Airlines Still See Red, But Also Report Corporate Gains

Airline revenues from corporate travel are approaching levels last witnessed in pre-recession 2008, far higher than levels registered in the downturn's valley a year ago, major U.S. carriers reported during first-quarter earnings calls last month. The year-over-year growth in corporate travel revenue—in some cases, exceeding 30 percent—speaks as much to the current relative health of the market as to the severity of the recession last year.

"The quarter's improvement was driven largely by improving business demand," US Airways president Scott Kirby said. The carrier reported corporate revenue growth of 35 percent in the first quarter from the same period last year, "though remarkably," according to Kirby, "it's still down 6 percent compared to 2008." Kirby, like other airline executives expecting a sustained corporate travel recovery this year, said demand has grown and pricing is firming. Both trends, most said, would continue.

April proved a good start. "We will continue to see a strong year-over-year pricing environment and improving corporate demand, with booked corporate up 45 percent year-over-year thus far in April, and overall booked yield up 20 percent thus far in April," Kirby said. "Both are still slightly below 2008 levels, though we are getting close to the 2008 levels of both yield and business demand."

Delta Air Lines CEO Richard Anderson said a recent weekly corporate sales snapshot showed total corporate revenues grew 61 percent year over year, and the number of corporate tickets sold rose 46 percent. "If you look at the trend line over the last year, it's a steady upward slope to the right," he said during the carrier's earnings call. "Admittedly, we're on top of some pretty easy comps, considering that a year ago, heading all the way into June, we were on a decline."

CFO Tom Horton said of American Airlines' corporate travel trends, "unit revenues have nearly returned to 2008 levels." In the first quarter, the carrier saw revenues in that segment increase by more than 17 percent—the result of more traffic and higher fares—and they built as the quarter progressed.

"Importantly, March showed even more improvement, as domestic corporate revenue increased close to 30 percent year over year," Horton said. "We are seeing companies loosening restrictive travel policies and increasing travel spending to stimulate their own business activity."

Though other airlines did not provide as much corporate-specific detail, anecdotal evidence from United Airlines and Continental Airlines pointed in the same direction. "One of the key areas driving the strong growth was improvement in both load factor and yield in our premium cabins as corporate travel begins to return," United president John Tague told investors.

Continental executive vice president and chief marketing officer Jim Compton said the carrier is seeing more bookings within 14 days, an indicator of a healthy business travel market. Still, Continental CEO Jeff Smisek said, "A certain amount of caution regarding business trend is warranted, as we are uncertain as to the level to which business travel will return."

SWA: Fee Ban Ups Share

Ever since Southwest Airlines became the lone holdout among large U.S. carriers by charging no fees for first and second pieces of luggage, analysts have badgered the carrier to stop leaving that revenue on the table. Southwest, however, insisted its stance has been accretive. "We continue to believe we are gaining marketshare with our steadfast commitment to our Bags Fly Free campaign," Southwest CFO Laura Wright reasserted during its first-quarter earnings call. Some Wall Streeters now are joining the chorus.

JP Morgan aviation analyst Jamie Baker in a research note agreed that Southwest's bag-fee stance is helping the carrier grab revenue share "in markets where it faces nonstop competition from those charging for bags." Still, Baker said the percentage of share is so small that carriers that lose passengers or revenue to the carrier would be foolish to drop bag fees—just as Southwest would be foolish to add them.

AA Defends Strategy

JP Morgan's Baker was less congratulatory in his assessment of American's financial performance during a heated exchange with the carrier's leadership during its earnings call.

"You have the highest costs. You have the lowest margins. You are the only major airline expected to lose money this year. Your year-to-date equity performance has trailed that of your peers. In other businesses that I can think of, when there is a company standing out like this, you sort of expect a major overhaul, and it isn't clear to me that Flight Plan 2020 is that plan," according to Baker, referring to American's 10-year strategic plan. "I am trying to find a reasonably intelligent question. I guess it has to be: Is this really all you have got?"

CEO Gerard Arpey countered that American is the only legacy carrier to avoid bankruptcy, thereby missing out on opportunities to restructure costs like its peers. However, Arpey expects bankruptcy benefits competitors enjoy to dissolve in time, bringing cost structures more in line with American's.

"We feel good about our relative revenue performance, and, of course, we feel good about the partners we have chosen around the world. I would acknowledge we do have a cost challenge relative to the industry," Arpey said. Pointing to the carrier's legacy costs, he continued, "but I don't think that creates long-term competitive advantage for all of those bankrupt companies. Over time, that will not be a sustainable competitive advantage for them."