Since the devil is unlikely to come and argue his company's position here, I decided to be an advocate for him.

So here is the view from the other side.

CO is not against its best customers. We value every one of our customers. However, the reality of the airline business has forced us to take some hard decisions.

The airline industry is suffering from over capacity (too many seats chasing too few travelers) which results in a downward pressure on pricing thereby squeezing margins to the minimum. In addition, the economy and events of the last two years has significantly reduced travel from business sector.

The travel experience and benefits that customers get for their tickets and the cost structures of the major airlines were decided/designed in the era when the pricing and margins were much higher.

With the margins decreasing, any reasonable business will first cut its costs and try to match supply to demand. We have done significant work to reduce our costs without demoralizing our team and continuing to provide a safe and clean travel experience. While we continue to reduce supply, the overcapacity in the industry is beyond the control of any one airline and we expect this situation to continue for a number of years to come.

In this situation, the only other thing left for us to do is to match the product and services we provide in line with the prices we can charge for it.

At one extreme, the low fares demanded due to competition with low cost carriers requires us to reduce the services afforded for such tickets to the minimum provided for these carriers - basic and safe transport from point A to point B. At the other extreme, the high fares realizable from our best customers who demand high comfort and levels of service in return deserve the very best we can provide them.

It is with this need to rationalize the product and levels of service with the price that we have instituted both improvements (Elite Access and improved BF) when our customers have paid a high price as well as some reductions in benefits when our customers have taken advantage of our low pricing dictated by the competitive markets.

While we have not held ourselves to some of the statements in the past, one thing I can guarantee going forward is that this philosophy of matching the product and level of service (both immediate and cumulative) to fares paid will continue to be our primary guide and we will be very consistent in making our decisions based on it.

We are not against any particular segment of our OnePass members all of whom are very valuable for our business. When any of our OnePass members purchase a ticket they get benefits as a result of their past relationship with us and they get certain "currency" (miles, bonuses, etc.) that allow them to realize benefits in the future.

While we have tried to maintain the benefits provided to our customers based on past relationship (as reflected by their elite status) as much as we can in the current climate, we have to use our philosophy to match the "currency" we provide for future benefits with the price paid for each ticket.

As a first step, we have instituted changes to reduce the elite qualifying miles for lower fares as this "currency" has the biggest impact on our costs for providing future benefits. Similarly, we have instituted charges on our lower fares on international flights since the benefit of miles upgrades to BF was not commensurate with the lower fares paid. Alternatively, we could have set up a tiered miles table for upgrades based on the fares paid but it is impossible to match the cost of that benefit using just miles.

Hope this explains our position on the matter and lays to rest any doubts that we are against any segment of our customers despite what we may have inadvertantly said earlier.

Cute!

A few brief comments:

While we have not held ourselves to some of the statements in the past, one thing I can guarantee going forward

'While we are born liars always out to deceive you, we really want you to trust us now as we attempt to clean your clock one more time' Even cleaned up this concept does not cut it. I'm still not sure if our "cockroach pin" should read "Gordo thinks I'm a shmuck" or simply "Fire the Liar"

While we have tried to maintain the benefits provided to our customers based on past relationship (as reflected by their elite status) as much as we can in the current climate, we have to use our philosophy to match the "currency" we provide for future benefits with the price paid for each ticket.

Not gonna cut it. They now overtly attempt to reduce the distribution of their "currency" for lower priced tickets, while all along they've made the extortion of "easy pass" the only option for non Saturday night stay trips, and nearly the only option everywhere else. Their covert tremendous reduction in the value of their "currency" shows that this overt act is merely to coerce flyers into paying more than they have to.

At one extreme, the low fares demanded due to competition with low cost carriers requires us to reduce the services afforded for such tickets to the minimum provided for these carriers - basic and safe transport from point A to point B. At the other extreme, the high fares realizable from our best customers who demand high comfort and levels of service in return deserve the very best we can provide them.



Unfortunately, this again masks the cold truth that there IS NO DIFFERENCE between the services afforded the traveler who purchased seat 8A two months ago at $300 and 8C yesterday at $3000. Until they adopt the new world model of reasonable prices for all fare classes, they will be burdened to lie about additional value that does not exist. Flying the row 8 seat may cost them a bit more than the $300, but it doesn't cost them $3000. That delta ( ) is just what Gordo-The-Liar expects his eight figure salary to come from, and it just won't work any more.

venk, very well written.

However, this is not the view from the other side. The other side did not respect its customers enough to announce the change and clearly explain the rationale as you did. Instead, they tried to play up a good news event, and while that was still in the buzz, they tried to squeeze in the bad news. It was an orchestrated PR move, and it insults the intelligence of the very customers they allegedly want to keep.

Announce the change, explain the rationale as venk did, that's all that people want to hear. They'll empathize or take action accordingly.

While I appreciate you presenting the company's viewpoint in a straightforward post, I have some troubles with parts of the explained rational behind the changes.

"The travel experience and benefits that customers get for their tickets and the cost structures of the major airlines were decided/designed in the era when the pricing and margins were much higher."

Does this mean it's the pax fault the market has changed and the CO has been unwilling or unable to keep up with the times? Or that pax are expecting way too much from airline's these days and must scale back their expectations?

It sounds much like the identity crisis Air Canada is in the midst of at the moment: trying to compete with the Low Cost Carriers while still providing perks for the pax who are paying much higher fares. I wish CO lots of luck because trying to be all things to all people hasn't been working for AC for some time. Ultimately, the market will decide who flys off into the wild blue yonder and who left on the ground.

First , I must compliment you for taking the time to write a very well written letter, but it seems to be based on the same myopic thinking that many executives in the airline business have.

They are constantly looking at their perceived value of the product and not looking at what makes some people fly and remain loyal to a certain airline, as well as not focusing on marginal costs and marginal revenue.

Further, even if for the sake of argument, everything you said is correct (which I do not think is the case), some of the same objectives could have been accomplished in a much more customer friendly way that might have had the dual benefit of increasing customer satisfaction (or, as Hippocrates might say, in a way that does no harm (or at least minimizes it) and increases revenue.

I know a lot of thought went into this decision at the top and senior management is willing to take the flack thinking they are right, but they might be wrong. One thing I really do not think they did was talk to frequent flyers and do focus groups to find out how to have a win-win situation or at least not a win-lose (for the customer), which seems to be the goal, but will probably turn out to be lose-lose at the end of the day.

I think the executives went into this thinking solely about increasing revenues (**** the torpedoes) with an inside the beltway (or whatever it is in Houston) mentality that does not understand how the real world lives.

There are some people who travel for business and have to keep to the lowest fare, but maybe their corporate travel policy allows for C class to Asia. Well, that person may only do one flight per year to Asia and the rest at Q/T/S, and that person is probably reasonably profitable for the airline, but if that person does not get elite status under the new rules and the accompanying perks which cost almost nothing incrementally, he/she will have no loyalty to CO and will probably fly Singapore Airlines (or whichever airline) to Asia, as well as a lot more Southwest and JetBlue (love those seats and TV) in the US. Has CO really won here? LOSE-LOSE. Maybe the rules could be tweaked to keep this flyer happy and maybe even gain some revenue.

Now I will just speak briefly about my own patterns, which I know are not the norm, but that is what focus groups are for. I fly 100,000 miles per year�just about all for pleasure (but I too might find I have to take that last minute C trip on business to Asia). I do not need to fly. It is all discretionary and I fly (mostly quick hops across the pond�or long weekends across the dateline) because I hope to have a good time, both over there and on the way there.

Last weekend I took a real short hop to DC and stayed at a Starwood. I paid $200 and was upgraded to a $1,000 suite. Now with your mentality, you might say the hotel could not afford to give me a room worth that much, but if they did not, I probably would have stayed elsewhere (I could have gotten a cheaper room in a top hotel), but I hoped for an upgrade (subject to availability) and got it. The room would have gone empty if I had not stayed there and stayed elsewhere or not even made the trip. But part of the fun of the weekend is getting pampered�incremental revenue at the margin for the hotel. WIN-WIN!

I am planning a long weekend trip to Istanbul the beginning of the year. Starwood does not have a property there so I must admit that I am having fun picking another hotel to stay at (I am partial to Leading Hotels of the World as they treat me well too). There are all these great local properties and some of the world�s great chains, many having great rates. But I must admit if there were a Starwood there I would be there. I mean I must make my 25 stays per year to stay Platinum and I do like being Platinum�WIN-WIN.

In fact why am I going to Istanbul? Well I made my reservation when I thought being Platinum on CO was worth the bother and it was worth racking up the miles. It turns out I was wrong. It turns out that some of the other trips I am contemplating are $500 Q fares to Europe. Well, that just does not satisfy the bean counters in Houston (although it will at continental.com through 2004, subject to change). And an upgrade---I can hear the laughs at CO. Well maybe the value of the seat to a business passenger is $5,000 but if it flies empty or with a NonRev, it is worthless to the airline. Giving it to me on a standby basis would just keep me coming back for more. WIN-WIN.

With the new rules, I may either abandon frequent flyer programs or go for mid-level status on both UA/AA, or just fly less. With OneWorld and Star Alliance, I may not get upgrades either, but I will have many more destinations open to me than the CO/NW/KL/DL route map and can just choose the lowest fare and best schedule or Orbitz. Neutral for me�LOSE for Continental.

I just got an email about a great fare to Moscow and Reykjavik on Icelandair. Before the new rules, I would have ruled out Icelandair, but now I will think about it. In fact, one of the reasons I have never been to Iceland is that it is not on the CO Partner route map. WIN for me�LOSE for CO.

Another thing that does not show up on the CO bean counter radar screen when evaluating my travel patterns is that I have flown friends/family on CO to help them get status or so they could fly with me (and this applies internationally at fares of over $1,000). Now if my loyalty is lost, so is that business�Neutral for me�LOSE for CO.

Now, as they say your mileage might vary, but if CO talked to frequent flyers and did not have this myopic mindset about how much they could �potentially� sell an empty seat for, maybe they would have come up with a WIN-WIN situation.

Frankly there are things CO could have done which might have both made me happy and increased my spend on CO. Instead the way they did it, I am more likely to flee.

It looks like a WN-WN situation. Or maybe I will just stay in NY and enjoy one of our fabulous restaurants�where they recognize loyal customers and treat them very well.

[This message has been edited by Nevsky (edited 09-20-2003).]

Venk wrote: "As a first step, we have instituted changes to reduce the elite qualifying miles for lower fares as this "currency" has the biggest impact on our costs for providing future benefits."

This comment alone is utterly ridiculous and without support. As I've mentioned many times, at worst elite benefits (in the sense of those now targeted for modification) are revenue neutral and, at best, allow for potential profit.

Priority checkin? Revenue neutral (and more folks are checking in online or at kiosks.)

Priority boarding? Revenue neutral.

Upgrades? As I have mentioned many times, the F seat that went unsold was reallocated to a frequent flyer. Again, essentially revenue neutral EXCEPT that this freed up the seat previously held by that passenger for resale at the last minute to an airline's most profitable passenger: the walk-up.

I am sitting on the fence reading all the posts and and being amazed that no one has talked about the whole "picture"!
For those of us who read FlyerTalk everyday and realise that every airline probably has someone dedicated to do the same reading, does it not make sense that we who plan MR's just to gain the most mileage for the cheapest price, should not be suprised that it didn't last.

CO looks at their bottom line and as a for profit company they decide that by changing their FF program that they can increase revenue. In a vacuum this may actually work. However, we are in a competetive environment and when you compare CO's FFP to others in the U.S. they are way behind AA, US, and UA, also NW unless they change also. The consumer will pick the better deal. So unless AA, US, or UA is totally inconvienent for a customer they are going to change. So if you raise the revenue by 10%-20% per customer, but lose 20% of your customers, you are going to get killed. This is just an example and I have no idea what the real effect will be. Personally I don't think they will raise much revenue and I think that they are going to lose a lot of customers.

------------------
dallasflyer

This is a key point that has been missed (or ignored). Put yourself in the place of the CO executive charged with maintaining (or achieving) profitability, and realizing that many (not all, certainly, and most likely not most)of your premium seats are going to those who connive to fly ultracheap segment/mileage runs.


The changes appear to take aim especially at the segment runners, but certainly severly curtail the ability of many of us to do $200 runs for, say, 6500 miles. On the other hand, I note that I can still do a MR to Asia and get 22000 miles for $900-$1000, so my options have not been eliminated (yet...).

These changes may seem a tad draconian at first, but as I strive to see things from the other side, I do see some sense in them. Those of us who already pay a bit extra (and believe me, there have been times that I've paid $100 more to fly CO as opposed to Frontier in order to get my precious FC seat) will likely figure out a way to maintain our status.

I considered going back to AA (former Plat), but on a DEN-IAH trip I would need 6 500-mile upgrades @ $40 per...$240 out of my pocket AND a connection in DFW AND a possible RJ DFW-IAH. No thanks...CO works much better for me.

The people that will be affected the most are those who have no control over which fare they pay...perhaps on some routings (the higher-mile ones?) y'all could do as I have done and pop for the extra $$$$ (if it's kept reasonable, which I've already implored Kellner to do). A ridiculous suggestion to many of you perhaps, but at least an option.

Thanks for your time.

It is not easy being the devil's advocate without resorting to prevarication and market-speak but I will try...

These are two related issues here. The redeemable value of the "currency" accumulated by you the past in terms of benefits and the amount of "currency" provided to you at each current transaction. Both are parameters that affect our cost structure in a similar way at the end.

One difference is that the latter is also the means by which we provide differentiation in the various categories of fares. It does not make sense for a premium cabin customer to get the same "currency" as a discount coach customer because the margins we realize from them are so different. This is why we have fine-tuned our program to increase the spread in "currency" between various categories of pricing.

We realize that other airlines do it differently but in the end it is the relative spread that matters and whether we are competitive in the value provided for that "currency" within that spread. Some have complained that we could have kept the "currency" the same for low fares and increased it for higher fares. That, in reality, only leads to "currency" inflation since we are not in a position to increase the costs asociated with the program with increased currency float.

This brings us to the value of "currency" provided. Here, all we can say is that we intend to be competitive with the rest of the industry as much as our financial strength allows us but we may not be able to please all the people given the structure of the industry. In a free market, our customers will need to look at the total value provided our airline and compare it against the competition to decide which suits them better.

That is indeed a problem. While we have to take some responsibility for this pricing model, it is not up to CO alone to change it. The whole industry needs to take a step back and look at it to see what maks sense for our customers. We are not sure how this can happen in the current climate.

It will not be as simple as bringing the high fares down because the margins we operate in does not permit it without leading to bankruptcy. But the current climate of overcapacity does not allow us to increase the lower fares even marginally to compensate. So we have a stalemate in our pricing structure.

Meanwhile, we have to deal with that reality of that situation and the changes we have instituted and future changes we intend to make are indeed designed to differentiate the value provided for that difference in price in terms of immediate benefits for that flight (priority services, seating arrangement, cabin upgrades, etc.) as well as future benefits provided with our OnePass "currency".

When CO's parter, America West did just that, CO vindictively dumped them (despite losing valuable network destinations and club access) and openly routed for their demise.

Sorry venk, noble effort (to engage the customers in a way that CO steadfastly refuses) but you can't defend the indefensible. Sometimes the answer is just telling the devil to go back to he11.




[This message has been edited by NJDavid (edited 09-20-2003).]

We will certainly evaluate our marketing techniques and staffing to see why one of our ex-customers can articulate our position better to our customers than we can.

It is certainly not our customer's fault that the market has changed. CO has been trying to come to grips with the changing market place but it is a complicated environment. Meanwhile, we believe customers do need to match their expectations with the fares they are paying which in real dollars is much less than what they were paying last decade. Unlike the PC industry, the labor-intensive airline industry cannot decrease prices and increase performance and services at the same time.

If we knew what that silver bullet is, we would have implemented it in a flash. We seriously don't believe there is such a silver bullet in terms of affecting pricing vs. benefits.

There is certainly some validity in the observation that our current method of communication with our customers is counter-productive to deliver our changes good or bad. We have been told over and over again that being straight with our customers and making them our partners in these difficult times rather than trying to manipulate them is a better way to manage this.

You do have to understand that this is a much different way of doing business than we are used to and it takes time for us to learn and adopt it. Not all of our management is comfortable with it as yet but that is one of the challenges we will have to face going forward.

NEVSKY --- excellent post!
I am planning a business trip to Asia at the end of October ---- I would never have thought of going outside to CO family ---
I found some Asian travel agents in NY that are offering great fares to Asia on a variety of carriers --(Business Class) on Asia -- JAL --- ANA --- NW (is the lowest)
and with the "new" FF plan at CO I leaning toward taking Asiana and enjoying a "new" experience --- great fare / new airline / and is it a loss to CO?