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More Premium Fares Fun and Games: Directional Fares

8-May-2009

FRIDAY REFLECTIONS, WITH RON KUHLMANN & THE CENTRE. Last week, we looked at the cost of premium seats for a last-minute, short-duration journey and then compared those fares to prices applicable for a longer stay, booked with more advance notice. The results were quite stunning; with the longer, advance-purchase fares yielding an 80% saving for business class seats.

Directional fares

The next question is just how - or if - fares may differ directionally. Does it make a difference if the trip begins in New York or in London?

Since many premium fares are available on a one-way basis - even some of the reduced tariffs - there is perhaps the chance to get a bargain by buying a one-way to the lower cost city (if you weren't there already) and then purchasing future return tickets at the lower cost point of origin.

As it turns out, right now London is the place to get the better deal-sometimes by a wide margin. Most astonishing was the revelation that there is a very much-reduced First Class fare (booked in A) available on American Airlines which, at under $4000, is an remarkable deal.

In order to keep comparisons possible without having to constantly convert, I have listed all fares, regardless of their origin, in US dollars. American Airlines quotes fares ex-London in USD and the other two carriers provide conversions at the time of booking.

Consequently, barring huge currency fluctuations in the next week or so, the numbers should be valid. Bear in mind that we are looking at the differential, not the actual fares, and that is mightily affected by exchange variations. The USD equivalent of a fare expressed in British Pounds means nothing to UK residents who earn and pay for their tickets in Pounds.

The rules of the game

The simulated travel was based on the same travel dates in both directions; outbound June 1, 2009 and returning on June 8. All fares shown are return fares, even if they need not be bought as such. The same flights on each carrier were used, irrespective of the origin city and the flight times were equivalent on all three carriers.

Chart 2 is identical to last week's chart, but for comparison purposes I have rounded off the amounts. As a result, we are comparing apples to apples insofar as it is possible.

One final caveat: even though the same flights were used, they were used on different days, which means that some of the differential may be accounted for by different availabilities in the revenue management scheme. Looking at the BA Flexible Business fare, for example, there is a more than $4000 difference when direction is considered. But there may be different booking profiles for the two directional segments offered on the same date - and there is always that currency thing.

Class by class; bargains in first

As previously mentioned, the biggest surprise was the reduced First Class fare on American. Unless it is a standing room only fare, or comes with only one drink, it is a real steal. However, even the full fares in First are considerably cheaper originating in London, rather than New York. Flying round-trip but purchasing each leg separately would result in considerable savings.

The Instant Upgrade fare on American was not only cheaper ex-London but also included a First Class seat JFK/LHR as opposed to the similar fare in Chart 2 which was Business both ways. The other business tariffs all reflect lower total cost when the journey begins in London. The restricted business fares all cluster around $1500+ as opposed to $2200-2300 if the journey begins at JFK - a pretty healthy differential.

Finally, a similar pattern is evident in enhanced Economy, albeit with much smaller differentials, making for a clean sweep. The single most notable similarity is the fact that in either direction a reduced C-class ticket is cheaper than a full Y+ but, the differential between restricted business and restricted Y+ is much reduced when originating in London.

Once again, too bad for those whose policy excludes business class travel.

Chart 1: Economy and premium fares: London/New York: Origin LHR

 

Economy +

Business

First

AA D

 

5748

 

AA R

 

1547

 

AA Upgr

 

6614

 

AA A

 

 

3099

AA F

 

 

11727

BA Rstd

1125

1520

 

BA Flex

2584

7437

11517

VS K

1136

 

 

VS W

2609

 

 

VS D

 

1535

 

VS J

 

7654

 

Source: AA, BA, VS sites 27 April

 

Chart 2: Economy and premium fares: New York/London: Origin JFK

 

Economy +

Business

First

AA D

 

5391

 

AA R

 

2229

 

AA Upgr

 

6748

 

AA A

 

 

 

AA F

 

 

15028

BA Rstd

1354

2326

 

BA Flex

3202

11698

16816

VS K

1354

 

 

VS W

3202

 

 

VS D

 

2326

 

VS J

 

11698

 

Source: AA, BA, VS sites 23 April

 

Explaining the differentials

This analysis is a simple one, although probably not atypical. Without a full booking profile of the flights involved, it is difficult to ascertain why there should be such a directional discrepancy. For frequent travelers between New York and London, this cursory survey would tend to support the idea that the most economical option is to purchase a one-way ticket to London and then buy future return fares in the UK, as even the unrestricted fares offer better value.

More interesting is the question of yield. The same two airports are involved, the same aircraft and crews are used and the charges and fees incurred are the same for the operation, irrespective of directionality since the aircraft all operate both directions. What market conditions or disparities drive the pricing differences? While we would all like to apply logical reasoning in such circumstances, and there are some good reasons, perhaps it is better, in this case, just to accept the reality and play the game.

What differences appear when alliances are involved?

Global and bilateral alliances are in the news these days. So, we thought we should explore if there are any themes in their pricing too.

1. Star Alliance
While American and British Airways, for example, share an alliance, they do not have antitrust immunity. So we would expect fare disparities to exist. But immunized alliances are allowed to collaborate and often have revenue-sharing of some sort on routes where both operate. At the very minimum they have full marketing and sales possibilities. Again, how, if at all, does this capability affect premium pricing?

For this example we will move to different city pairs, comparing the fares applied between Washington (IAD) and Frankfurt and Munich. Both are routes served by United and Lufthansa with their own aircraft, as well as code-sharing on the partner's flights. Chart 3 shows the results, taken from the two web booking sites.

Chart 3: One way fares: Washington DC-Frankfurt/Munich

IAD/FRA

UA

LH

Z

2757

2777

C

9770

9790

F

14805

14825

IAD/MUC

 

 

Z

2545

2565

C

9758

9778

F

14468

14488

Source: Websites

 

The two airlines' sites were in complete agreement as to pricing and allowed any combination of non-stop flights for the same price. There is a persistent $20 differential between their fares and it resides not in the base fare but in the taxes/fees supplement. Lufthansa specifies all of the amounts, while United's explanation of that amount is less specific. However to save $20, booking on the United site would achieve that goal.

Advance purchase business class is booked in Z and has not only purchase but also change and cancellation fees, while the C fares are fully flexible. Neither carrier offers any reduction in First, and neither has a premium economy offering. United does offer Economy Plus but that is a seating surcharge rather than a separate class. Following a quick comparison of San Francisco/Frankfurt fares - where each also operates - it is safe to say that the two alliance partners appear to have achieved full alignment of premium pricing.

2. SkyTeam
Another search was prompted by the news that KLM will soon begin to offer a Premium Economy cabin, making it consistent with Air France's offer. That means that the two primary SkyTeam European partners will offer four (AF) and three (KL) distinct cabins on many long-haul services while the US counterpart, Delta (incorporating Northwest) will offer only two cabins. This makes for a more complex mix for the alliance pricing to deal with.

To get a sense of this alliance, I researched premium fares from Atlanta to Paris. The bulk of the service is offered by Delta, with Air France having a single daily flight. Both airlines' websites presented identical fares with an advance purchase level of $3,082.65, with restrictions, and a fully refundable fare of $10,597.65. On this sector, Air France does not currently have a premium economy cabin, but does have First.

Booking on the Delta site, the choice was either Economy or First/Business while the Air France site separated Business and First and offered the option of premium economy. But, when clicked for this route, it says "Sorry". The Delta site displayed all available flights but did not offer the reduced $3,082.65 fare for the service operated by Air France. That was displayed as a C fare with the $10,597.65 price tag. I was unable to find a way to access the lower fare on the Delta site when Air France was the operating carrier. Similarly, the First/Business category on Delta's booking engine did not display a full F cabin or fare.

Conversely, The Air France site allowed the lower business class fare to be used interchangeably, regardless of the operating carrier. Unlike Delta, Air France allowed booking in the First Class cabin by parting with $15,353.65.

Judging from this singular example (again, perhaps not representative), Delta's booking engine appears to skew purchases towards Delta-operated services by presenting no options that include Air France at a competitive price. Nor does the DL site indicate that there is a true First Class cabin operating between the two cities. This may help Delta's short-term yields, but is unlikely to win passengers over to SkyTeam, when they learn that there were other "joint" options.

Finding the patterns

1. Currency fluctuations create an overhang
City of origin matters in international travel and always has. It's just that now, when everyone is so hungry for business that the cracks become wider. In the case of New York/London there are differences that are not only contingent on when the passenger bought a ticket, but also on where. Certainly a sizable portion of the current imbalance is attributable to currency fluctuations. Until quite recently the British Pound was trading a 2.01 to the dollar as opposed to its current rate of about 1.45.

As an example, the unrestricted British Airways Business fare ex-London is currently $7437 (£5,115.50) as opposed to the New York-originating fare of $11,698. Converting that GPB amount at 2.01, the USD amount increases to $10,282 - still less, but with a greatly reduced differential. The problem is not easily remedied, as any adjustment to the British fares would penalize UK customers, who would see their fares rise dramatically. A similar, but less dramatic differential is observable right now between the dollar and the Euro - or the yen. Savvy frequent travelers can play the currency fluctuation to their advantage and there is little the carriers can do, other than keep it quiet.

2. Alliances help stabilize price competition within the group - but there is still competition.

Alliances do - naturally - use their immunity to stabilize competition, within the grouping anyway. Should the AA/BA link up be immunized, Virgin likely has good cause to fear a more monolithic competitive landscape. But - and here's the rub - it is also true that the more uniform alliance pricing, on a per mile basis, is actually lower than a similar rate on the "competitive" NYC/LHR route.
Chart 4 displays the cost per mile of a reduced and full Business Class fare between two city pairs. The LH/UA reduced fare is slightly less expensive but BA and VS collect a hefty premium for their identical unrestricted fares to London. American, with its much lower D class fare is by far the most economical, if price and flexibility matter.

Chart 4: Alliance Pricing vs. "Competitive" Pricing

Cost per mile

 

C reduced

C full

JFK/LHR

$.33

$1.69

IAD/MUC

$.30

$1.15

3. These days, shopping around pays dividends, even for premium seats
When times are tough and seats are empty, prices will go down - and these days, that includes even the front of the aircraft.

Alliances and their market effects are once again under scrutiny by both US and EU regulators.

A key aspect which makes comparison difficult is that the large alliance members tend to dominate the hubs that they use – virtually eliminating direct competing services by other alliances.
 
By examining non-hub to non-hub competitive examples, for instance Austin, Texas to Warsaw, Poland via different alliance routings, comparisons may become more illustrative. But in terms of measuring impacts, it will be necessary to first allow the three alliances full rein to fully implement their alliance’s potential. That is probably not the sequence Rep. Oberstar and other regulators prefer, thus making a realistic review of alliance competitive impact difficult.


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