reduction. Leisure travelers were not likely to benefit, because they generally buy their tickets well before their trips. But this would make Delta's fare structure easier to navigate. Airline executives also said that in the short term, the program could lead to lower revenues for the struggling carrier, but it could benefit Delta long-term by bringing in more customers.

"Let it be clear, this is not a fare sale," chief executive Gerald Grinstein said in a conference call with investors. "This is a fundamental change to our pricing structure."

Discount rival AirTran Airways, based in Orlando, Fla., said it had no plans to mimic Delta. The nation's largest carrier, American Airlines, a unit of AMR Corp. of Fort Worth, Texas, and No. 2 UAL Corp., parent of United Airlines in Elk Grove Village, Ill., said they were reviewing Delta's program. Houston-based Continental Airlines Inc. declined to comment.

Wednesday night, Trippler said it appeared American Airlines matched the Delta cuts in "selected markets.""I can't say it's across the board. But it is significant," he said.

Trippler was citing rate changes listed on the Airline Tariff Publishing Company system, which is accessible by airline-related businesses, but not the media.

"I can confirm we've filed broad changes to our fares this evening and we'll have specific details" on Thursday, American spokesman Tim Wagner said, declining to elaborate.

Northwest Airlines Corp., the No. 4 carrier, said the Delta fare cut would hurt industrywide revenue. On Wednesday, a Northwest spokesman would not say if the airline would match Delta nationwide, though by the afternoon it and Arlington, Va.-based US Airways Group Inc. matched Delta's fares on select nonstop routes where they compete head-to-head, according to analysts with access to published fares. A US Airways spokesman said the carrier was already offering Delta's new maximum one-way coach fare in 29 percent of its markets.

Trippler said no other airline appeared to have made significant changes to their fare structure Wednesday night.

"We expect a significantly hostile industry response," J.P. Morgan airline analyst Jamie Baker said in a research note.

Merrill Lynch analysts cautioned that if there was an industrywide adoption of Delta's overhauled fare structure, the nation's carriers could see their combined revenue reduced between $2 billion and $3 billion annually.

The Delta move, Merrill Lynch said, is reminiscent of American's attempt to restructure airfares in 1992. In that case, the investment bank said, American's revenues and share price were hurt more than its discount rivals, and it quickly dropped the plan by the end of that year. Merrill Lynch said Delta could have similar problems.

Delta's shares sank 51 cents, or nearly 7 percent, to close at $6.80 on the New York Stock Exchange. Northwest shares fell $1.04, or 10.8 percent, to close at $8.60 on the Nasdaq Stock Market. Continental shares fell 99 cents, or 8.1 percent, to $11.21 on the NYSE, where AMR was off 96 cents, or 9.6 percent, to close at $9.05.

Also Wednesday, Delta reiterated its plans to charge $50 instead of $100 to change tickets and said it would eliminate a Saturday-night stay-over to get a cheaper fare. That last option had been previously available only on flights from Cincinnati where the program has been tested for several months. Cincinnati is Atlanta-based Delta's second-largest hub.

Delta is the only one of the big six legacy carriers to completely eliminate the Saturday-night stay-over provision nationwide, though many carriers have done so in certain markets, Trippler said.

Delta spokesman Anthony Black agreed that business travelers will see the most benefit from the changes, but he stressed that the fare structure at Delta is getting simpler to allow it to compete better with discount carriers like AirTran.

The program went into effect nationwide on Wednesday. Those people who bought full-fare tickets before Wednesday can exchange them for the reduced fares if they pay a $50 fee, spokeswoman Benet Wilson said.

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On the Net:

Delta Air Lines: http://www.delta.com/simplifares

Terry Trippler: http://www.terrytrippler.com

Source: Associated Press/AP Online

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