Ralph Doty: Northwest Airlines' predatory pricing drives out competition
PREDATORY PRICING: An anti-competitive measure employed by a dominant company which involves temporarily pricing a product low enough to end a competitive threat. (Source: www.investorwords.com.)...
PREDATORY PRICING: An anti-competitive measure employed by a dominant company which involves temporarily pricing a product low enough to end a competitive threat. (Source: www.investorwords.com .)
A few months ago I wrote that I had given up traveling by air after a half-dozen difficult flights into and out of Duluth. Last week I broke that vow, flying from Orlando to Duluth.
My first choice was to travel on Midwest Airlines. But to my dismay, I discovered that Midwest's late evening flight into Duluth -- and the next day's early morning flight -- were dropped a few weeks ago. Midwest said at the time that three daily flights would not be profitable during the winter months, so it reduced service to two.
Apparently they didn't care about large numbers of winter visitors to Spirit Mountain and numerous other wintertime locations up here. (I ended up buying a ticket for Northwest's last daily flight into Duluth.)
I think I know the real reason behind eliminating the late-night and early-morning flights: It was Midwest's first step in making the case that it's leaving the Twin Ports on Dec. 1 because passenger numbers aren't what they were earlier this year. Hello?! Hey, that's what happens when the number of trips is cut by 33 percent. The total number of passengers drops. Even I can figure that one out!
Midwest's abandonment of Duluth probably makes Northwest Airlines executives absolutely giddy. With the holiday season approaching, they won't have competition in Duluth during that traditionally heavy travel season (except for Allegiant Airlines' flights to Las Vegas). NWA can then increase its ticket prices with impunity. Of course, some folks will hop on a shuttle to the Twin Cities to catch their flights to wherever. At $68 a round-trip ticket, it will probably cost less than what they'd pay to fly from Duluth to Minneapolis and back.
Incredibly, a few weeks ago Midwest told Duluth Airport Authority Executive Director Brian Rycks it was pleased with its Duluth passenger load. Here's how Mr. Rycks explained it to me a few days ago: "We were communicating with Midwest Airlines just last month on how the route was performing. Passenger numbers and load factors continued to increase during this time. But ... Northwest is a very fierce competitor. Northwest, as a result of their dominance, really can control the market from a pricing standpoint and prevent a new entrant carrier such as Midwest from making money. And the question is, as carriers try the Duluth market, do they have the staying power to remain in the market and build the clientele on the airline to outlast whatever Northwest might throw at them? In this case, obviously, Midwest Airlines was not willing to stay in the market and build traffic."
We may never fully know why Midwest is leaving Duluth, but here are some thoughts:
To begin with, Midwest's Duluth service was destroyed by Northwest's practice of predatory pricing. United Airlines and American Airlines failed a few years ago in their attempts to compete with Northwest in Duluth when NWA employed predatory pricing to drive them out.
Second, Northwest's determination to maintain its market share at airports they serve is legendary. Case in point: The Fargo airport's assistant manager, Darren Anderson, told me a few days ago that on Aug. 17, 2005, Allegiant Airlines announced it would start weekly non-stop service from Fargo to Las Vegas. Just three weeks later, on Sept. 7, Northwest -- which was in the midst of bankruptcy proceedings -- announced it, too, would fly non-stop to Las Vegas from Fargo at ticket prices lower than Allegiant's. It didn't work.
We learned from a reliable source that for nearly a year Allegiant was flying to and from Fargo with nearly full aircraft. Northwest's planes carried many fewer passengers to Las Vegas. One can only imagine that maybe someone got to Northwest's management team and asked if they had lost their collective minds. Losing money on the Vegas flights while in the middle of bankruptcy proceedings was not a good idea, they were probably told. Northwest halted the Fargo to Las Vegas non-stop flights less than a year after it started them.
Third, the recent sale of Midwest Airlines to TPG for $450 million might be disastrous for airports currently served by both Midwest and Northwest. That's because NWA will have a significant minority stake -- about 45 percent -- in the Midwest sale. Northwest said, apparently with a straight face, that it will have no input into Midwest's operations. Excuse me, but I don't believe them. And if it turns out that my skepticism is correct, look for other small markets to lose Midwest-TPG's services, leaving NWA as sole vendor.
Even though Midwest's passenger count was steadily increasing in Duluth, its reason for leaving is basic economics: Midwest doesn't have Northwest's deep pockets. Despite the fact Midwest's Duluth flights were 70 percent full on average -- that's more than Midwest said it needed to break even -- the company had to cut its fares to draconian levels to meet Northwest's predatory prices. Midwest's ticket revenue -- regardless of the passenger count -- wasn't adequate because it needed to heavily discount their prices to compete with Northwest.
So, thanks to predatory pricing by Northwest airlines during the past 10 months, area travelers saved money to fly out of Duluth. Now Midwest has tossed in the white flag of surrender and area flyers will end up paying more.
And, as he has done before, Mr. Rycks will get back on his feet, dust himself off and try to persuade another company to restore airline competition to the Twin Ports. It won't be easy.
Ralph Doty can be contacted at email@example.com .