New America West pricing plan evaluated by analysts

Friday, July 5, 2002 | 11:15 a.m.

PHOENIX -- Analysts say America West Airlines' controversial new pricing structure is an attempt to fix an industry business model that has been broken for years.

And the plan may further evolve as competitors react and the company counters their punches.

"It's going to evolve, these things always evolve," said Mike Boyd, an aviation analyst with the Boyd Group, Evergreen, Colo.

Boyd noted tampering with established pricing strategies can be perilous, citing a new strategy initiated by Braniff Airlines as a contributor to that company's demise in 1982.

"Other carriers may cause America West to modify what they're doing," Boyd said. "New pricing structures can kill an airline, but I don't think that's what's happening with America West. The question is whether they can make money with it."

The airline says it can.

W. Douglas "Doug" Parker, new chairman, president and chief executive officer of America West, said the new structure is generating revenue, despite efforts by competitors to retaliate, so he's confident the new pricing will stick.

Under the initiative, which began March 24, the Tempe, Ariz.-based airline put fewer restrictions on its walk-up fares. America West reduced advance-purchase restrictions, eliminated Saturday-night stays as a condition of a ticket purchase and cut the price of one-way fares to promote flexibility for the business traveler.

Scott Kirby, executive vice president of sales and marketing, said the change means America West will always have a price that is 50 percent to 75 percent below fares offered by other major carriers.

Kirby said as a result, loads are picking up. "Close-in bookings," those involving late purchases primarily by business customers, are up 40 percent to 50 percent.

Other major carriers aren't liking what they're seeing and are retaliating.

"The structure threatens the stranglehold they have on fares," Kirby said.

Some of the seven other major air carriers have tried to punish America West by cutting fares on competitive routes at America West's three hub cities -- Phoenix, Las Vegas and Columbus, Ohio.

Kirby said even with the retaliatory measures, the new price initiative has generated positive cash flow for the company and, therefore, the company plans to continue offering it.

"This thing has been broken for 10 years," said Robert Mann, an analyst and aviation consultant with R.W. Mann & Co. Inc., Port Washington, N.Y. "The whole value proposition has changed. What America West is trying to do is make it more appealing for business customers (to travel)."

Mann said America West is attempting to win back business customers who have been slow to climb aboard planes for more than a year. When the economy cooled in early 2001, businesses slashed travel budgets.

Many companies were fed up with having to pay premium prices for last-minute ticket bookings many companies are forced to use. Some of them invested in technological alternatives, like teleconferencing for long-distance meetings, while others scoured the Internet for cheap fares.

Spotting an opportunity -- and copying some of the successful models offered by smaller low-cost carriers -- America West announced the new pricing plan.

"Doug Parker decided this was a lever he wanted to pull," Mann said. "He knew that there were some people who were truly upset with the existing pricing system."

Indeed, America West executives say they're happy with the response the airline has received on the revamped strategy. The strategy now becomes telling the story to as many people as they can.

Parker recently took the campaign on a road show, including a stop in Las Vegas. He addressed local travel industry leaders at the Las Vegas Convention Center.

Recently, the company invited journalists from all across the country to a media day where executives made themselves available to reporters and the company showed off its new $33 million, 164,000-square-foot flight center near the Phoenix airport.

Several community supporters attended the grand opening for the building, which houses flight simulators and training centers for the airline's 1,650 pilots and 2,400 flight attendants.

But Phoenix and Las Vegas aren't where America West needs help. Kirby said the company is working with travel agents and reservation centers to convince business travelers to give the airline a try. The airline is taking the message that a company can triple its travel budget by flying America West because last-minute travel restrictions have been changed so dramatically.

The company also says it wants to be known as the No. 2 discount flier behind Southwest Airlines, among the big airlines and not the No. 8 major.

It's a tough sell.

America West severely damaged its reputation in 2000 and 2001, dogged by regulators criticizing its maintenance performance and record-keeping. The airline also was bashed publicly by the Department of Transportation for poor on-time performance, lost luggage and bad customer service. Parker freely admits "we ran a bad airline."

The company's financial performance was also poor. The company has suffered through six consecutive quarters of losses and in 2001 posted a loss of $147.9 million. Last summer, the company was on the verge of bankruptcy for the second time in its history.

When Parker took over as the airline's top executive 10 days before the Sept. 11 terrorist attacks, he embarked on a mission to turn around performance and perception.

By November, the Department of Transportation indicators had begun shifting. Then, America West filed for and was approved for a federal loan guarantee before the Air Transportation Stabilization Board. In January, the airline became the first -- and, so far, only -- airline to get a loan guarantee when the ATSB approved a $380 million guarantee on a $445 million loan package.

In February, America West ranked first in on-time performance for the third consecutive month and complaints, flight cancellations and lost baggage statistics dropped significantly with the company reporting a year-over-year improvement of more than 6 percent.

With the infusion of cash, America West enjoyed the greatest liquidity in its history and began expanding routes, especially in Phoenix, Las Vegas and Columbus.

Having a more favorable cash position also gives America West a greater hedge against volatile fuel prices, said Bernie Han, the company's chief financial officer.

At the media day event, Jeff McClelland, executive vice president of operations, announced the airline on Tuesday would begin returning the last 59 laid-off pilots back to their jobs. The company laid off 179 pilots following the terrorist attacks when the airline reduced operations by 20 percent. The returning pilots are part of 1,500 total employees laid off after the attacks.

The airline has 970 Las Vegas employees and also has a reservation center in Reno.

America West, the No. 2 air carrier at McCarran International Airport, has 73 daily departures to 35 destinations. In 2001 the airline carried 5.6 million passengers to and from Las Vegas, about 16 percent of the total at McCarran that year.

By September, America West will have 84 daily departures to 37 destinations in Las Vegas, bringing capacity to a level higher than it had prior to Sept. 11 last year. The airline uses 26 gates at McCarran with a dominant presence in the airport's A and B gates.

America West is the smallest of the nation's eight major air carriers with a fleet of 143 planes.