Air CEOs: Fares Offset Demand

The top brass at major domestic airlines—all of whom detailed second-quarter losses last month—acknowledged a slight slowdown in business travel traffic, but many noted that growing fares, declining capacity and new fences built around business tickets help to offset traffic deterioration. Several CEOs said the capacity coming out of the domestic system in the second half of 2008 should help create revenue equilibrium out of higher fares and slower traffic.

Northwest Airlines CEO Doug Steenland said corporate travel volumes are down slightly, but said capacity reductions—which legacy carriers resoundingly will deploy in the second half of the year—should help shed lower-yielding traffic and grow average fares.

Continental Airlines president Jeff Smisek said companies are encouraging further advance purchases as well as greater compliance with preferred carriers—in some cases enforcing pre-trip approvals and shifting bookings from business class to economy. Smisek said such moves are "pretty typical behavior in a weaker economic condition."

"While it's good news that we aren't hearing of travel budget decreases for the most part, we also aren't hearing of many companies increasing travel budgets to compensate for higher fares," Smisek said. "The number of trips will have to decrease if companies are to stay within travel budgets."

American Airlines executive vice president of planning and CFO Tom Horton said of corporate travel pullbacks, "We're hearing that companies are being more cautious and more closely scrutinizing their travel, and we've actually seen that business traffic has been down a bit year-over-year, but pretty modest reductions thus far."

United Airlines executive vice president and COO John Tague said, "We're clearly seeing business travelers change behavior and book earlier. We have seen a modest decline from that perspective. We continue to believe that we have the right level of capacity now, and for the time being our fourth-quarter capacity plans were addressed with this trend in mind."

Traffic concerns aren't limited to the domestic front. Delta Air Lines president Ed Bastian said international fares are up and demand from the United States is "down slightly," while international demand to the United States remains strong.

Several noted that further fare restrictions, including minimum-stay requirements and Saturday-night stays, fence business travelers into higher fares. "It's hard for businesses to manage far in advance business travel" said US Airways president Scott Kirby. "If anything, it's getting harder to do because there are more and more fences in terms of pricing structure and minimum stays." Other carriers, including United and Continental, also noted an increase in fare restrictions.

Continental CEO Larry Kellner said that the post-Labor Day travel season could prove a greater test of business travel demand, as the current environment has made it "difficult to know if this is a false alarm or a real alarm." US Airways' Kirby, however, said of business travel, often the first expense scaled back in times of economic uncertainty: "It also comes back pretty quick."