The airline industry has yet to back
( NWAC) attempt to add new fees to tickets, jeopardizing the carriers' effort to cut $70 million a year in costs and causing shares to slump.
Northwest late Tuesday announced that it would charge an additional $7.50 on every roundtrip ticket booked through a global distribution center, or GDS -- a strike against
and other companies that provide the databases travel agents use to book tickets. The move is strategic and one that Northwest hopes will push customers to book through its own Web site, thereby cutting distribution costs to $5 a ticket, on par with low-cost carriers like
In response, Sabre retaliated against Northwest, making it harder for travel agents to find and book the carrier's fares in its system, withholding discounts and saying the carrier is in breach of its agreement governing the listing of fares. Sabre's counterattack sends a strong message to the rest of the airline industry, which has yet to match Northwest's gambit.
In reaction, shares of Northwest fell 7 cents, or 0.7%, to $9.75, but Sabre fared worse, dropping $1.96, or 8.1%, to $22.31. Northwest's rivals, meanwhile, tacked on gains.
, parent of American Airlines, rose 7 cents, or 0.8%, to $9.75, while
rose 6 cents, or 0.6%, to $9.86, as they continued to benefit from the recent slide in oil prices.
If Sabre's threats aren't enough, other carriers may not back Northwest out of spite. Traditionally, Northwest has been the spoilsport when it comes to implementing rate hikes. For the last two years, legacy carriers like Continental and American have pushed for $5 and $10 surcharges to cover the cost of fuel, only to roll them back when Northwest, which faces less low-cost competition on its routes, balked.
"Even though cutting GDS costs -- about 2.7% of airline revenues -- is something we believe all the full fare airlines want to do, it is our understanding that Northwest had often been alone when it came to both following and leading price changes," said Jeffrey Kessler, analyst at Lehman Brothers. "We believe price leaders, like American, may not go along with Northwest now." (Lehman does and seeks to do business with the companies covered in its research reports.)
If history is any indicator, Northwest's bid will fail. This is not the first time Northwest has tried to control the way consumers buy its tickets by using surcharges. In October 2002, the carrier added fees to tickets booked through Expedia, which retaliated by removing Northwest's flights from its site. Three weeks after taking a stand, Northwest rolled back its fees, signed a new agreement and was back on Expedia.
Ultimately, analysts say Northwest will have to roll back its fares if rivals don't match by Sept. 1, when the carrier's new GDS-related fees go into effect. But in the meantime, as the lone carrier, Northwest stands to lose revenue as punishment for trying to revolt against Sabre. Three of every five tickets booked on Northwest go through a GDS, where Northwest now lurks at the bottom of agent screens.
"Given Sabre's response, we believe Northwest could lose much more in revenue than cost savings," said Paul Keung, analyst at CIBC World Markets. "We expect Northwest to abandon the policy and do not expect other carriers to follow. We could see other GDS respond with similar actions. In our view, the only wild card is if all airlines randomly follow suit."
There is good reason for rivals to match -- everyone needs to cut costs and get more competitive and this could be a fine opportunity for the industry to stand together to make structural change. But in a business where airlines haven't been able to raise ticket prices to offset the unexpected spike in oil over the last year, finding consensus on anything is highly unlikely.
But even if Northwest's move against Sabre proves unsuccessful, analysts note that it could also be tremendously shrewd, given that it is in negotiations with its pilots union over wage concessions.
"In an informal survey, we interviewed some travel executives who believe that Northwest, in the middle of labor negotiations, is trying to show its unions that it is pulling out all the stops before it has to ask them for concessions," said Kessler.