U.S. carriers are holding out hopes that 2005 finally will be a year of recuperation following another disappointing financial performance last year. Though more modest capacity growth, modifications to the domestic fare structure, fuel prices and the possibility of airline liquidations are wild cards in the year's outlook, one expected bright spot is the continued recovery of corporate travel volumes.
"Given the current pricing environment, which is very good for the consumer, along with continued economic recovery, which I would expect to flow into 2005 and 2006, it should be a very good year for business travel," said Southwest Airlines CEO Gary Kelly.
"We saw signs of that as 2004 went on," added John Heilner, vice president of consulting firm Management Alternatives. "We no longer are seeing much of the 'travel-only-when-necessary' mandates from senior management."
Many corporate buyers anticipate an uptick in their company's travel for the coming year, including 60 percent of 300 North American travel managers surveyed in November by Carlson Wagonlit Travel. "We have been very encouraged with the pace of business travel over the past six months and this survey confirms our belief that business travel may finally bounce back to something akin to pre-9/11 days," said CWT North America COO Jack O'Neill.
In recent discussions with BTN, some travel managers said the recent fare overhaul by Delta Air Lines, if it sticks, could allow for more trips by employees
(see story). Similarly, analysts expect simplified fares to stimulate price-sensitive business travel demand.
From an airline perspective, a reworked domestic fare structure will adversely impact industry financials in the near term—perhaps drastically—but by year-end may start generating positive results for carriers successful in lowering costs.
"Consumers will soon begin to see the fruits of airlines' restructuring efforts as unit costs, excluding fuel, plummet and the offering of low fares day-in and day-out become sustainable," said Olivier Houri, president and general manager of the global transportation practice at Unisys. "The news in 2005 will be the revival of the North American legacy carriers."
To be sure, quarterly financial reports that begin trickling in this week will be ugly. Industry losses for the quarter again will be measured in billions, following more than $5 billion in losses racked up by the nine major carriers in the first nine months of 2004.
In the short term, new fare levels won't help to fix airline balance sheets. Delta fully acknowledged revenue dilution associated with restructuring fares, but executives said a combination of factors gradually would make the new pricing scheme sustainable. For starters, the carrier anticipates higher traffic levels to help offset revenue loss. It cited Cincinnati, where traffic jumped 30 percent since Delta debuted its new fare structure in that market last summer
(BTN, Sept. 6, 2004). The airline also expects cost savings from more efficient customer service and customer migration to its Web site, Delta's least expensive distribution channel.
Moreover, Delta actually may experience increasing yields on certain routes since more affordable walk-up business fares and first class fares may be an option for more travelers. At the same time, certain airlines in 2005 either will reduce capacity in the domestic market—as announced by American and United—or slow growth, which would push load factors even higher and potentially minimize availability of the lowest-priced seats.
"We designed this as Delta solution," according to Delta chief marketing officer Paul Matsen. "Delta is a short- and medium-haul airline on the East Coast, which is a battleground for JetBlue and AirTran. We are not trying to impose an industry solution."
Eagerly or not, most competitors have at least partially matched. That, according to analysts, will cost the industry billions.
Though many observers recognized the concept behind fare simplification, some questioned the execution. "We were thinking this type of fare program would have occurred at the start of the second quarter, when the industry was generating cash, not in the first quarter, when the industry is using cash," said Helane Becker, analyst with The Benchmark Co. "It looks as though Delta took its pilot cost savings and applied it to this program, so nothing has changed with respect to the outlook for Delta. We expect Delta to have its back against the wall again later this year."
Others wondered how Delta could make the economics of the new fare structure work without also raising lower-end fares. Some suggested the decision may have in part been a move to break struggling competitors, notably US Airways
(see story).Yet, simplified faring appears to be the major carriers' best opportunity to stem the steady migration of passengers to low-cost carriers like Southwest, JetBlue and AirTran.
"Our analysis suggests low-cost carriers will witness significant negative share shift, particularly ATA, AirTran and America West," said J.P. Morgan Securities analyst Jamie Baker in a research note last week. "Hundreds of overpriced markets evaporated last week. As nonstop fares decline, so too will the economic incentive to change planes in low-cost carrier hubs such as Midway, Atlanta or Phoenix."