Reinvention: Delta sets the stage for a marketing war

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Delta Air Lines' declaration of a price war in the airline business isn't just a short-term bid to pressure rivals but part of a long-term plan to reinvent the No. 3 carrier to rival the likes of JetBlue and Southwest.

Delta's move could have disastrous effects on other struggling big airlines, but it represents a boon for consumers, agencies and media sellers that have stakes in the marketing battles to come.

Delta last week rocked the industry by slashing the cost of tickets, lowering its fares on walk-up travel and eliminating Saturday-night stay-overs. The Atlanta-based carrier cut some prices up to 50% and capped one-way domestic economy fares at $499 and one-way first-class fares at $599.

`fundamental change'

"Let it be clear: This is not a fare sale," Delta CEO Gerald Grinstein said in a conference call. "This is a fundamental change to our pricing structure."

The move electrified competitors, who matched the fares within days, though they went kicking and screaming. "We doubt Continental Airlines can maintain $970 one-way fares between Houston and Newark while Delta offers first class via Atlanta for $549," JP Morgan analyst Jamie Baker said in a research note.

Stocks for the major carriers dropped between 7% and 17% in the wake of the news, and some were caught off-guard.

They shouldn't have been. This was not a quickly planned marketing scheme by Delta. It trademarked the name "Simplifares" as far back as August as part of the No. 3 airline's strategy to reinvent itself as a low-cost carrier. It also continues to compete with Song, Delta's low-fare unit. Instead of competing against American and United, "We view [discount carriers] JetBlue, Southwest and AirTran Airways as our principal competitors," Delta Chief Marketing Officer Paul Matsen said. Mr. Grinstein said Delta did a test run late last year in Cincinnati, one of its hubs, and sales went up more than 40%.

Delta is advertising its new fares in print ads in major newspapers around the country and is developing TV ads from Ogilvy & Mather, New York, the WPP Group agency it selected last year for its $25 million account.

the downside

The big airlines are now left to follow Delta-at considerable cost. "The whole airline industry will now have to move in this direction," said Caylon Securities analyst Raymond Neidl. "This will likely hurt revenue in the short run but could be beneficial in the long run," he said, if the airlines are able to attract more customers.

"Anything that benefits making air travel more convenient benefits the consumer, benefits the tourism industry and even benefits us as an advertising agency," said Dorn Martell, CEO of Miami-based Tinsley Advertising, a shop dedicated to travel/tourism. "But the downside here is, when you get predatory you lose carriers."

Ripe for the picking: US Airways, United Airlines and ATA Holdings, all in bankruptcy, including US Airways for the second time in two years. Delta itself has lost more than $6 billion since 2000, but has staved off bankruptcy after negotiating pay cuts with its unions.

Delta is already seeing some benefit. Internet search engine Yahoo reported that following Delta's announcement, searches on "Delta Airline Reservations" rose 611%, "Delta Air Lines" was up 289% and "Delta Skymiles," its frequent-flier program, was up 98%. The possibility that Delta's cuts might precipitate a price war sent searchers to major travel sites as well. Among Yahoo's top 100 search terms, Expedia, Southwest Airlines, Travelocity and Orbitz all climbed 8% to 10%.

"This is the first time in a long time that a major carrier has come to the marketplace with something other than a laundry list of fares," said airline-industry expert Joe Brancatelli, who runs the site "They not only set the structure, they now become the standard against what everybody will be measured."

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