Demand for air travel is strong and much of the airline industry's
excess capacity has been removed, but airlines in recent weeks have seen fresh
fare hikes fail. Why? That's what Morgan Stanley analyst Bill Greene wanted to
know during Delta's and US Airways' quarterly earnings conference calls on
Wednesday. According to executives at both carriers, one answer relates to
rebuilding "fences" between airfares.
"We have had a lot of success in what I would call some
smaller changes to the fare environment," said Delta executive vice president Glen Hauenstein. "Clearly some
of our competitors don't like some of the absolute fare increases that have
been in the market, but there has been a lot of strengthening in the fences, a
lot of strengthening of the advance purchase, of the stay requirements. You
have to look at fares in more than just the dollar amount we are charging but
also in qualifications in how you actually get those fares. That is what is
driving industry yield up across the board. While we have had some resistance
to fare increases, we made some progress on the other side of the fare
equation."
The airline posted solid year-over-year revenue metrics, including
a 10 percent increase in consolidated passenger revenue to $7.2 billion, a 9
percent improvement in passenger yield and a 14 percent jump in passenger unit
revenue. It also reported an 11 percent jump in revenue from corporate
customers.
US Airways reported similar strength in the first quarter, with
"record" overall revenue, passenger yield and passenger unit revenue.
"Corporate account revenue," according to president Scott Kirby,
jumped 29 percent in the first quarter versus the prior-year period.
In answering Greene's question on the fare environment, Kirby
said, "While the fare increases
are easy to follow through ATPCo reporting and they get a lot of the headlines,
they are third or fourth in importance in terms of what our yields wind up
being. If you look historically, one in three fare increases goes through
successfully, even in strong demand environments, for a whole host of reasons.
I wouldn't read anything negative into the failure of a fare increase. What's
more important, or at least as important, is the lack of deeply discounted fare
sales.
"There's also been
a lot of what I would call cleanup going on in the market with getting fares
that used be seven-day advance purchase and somehow became zero advance
purchase back to a seven-day advance purchase, and a lot of other initiatives
like that," Kirby continued. "The demand environment certainly feels
strong, yields are robust and the industry is successfully passing on the
increase in fuel prices."
Greene then asked, "So,
essentially, it's rebuilding fences and some revenue management?" Kirby
responded, "All of those things are occurring, yes."