AMR Corp's American Airlines, Continental Airlines Inc and Delta Air Lines Inc dropped their third attempt since mid-April to raise leisure fares after rivals refused to match the increase.
Continental, the fifth-largest US airline, kicked off the latest push Thursday by boosting round-trip fares US$20. American and Delta initially joined, while UAL Corp's United Airlines, Northwest Airlines Corp and US Airways Group Inc matched only in some cities. Airline shares fell after the fare increase failed.
Two recent attempts by carriers to boost prices fell apart after Northwest didn't go along, leaving rivals with higher fares no choice but to scrap the increases. Carriers reduced fares to spur demand after the Sept. 11 attacks deepened a decline in travel in the US recession.
"A US$20 differential per ticket is plenty of money to prompt a family of four to switch to a competing carrier," said Tom Parsons, chief executive officer of Bestfares.com, which monitors ticket prices. ``American, Delta or Continental couldn't afford to give their competitors this big of an advantage.''
American, United, Continental, Northwest, Delta and US Airways said today they dropped the increases. AMR shares fell US$0.62 to US$20.33, while Continental slid US$1.22 to US$21.05 and Delta declined US$1.32 to US$24.93. The Bloomberg US Airlines Index lost 3.9 percent to 70.4.
Leisure travel has increased since last year, while some businesses are restricting travel or telling employees to book lower fares. Leisure fares cost less than business tickets because they generally carry more restrictions and must be purchased further in advance of travel.
Northwest hasn't matched recent attempts at leisure fare increases because the carrier wants airlines to scale back on discounts instead, Merrill Lynch & Co analyst Michael Linenberg said.
"It's a differing of pricing philosophies," said Linenberg, who has a "near-term strong buy" rating on Northwest shares.
"The end result is similar for the most part. There are different ways to capture revenue."
Northwest acted as the spoiler in six attempts to raise air fares in 1999.
The St. Paul, Minnesota-based airline told employees recently it hadn't gone along with earlier leisure fare increases because those tickets aren't the ones customers are buying.
"We found that fares affected [by the previous increases] had very little to do with what our leisure customers were actually paying," Northwest said in its May newspaper for employees. "Matching might have actually led to more fare discounting, producing even lower revenue."
Kevin Mitchell, who heads the Business Travel Coalition and represents corporate travel customer concerns, has a different perspective on Northwest's strategy.
Northwest's decision not to raise leisure fares is keeping business fares high and maintaining an industry fare structure that isn't working, Mitchell said. The airline relies too much on higher fares paid by business customers subsidizing leisure travelers, he said.
"Leisure fares have got to go up for the health of the whole industry," Mitchell said.
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